Federal policy changes on the horizon: what to expect for U.S. cannabis businesses in 2024
Regulatory expert Denis Gertler provides an overview of the final cannabis conference of 2023 and its implications for this year
January 18, 2024 By Denis Gertler
Attending MJBizCon is a daunting exercise which is both the event’s charm and challenge. With over 100 speakers and more than 50 sessions covering women in leadership, cultivation, finance, cannabis science, and many other topics it’s impossible to capture the full experience. It’s also the largest trade show in the business, attended by some 35,000 participants and more than 1,400 exhibitors.
Given the number of topics featured, I passed on the psychedelic industry sessions and focused instead on U.S. and global markets, regulatory developments, social equity, business strategies, consumer marketing and retail trends.
As many already know, each state is different so it’s difficult to gain a sense of what’s happening in the U.S. as a whole. However, discussions did yield insights on tax rescheduling, equity and diversity issues, and market dynamics in the U.S. and abroad.
What’s new for U.S. markets?
On that last point, there was much buzz about the expected impact of adding Florida to the legal marketplace. Most commentators presumed that the April 2024 ballot initiative for adult use would gain approval although it remains an “x” factor.
With 21 million residents, millions of annual visitors and a rapidly growing population, legalization should provide a major boost to demand.
As Kim Rivers, Trulieve CEO noted, the state’s medical use initiative passed with a 72 per cent approval rating, and there is still room for growth of that market of 900,000 users. She indicated that Florida’s recreational market is projected to reach US$6 billion in annual revenue. Other states will also help drive industry growth, according to Rivers, with New York and Ohio just getting started and Pennsylvania expected to reach $4 billion annually.
The panel on Mature Market Regrowth asked to address the question of whether there is cause for optimism, did not provide a clear answer. Panelists agreed that the lack of national distribution infrastructure and federal banking services hampered the industry’s development, even in a large state such as California. Quipped Vince Ning co-CEO of wholesale platform Nabis, “Mature does not mean sophisticated.” When the legal and commercial ecosystem is cash-driven, unsound, and businesses are not paying their bills it has a ripple effect across the sector, panelists agreed. As Guy Rocourt, CEO of wellness brand Papa and Barkley remarked, “There’s lots of cannabis but with all the hoops, taxes and a lack of retailers it still feels like an illegal market.”
Despite regional differences, some overall consumer trends are emerging across markets.
As in Canada, price compression is hitting multiple categories. That includes pre-rolls, unlike Canada where prices of this product are increasing.
Discounting is pervasive and profitability has been declining in most markets since 2017. Customer demographics are changing, as presented by Buck Dutton, VP Marketing at Native Roots Cannabis. There is marked growth in the 65+ segment where use has nearly tripled from three per cent in 2016 to more than eight per cent in 2022 (sources: NY Times and National Survey on Drug Use and Health). Data reported by the Brightfield Group show growth over the past year in three segments: “Aging Ailers,” “Budheads” and “Stressed-out Millennials.”
However, the overall market is getting younger as Gen Z enters the picture. The average age of Native Roots customers since 2019 has been steadily dropping from 53 per cent under age 39 to 61 per cent in 2023. Other data reported during the conference echoes findings on Gen Z’s. Nearly two-thirds of this demographic are still underage, so there’s huge potential here.
U.S. federal policy changes in ’24?
In the absence of federal legalization and cannabis-friendly regulations, most businesses are still challenged, as many speakers stated or inferred. Rescheduling of the federal tax applied to legal cannabis businesses was mentioned often, with observers foreseeing change being implemented in 2024. IRS tax code 280E prohibits U.S. cannabis businesses from deducting commonly permitted expenses from gross income, which is still seen as derived from “trafficking” of an illegal Schedule I substance.
Last September the federal Dept. of Health and Human Services recommended that cannabis be migrated to Schedule III by the U.S. Drug Enforcement Agency (DEA), which would effectively eliminating 280E.
According to some analysts, such a move would lower cannabis business tax rates from an average of 80 per cent to 28 per cent. According to Virgil Grant, co-founder of California’s Minority Alliance, the repeal of 280E will allow him to recoup 30 cents on the dollar for his business. On the other hand, National Cannabis Roundtable Policy Director, David Mangone sees limited benefit from Rescheduling, perhaps due to state and municipal taxes rising to fill the gap.
The other major policy topic being speculated was the proposed SAFER Banking Act. The legislation’s passage is far from a sure thing, according to most although several commentators expressed optimism.
SAFER—The Secure and Fair Enforcement Regulation Banking Act—was introduced in September 2023 and approved with amendments in early October by the Senate Committee on Banking, Housing and Urban Affairs.
Currently in Committee hearings, the proposed legislation would enable cannabis businesses to access basic banking services such as bank accounts and credit card processing. Without these services businesses are hampered in conducting basic transactions and are more vulnerable to crime. Speculation was all over the map, but it was noted that the Bill has bipartisan support and is being pushed by major financial services firms. The question is, will it be one of the 200 bills that make it to the President’s desk for signing in 2024, from the roughly 4,000 introduced each year? The Bill must still pass both the Senate and the House during an election year, adding further uncertainty.
Social equity and diversity a defining feature
Social equity considerations are often baked into state legalization bills to redress harms from the US War on Drugs through which Black Americans and persons of colour have been disproportionately penalized. But social equity and diversity considerations are a pervasive feature beyond state licensing, as federal prohibitions which still bolster the W.O.D. continue to inhibit banking, impede interstate commerce, threaten public safety, and constrain small cannabis businesses. Part of SAFER’s impetus is to fight crime by reducing the need to keep cash in stores.
In a fascinating session on the current landscape for state and federal legalization, panelists profiled the District of Columbia as a jurisdiction strewn with barriers to developing a cannabis sector to the detriment of its Black American population, the District’s largest racial group.
The requirement that each state grow, process, and sell its own cannabis hampers smaller jurisdictions from developing an integrated market. In D.C.’s case, there is little room for agriculture and federal prohibitions prevent cannabis products and accessories from crossing state lines. Other jurisdictions are less affected but companies seeking access must replicate infrastructure within each state, not an efficient business model.
Social equity was also discussed in sessions where one might not expect it to be a factor. On a craft cannabis panel, Loriel Alegrete, owner of social impact brand 40 Tons, shared a live call with the audience from a prisoner serving time on a simple possession charge. The company directs all proceeds from T-shirt sales to support persons of colour incarcerated for non-violent cannabis offences. This was another example of how social equity issues are woven into industry sub-sectors, in this case fashion retailing.
German market a big focus
Sessions on Global business addressed a range of international markets but paid special attention to Germany’s medical market, as well as the government’s plans to legalize recreational cannabis. European cannabis markets are quite fragmented, unlike other EU sectors and at least seven years behind North America, according to Benedikt Sons, CEO of pharma wholesaler, Cansativa. As Europe’s largest economy, Germany naturally commands considerable attention. The government also subsidizes half of medical users; a factor that Sons sees as a big driver in the country’s evolution towards becoming the continent’s main medical cannabis market. Currently, Germany is one of only three “free” European medical markets according to Son, who defines other countries’ markets as tightly controlled, early/slow or subject to exceptional access. He also identifies Switzerland as a market in transition and notes that several others are running pilot programs and not fully operational.
Deepak Anand of ASDA Consultancy Services shared additional insights about the German medical market, noting it was the first to import cannabis to serve growing domestic demand. Domestic production of 2.6 tonnes is supplied by three licensed cultivators, two of which (Tilray, Aurora) are Canadian.
The German market is also highly dynamic, with new products appearing on pharmacy shelves every few weeks. Pharmacy purchases have grown quickly, from less than 1000 kg of flower/equivalent in 2017 to just under 15,000 kg. in 2022. An aspect of the market’s dynamism is a growing demand for high-THC products with content as high as 30%+ according to Sons, a figure that may prompt skepticism by Canadians due to reports here of inflated lab figures.
Plans for legalizing recreational cannabis in Germany are still taking shape so full-scale commercialization is not yet feasible. Over the next five years Sons sees only limited regional commercial markets being established. As Germany will be “the first domino to fall” its experience will influence other markets. Debate may be heating up as Anand put it, but Europe’s appetite for recreational cannabis remains limited.
Still, there is an apparent cultural shift toward a more liberal outlook, enabling private domestic production and use in Portugal, Spain, Malta, Czechia, and the Netherlands. In terms of commercialization beyond medical use and cannabis clubs, the Netherlands recently announced a supply chain test project in 11 municipalities, and Switzerland has pilots underway in selected cities and cantons. Last year Luxembourg announced plans to legalize cannabis as well. Above all, those looking to enter German and other European markets were advised not to launch business plans based on the expectation of future regulatory developments.
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