The Economics of Cannabis Trade - Nov 2020

The Economics of Cannabis Trade

“Marijuana is a soft product. Doesn’t hurt anyone. For now, it’s illegal, but in the long run, it will be legalized”.

Does this dialogue seem familiar to you? If you are an ardent fan of the Netflix series Narcos: Mexico, you would recognize this line as spoken by Cocaine King Pablo Escobar in the show’s fifth episode of season one.

The 2020 elections further ramped up hopes that cannabis would soon be legalized in the US at the federal level after voters in New Jersey, Arizona and South Dakota approved ballot measures to legalize recreational marijuana. With these three states in the fray, the count of states where Cannabis will be legalized either for medical or recreational use will jump to 38! We, therefore, felt this would be the right time to give you a little insight on the economics of this business in the US and what fortunes the future holds for this industry now that it has been legalized in quite a few states.

First, let us understand what drug legalization is. Legalization is the process of removing all legal prohibitions on the consumption, trade and possession of a drug. These drugs would then be available to the adult general population for purchase and use at will, similar to tobacco and alcohol.

Sounds like a good time to get “high” on the cannabis business, right? Well, let’s dive right in.

The bloom of the plant

Being one of the most commonly cultivated, trafficked and used illicit drug, with a growing push for legalization in the US and abroad, marijuana is piquing the interest of investors, manufacturers and researchers.

Being illegal under the federal law as a Schedule I drug did not stymie the growth of the U.S. legal marijuana industry, which was valued at $13.6 billion in 2019 and generated nearly 340,000 jobs devoted to the handling of plants. The industry is expected to grow to $23 billion by 2025.

Figure 1: US Legal Cannabis Market Projections

A total of 35 states along with the District of Columbia have now legalized marijuana for medical use. As of November 2020, 15 of these states even allow adults to legally use the drug for recreational purposes. And this number is expected to rise, as more people are accepting the idea of legalizing marijuana across the United States.

Currently, 67% of Americans believe the use of marijuana should be legalized. This is double of what it was in 2000—31%—and five times what it was in 1969—12%. Capitalizing on the changing trends, companies in the U.S. marijuana industry raised $116.8 billion in the capital in 2019 and are expected to generate nearly $85 billion in sales in 2030, according to analysts at Cowen Inc, an American multinational independent investment bank and financial services company.

Figure 2: Worldwide Legal Cannabis Spending

CBD Stealing the show

Marijuana has been used as a medicine in different cultures for thousands of years. The federal law banning it in the U.S., the Marijuana Tax Act, was passed in 1937. The recent shift in attitude towards marijuana consumption seems to signal a return towards recognizing its medicinal benefits with a growing acceptance of the plant as a legitimate option for patients who suffer from medical problems like chronic pain or seizures in modern-day America.

This is mostly, thanks to cannabidiol or CBD, a natural compound found in cannabis plants that is non-psychoactive. This means it doesn't make the consumer high. CBD is sold as an ingredient in oils, oral sprays, creams, pills, or edibles like gummies and lollipops. Purveyors extol the benefits CBD can provide such as relief from pain, helping combat anxiety and depression and even easing the lives of people suffering from cancer.

It's true that CBD is having its moment. Large companies like Constellation Brands (owner of the Corona brand of beer) (STZ.B) and Marlboro cigarette maker Altria Group (MO) have bought multibillion-dollar stakes in marijuana companies. Not only that, Wellness and health brand, Goop, owned by Oscar-winning actor Gwyneth Paltrow, is also actively investing in the cannabis industry and selling CBD Oil. A report by New Frontier Data estimates that the market for CBD will grow from a value of $390 million-dollar it had in 2018, to a $1.3 billion market—or 3.3x—by 2022.

Technology is also shaping the industry. Weed delivery company Eaze has raised $37 million and is reportedly valued at $300 million. It recently announced it is creating a platform to ship CBD products to 41 states. On-demand marijuana and cannabis delivery service Dutchie raised $3 million in 2018 from the venture capital firms of rapper Snoop Dogg and basketball player Kevin Durant among others.

That’s a high valuation. Let’s Tax the industry

Better than expected sales of marijuana in Colorado and Washington over the past several years have resulted in buoyant tax revenues. In 2019, Colorado collected more than $302 million in taxes and fees on medical and recreational marijuana. Sales in the state totalled over $1.7 billion.

A report from Arcview Market Research and BDS Analytics says that in 2019, sales in the U.S were $12.2 billion, and are projected to increase to $31.1 billion by 2024. New research also suggests that federally legal pot could generate an additional $105.6 billion in aggregate federal tax revenue by 2025. From January 2018 to December 2019, California’s cannabis sales had generated the following amounts in various taxes.

If you ask us, this is tax galore! These bold collection figures however can give industry players sleepless nights. Why are taxes such a headache to ganjapreneurs? Under the IRS’s rules, code 280E explicitly bans tax deductions for income made by trafficking Schedule I and Schedule II drugs defined by the federal Controlled Substances Act. And since the feds classify “marijuana” as a Schedule I substance, these ganjapreneurs have their entire revenue stream being taxed without allowing for any deductions that an ordinary business would otherwise enjoy. Some states, however, such as Colorado and Oregon, do allow some deductions for licensed cannabis businesses. But these deductions only apply to state taxes, not federal and most states, unfortunately, follow the federal guidelines and don’t permit deductions. Ouch!

Driving these high tax collections are high sales which are in turn driven by people working in various jobs and roles in the marijuana industry. Let’s have a look at some of these jobs.

Willing to gain some work experience in the marijuana industry?

Setting up required infrastructure such as marijuana nurseries and dispensaries would be the first step for the states that have voted in favour of medical marijuana. Such areas would not only witness job creations but would also provide a fertile ground conducive to economic activity in the pot industry. States like Nevada and California where such infrastructure already exists, the economic impact has become visible and increasingly quantifiable with increased maturity of the sector.

An RCG Economics and Marijuana Policy Group study on Nevada says that legalizing recreational marijuana in the state could support over 41,000 jobs till 2024 and generate over $1.7 billion in labour income. Research by a leading consulting firm estimates at least 81,000 additional direct, indirect and induced jobs in California as a result of legalized marijuana sales. It also projects an increase in total labour income by at least $3.5 billion.

Experts also suggest that nationwide legalization could generate up to 1 million jobs by 2025. These jobs would be related to growing the plants and workers would be needed to farm, process, distribute, and sell marijuana-based products. Such jobs would also create opportunities for secondary industries not directly involved in production and distribution. These include jobs in the domains of software development, financial services, construction and realty, and many others.

If however, you are eyeing for a top-paying position in this industry—which is finally gaining respect for its role in helping people ease medical symptoms and side effects and relax and enjoy themselves more—here are four jobs to consider. The joint, as they say, is jumping.

Cannabis Consulting:

Combining their expertise in state and local cannabis regulations with their backgrounds as lawyers, accountants etc. consultants can earn a lucrative six-digit salary.

Dispensary COO and CFO:

Responsible for managing cultivation facility operations, supervising financial reporting, overseeing harvesting and associated tasks allow people in these roles to earn almost $125,000 a year along with other benefits.

Cannabis extraction technician:

Earning anywhere between $75,000 to $125,000 annually, an extraction technician is required to be skilled at laboratory work, extracting THC, CBD, and other cannabinoids.

Grow master/Botanical Specialist:

Specializes in cloning, transplanting, feeding, trimming, and other growing tasks and earns a salary of approximately $80,000 to $100,000 or more per year.

Prospects in India

The recent Rhea Chakraborty debacle over her alleged use of marijuana (and other charges) might lead you to believe that it would take us another 50 years to get to a stage where the US is right now. However, this is not so. Why? Because we never had any problems with marijuana to start with! Yes, it’s true that India legislated the Narcotic Drugs and Psychotropic Substances Act in 1985 but it did so only under pressure from the “War on Drugs” that President Ronald Regan was waging at that time.

At best, in India, attitudes are class-laced, weed being a ‘poor man’s tipple’. As a society, we have understood that consuming cannabis is less harmful than tobacco and alcohol, and indeed has the potential to ameliorate illnesses such as cancer, epilepsy and HIV. As a case in point, consider Patanjali; Baba Ramdev's Patanjali has successfully entered numerous segments and could be the first indigenous company to realise the investment potentials in cannabis. It spoke about legalising the plant in 2018 and is reportedly carrying out industrial and medicinal research.

Hence, the need of the hour is for India to turn Atmanirbhar in regulation, and return to its pre-1985 status and make marijuana commercial and legal.

The final puff!

High already? We are. High on optimism that the newly elected US president and his cabinet during their 4-year tenure will look into the legalization aspect of marijuana with more gravity. Hopeful that like Canada, they too legalize the plant at the federal level and thus bring the industry under the realm of proper regulation and supervision thereby dismantling the illicit trade business in marijuana.

In the end, let's also hope that the growing number of states in the US legalizing marijuana set a precedent for the Indian government and allow it to revitalize ancient ayurvedic treatments that harnessed the medicinal powers of marijuana.