February Newsletter

February Newsletter

Cannabis legalization is gaining ground on a global scale. Recently, we have seen a large shift in international attitudes towards cannabis as a number of countries have legalized it in some shape and many others have expressed an interest in legalizing cannabis in the coming years. The World Health Organization (WHO) recently released a letter recommending that cannabis and its chemical components be rescheduled under international drug agreements. If adopted, cannabis and its resins would be rescheduled from Schedule 4 (the most-restricted category) to Schedule 1 (the least restricted category). While there has been a large shift in perceptions about cannabis there are many logistics to be worked out among countries and the United Nations before the proliferation of global cannabis trade occurs. It is encouraging to see international organizations announce that they will be reevaluating their stance on cannabis; however, international cannabis operations will still require local licensing and compliance. Accordingly, Green Consulting Partners looks forward to keeping its clients updated as news surrounding global cannabis trade and local cannabis opportunities continues to unfold.

Cannabis Imports & Exports?

States, and even countries, are looking into the prospect of importing and exporting cannabis to assist with creating price and supply stability. Canada was at the forefront of the cannabis movement this past year, being one of the first countries to legalize cannabis for recreational use nationwide. Cannabis had a slow start in Canada as many retailers faced cannabis shortages throughout the first few months of recreational sales. Fast forward, and Canada is now on track to be one of the largest suppliers of cannabis in 2019. With the surge of legalization there has been a supply discrepancy between jurisdictions, leaving individual markets over or undersaturated with cannabis. This has led to the prospect of cannabis imports and exports between legal jurisdictions. Already in 2019, a Columbian cannabis producer has expressed that they will begin shipping dry cannabis to Canada for research purposes and to possibly aid with their ongoing shortage. Columbia is not the only country that has voiced an interest in exporting to Canada; the U.K will also begin to export cannabis pre-rolls to our neighbors to the North in the near future.

The State of Oregon has been flooded with cannabis since its legalization, forcing cultivators to sell flower at astronomically low prices, or turn to other crops for financial assurance. In order to deal with the overabundance of cannabis the State has proposed a bill which would allow for the exportation of cannabis to jurisdictions where cannabis is legal. If approved, Oregon could see the average wholesale cannabis prices rise for flower sales, which may bring back some of Oregon’s original cannabis cultivators. However, federal barriers to interstate commerce will likely slow progress in this direction.

Finally, Israel will likely begin exporting medicinal marijuana internationally by the end of this year. Israel has been leading the world in medicinal cannabis research for years and is presently one of the biggest producers of the product. Recently, Israelis approved legislation allowing for the export of medicinal cannabis to other areas of the world. Among the countries that have expressed an interest are Mexico, Austria, Germany, and Australia.

California’s Cannabis Industry

California got off to a shaky start with its recreational cannabis program. Strict regulations and heavy tax burdens have made it difficult for legal operators to gain a foothold in the legal cannabis market, while lack of unified enforcement efforts has allowed black market operators to continue to thrive in California’s cannabis market. Illicit cannabis operations are able to offer similar, albeit potentially untested and dangerous, products for a fraction of the price of a licensed Dispensary, and they do not pay taxes on their sales. These relatively low prices have encouraged some cannabis consumers to obtain their cannabis from illegal sources, which has a profound effect on California’s regulated cannabis industry.

In order to drive up competition by licensed cannabis businesses, California has introduced AB 286, which if approved would lower the cannabis excise tax from 15% down to 11% for retail sales and eliminate the cultivation tax for three years, until 2022. By cutting the tax on legal cannabis businesses, the state hopes to reduce the price disparity between legal cannabis businesses and black-market operators, thereby encouraging consumers to purchase product from licensed cannabis businesses.

Interestingly, this proposal was made around the time that California finalized its regulations and approved state-wide delivery, which many believe will allow the black market to maintain some control over the cannabis market.  However, this strategy has been employed in other jurisdictions, such as Washington, where it was effective at increasing tax revenues as well as limiting the black market’s control over the cannabis industry. If successful, California will see increased tax revenues and the development of a new cannabis market controlled mostly by licensed cannabis businesses.

Federal Developments in the United States

The United States federal government continues to fall behind on cannabis legalization as the majority of states have approved its use for recreational and/or medicinal use. At the beginning of 2019, U.S. Representative Earl Blumenauer proposed HR 420, which if approved would remove cannabis from the controlled substance act and allow it to be regulated like alcohol by the Bureau of Alcohol, Tobacco, Firearms and Explosives.

Since many states still prohibit the use of cannabis, the bill would not completely legalize cannabis in the United States. Instead, the bill will defer to state laws and ultimately give them the decision to permit cannabis use or not. While the bill seems like a long shot, it is a constructive step forward for the cannabis industry. Most notably, a bill like HR 420 would open up banking options for cannabis industry operators, which is currently one of the biggest remaining challenges for the industry.

Concurrently, federal lawmakers have expressed that they will be holding a congressional democratic house hearing in the coming months to discuss past complications that cannabis businesses have had in terms of securing banking contracts. Hopefully they will come to a decision that will ultimately open banking for the legal cannabis industry in the U.S.

Over the next year there are likely to be a handful of states addressing cannabis policy reform. Legislators in New York, Vermont, New Jersey, Connecticut, Pennsylvania and Illinois have mentioned cannabis as a priority issue. Vermont has already legalized cannabis possession and use, but the state is now getting ready to institute a cannabis business licensing program to provide Vermonters with legal cannabis sources. Illinois’ newly elected governor has vowed to fully legalize cannabis. New Mexico also has joined the legalization front, but there are competing approaches and interests being hashed out prior to any formal legal initiatives; one group of New Mexico lawmakers, for example, is proposing that the government itself sell cannabis – similar to the way Utah’s government controls Utah’s alcohol market. Lastly, recreational cannabis is slotted to be on ballots in both Arizona and Ohio in 2020.

Phase III Los Angeles

As Phase 3 is set to initiate in Spring 2019, the Los Angeles Department of Cannabis Regulation (DCR) has proposed a number of changes to the licensing process in order to make it more efficient, transparent, and more equitable. These changes will have strategic implications as to how an applicant approaches the Phase 3 licensing procedure. The DCR has expressed Phase 3 will be exclusive to Social Equity Applicants (except for delivery). As it stands there are around 200 licenses available before the city meets undue concentration limits, so General Population will not have an opportunity to obtain a Los Angeles retail storefront license in Phase 3.

The city has proposed two methods for issuing licenses in Phase 3 upon verification of social equity status, and each method will be used in conjunction with a merit-based system that will take approximately 9 months to process the remaining 100 or so applications. The first method would follow suit like previous phases by accepting the first 100 applications on a first come first serve basis. The second method would consist of a lottery style process. For more information on Los Angeles’ proposed Phase 3 updates see Green Consulting Partner’s recent article here.

Since Cat Packer and the entire DCR are behind these proposed amendments, they are likely to be approved. Given the magnitude of the Los Angeles cannabis market and its likely influence across the industry, it is prudent for cannabis businesses and prospective Los Angeles applicants to strategize accordingly.

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With a litany of proposed new regulations and regulatory changes, 2019 is shaping out to be another important year for the cannabis industry. Existing businesses and prospective businesses have a lot to look out for and to look forward to, especially with hopeful changes to the banking landscape on the horizon. Local and international developments are likely to have a large effect on how businesses begin to shape their long-term strategies within the industry. Green Consulting Partners will continue to monitor the industry changes and we look forward to working with our clients to adapt to developments as they unfold.

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