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Sonya Korshenboym for Quartz
STATE OF PLAY

A complete guide to the cannabis industry

We’re on the way to a fully legal global weed trade. Over the last two decades, more than 30 US states have legalized marijuana for medical purposes—and 10 of them eventually legalized it for recreational use, too. Canada and Uruguay have made weed legal nationwide, and countries in Europe and Oceania are opening the door to medical use as well.

It’s a cultural shift. It’s also a potentially giant industry.


Welcome to our field guide on the marijuana industry. Check out other parts of our deep dive here.


Before legalization, the illegal marijuana market in the US alone was worth between $30 billion and $40 billion, putting weed on par with America’s largest cash crop, corn. The legal market will almost certainly be even bigger.

That’s because cannabis companies aren’t just selling to stoners. Instead, they’re hoping to turn weed into an all-day, everyday product for adults who have jobs, kids, and 401(k)s. They’re hoping to get them high, sure, but also to replace their morning coffee, Advil, yoga, and whatever helps them get to sleep at night, too.

It’s not going to be easy: Most of the medical claims about marijuana are still unproven; the business taxes are wild; and every state has created its own industry with its own complex web of regulations. So while there’s a potential gold rush here, it’s not at all simple.

What we’re talking about when we talk about weed

Dispensaries in legal states sell a universe of products, of which “flower,” the botanical matter known as marijuana, is just one category. There are other ways to use a cannabis plant that have just as much, if not more, market potential.

THC

THC (tetrahydrocannabinol) is the chemical most closely associated with marijuana’s best known property. The marijuana plant can be reduced to potent, hash-like “concentrates,” which can contain more than 80% THC. THC oil extracted from the plant can be infused into baked goods, candies, and beverages or poured into vape cartridges.

Hemp

Since World War II, this industrial crop, like its sexier intoxicating cousin, has largely been exiled from scientific research. But as a source for paper, cloth, biofuel, and other materials, it could eventually end up becoming even more valuable than the devil’s lettuce. The Farm Bill, which passed the US House and Senate this month, legalizes hemp and is sure to create new opportunities for the crop. Hemp is also an important source for CBD.

CBD 

THC is only one of scores of chemicals called cannabinoids found in marijuana. During the prohibition era, growers had an incentive to maximize the THC in their crop, but with increased access to the plant, the rarer cannabinoids have begun to attract attention. Of these, the best known is CBD (cannabidiol.)

Unlike THC, CBD doesn’t get people high, but there is a lot of interest in its medical uses, as well as its potential as a “nutraceutical,” a commercial term used for various health and “wellness” supplements that are not regulated by the FDA (an important business advantage).

CBD advocates claim it can be used to treat everything from Alzheimer’s disease to arthritis, and they can largely get away with it—because what CBD does and doesn’t do are not yet well known. CBD has become a wellness fad, available as an add-on in California smoothie shops. But it’s not escaping mainstream attention: Coca-Cola, among other major companies, has researched CBD beverages.

So far CBD’s most important proven medical value is in treating epilepsy. In 2018, a pharmaceutical form of CBD called Epidiolex won FDA approval to treat two severe pediatric seizure disorders. It was the first cannabis-derived drug to win FDA approval, undermining the Drug Enforcement Administration’s assessment that marijuana has no medical value. The maker, GW Pharmaceuticals, is based in the U.K. and trades on the NASDAQ.

Other cannabinoids

THC and CBD are only two of the more than 100 cannabinoids that can be found in cannabis. Understandably there’s strong interest in what the other rare cannabinoids do, but research is hampered by both US law and the limited amounts of these chemicals found in the commercial marijuana crop (most cannabinoids can only be found in trace quantities in these plants).

Cronos, a Canadian marijuana company, earlier this year inked a $122M deal with Boston-based biotech firm Ginkgo Bioworks to genetically engineer yeast so it produces rare cannabinoids, which, if it works, will make them accessible in meaningful quantities.

Why it’s so hard to grow weed (businesses) in the US

In the US, marijuana is a Schedule 1 controlled substance, meaning the federal government regards it as having no medical value and a high potential for abuse. That puts it in the same category as heroin.

Schedule 1 controlled substanceaka
DiacetylmorphineHeroin
Lysergic acid diethylamideLSD
MarihuanaCannabis, marijuana
MescalinePeyote
MethylenedioxymethamphetamineMDMA, ecstasy, XTC
MethylfentanylChina White, fentanyl

Since using marijuana remains against US federal law, most banks won’t provide the industry with bank accounts and other financial services. While some banks still quietly serve the industry, many cannabis businesses operate in cash, a huge hassle that adds to the cost of doing business (and also ensures a lot of revenue goes unreported to the IRS).

Meanwhile, a tax rule known as 280E, enacted in the early 1980s, blocks businesses that deal in federally illegal drugs from deducting business expenses on their taxes. That means the local pot dispensary, even if it’s following its state rules, pays a far higher federal tax rate than the bakery or pharmacy next door. Now that the industry is mature enough to have its own lobbyists, the end of 280E and access to bank accounts are its top two priorities.

In addition to burdens related to taxes and financial services, cannabis businesses have to contend with a complex and fast-changing web of regulations. So, for example, a company that bakes edibles has to meet state requirements for, among other things, commercial kitchens, on-site security and childproof packaging. In many of the legal states, companies that try to follow the rules also have to compete against grey- or illegal-market businesses that—since they avoid following the rules—can sell the same products for less money.

Another significant obstacle to profitability are difficulties in benefiting from economies of scale. Say the Baked Bliss Kookie Kompany in Portland, Ore. wants to start selling in Seattle, where recreational cannabis is also legal. There is no legal interstate cannabis trade, so it can’t just drive its cookies up the highway to Seattle. The easiest option may be to license its intellectual property and brand to a licensed edibles company in Washington, which will produce pot cookies according to its specifications. But what if it can’t find a Washington partner it likes? Then it has to build and win a license for a new facility in Washington. The new facility will have to meet all of Washington’s laws, which will involve creating new packaging and labeling. And Baked Bliss will have to repeat this process for every new state it enters.  

Most Americans think using marijuana should be legal

Unlike with many other Schedule 1 controlled substances, the law and public opinion don’t necessarily agree.

The beginnings of weed’s legalization dates back to the worst days of America’s AIDS crisis, when dying young men turned to cannabis for comfort, but also because it boosted their appetites and relieved pain and nausea. Dennis Peron, a gay Vietnam veteran who ran an illegal dispensary in San Francisco’s Castro neighborhood, is credited with writing the country’s first medical marijuana law, Proposition 215 or “The Compassionate Use Act,” which California voters passed in 1996.

More than 30 US states, including deep red bastions like Oklahoma and Utah, have legalized medical marijuana legislatively or with ballot initiatives. Nationwide polls show roughly 90% percent of the public supports access to medical marijuana, and more than 60%, including a majority of Republicans, support legalizing recreational pot.

Canada: The land of opportunity

There’s a clear demand for marijuana products in the US, but the legal situation makes it exceedingly hard to grow a business there. That’s why Canada is so important in the global weed industry.

It’s not about market size—California has more people than Canada—it’s about institutions. Unlike US marijuana companies, which US banks won’t support without the OK from Washington DC, Canadian marijuana companies can access the country’s normal financial system. The Canadian stock market is also open to cannabis companies, enabling them to access growth capital much more easily than US companies.

To make things more confusing, some of the larger American companies are going public in Canada, while a handful of the largest Canadian companies have started trading on the Nasdaq and New York Stock Exchange. Unlike US companies, they can trade on American stock exchanges because they are not breaking their own country’s laws.

Canadian companies can also export medical marijuana to countries where it is legal, and they now have customers in Europe, Australia, and Latin America.

With Canada legalizing marijuana, bigger, established corporations are finally willing to invest. This month the tobacco giant Altria, maker of Marlboro cigarettes, said it would invest $1.8 billion in Cronos Group, a Canadian marijuana company. And earlier this year, the New York liquor company Constellation Brands (which owns brands like Corona and Ballast Point beer, and Robert Mondavi wines) invested $4 billion in Ontario-based Canopy Growth, one of Canada’s largest producers.

This is what big marijuana looks like

While weed may not yet be massively profitable, a handful of weed companies are already massive, with indoor pot fields the size of airplane hangers. Ontario-based Canopy Growth sold CA$23.3 million worth of dried flowers, oils, concentrates, capsules and hemp in the second quarter of this year (posting a CA$330.6 million loss in the process). Quartz went inside the production facility of its biggest brand, Tweed, to give you a quick glimpse of marijuana at scale.

Global weed

While the overwhelming majority of the world’s legal marijuana is consumed in North America, countries in Europe and Oceania are moving to legalize medical, from which recreational inevitably follows.

  • Colombia, a former narco state, has ambitions to be a center of legal cannabis agriculture. Marijuana is far cheaper to grow in the equatorial sun than inside under high-pressure sodium light bulbs, and Colombia has issued dozens of licenses to grow the plant, in hopes that it will be its next legal boom crop.
  • The 19th century opium wars left China suspicious of novel intoxicating drugs, but the country is a leader in hemp research and leads the world in hemp-related patents.
  • The Israeli scientist Raphael Mechoulam first isolated THC in 1964, and Israel, with its strong research in medical and agriculture technology, remains a center of marijuana research. Unlike in the US, in Israel doctors and scientists can conduct clinical trials in which they test marijuana-derived medicines on human patients.

Those striking it rich in the “green rush” aren’t selling pot

During a gold rush, it’s sometimes said, the people making money weren’t the ones panning for gold, but the ones supplying the picks and shovels. This is probably true of the cannabis industry as well. Cannabis businesses are divided into two broad categories. “Plant-touching” businesses include the supply chain: growers, processors and manufacturers (i.e. edibles and vape pen makers), and retailers. Ancillary businesses include companies that make paraphernalia such as bongs, pipes, and rolling papers, but also those that sell lighting and climate control equipment for indoor grows and the consultancies, accounting firms, and law firms specializing in the space. Many of these companies are best positioned to profit because they skim from the cash pouring through the industry but are not subject to the stringent regulations, 280E and the other aspects of the industry which make it so difficult to earn a profit.


DATA POINT

$10 billion: The amount of sales expected from marijuana businesses in the US this year, more than McDonald’s sales nationwide.

Legalization could help compensate for the war on drugs

The US cannabis industry is arising from a widely discredited but still ongoing “war on drugs,” the burdens of which, in the form of mass incarceration and other criminal penalties have fallen disproportionately on black and Latino Americans. With legalization, several states and cities have pursued so-called “equity programs,” which aim to ensure the communities most victimized by the war on drugs, including individuals with past convictions for marijuana offenses, can benefit from the wealth created by legalization.

It’s a hard problem. Minority entrepreneurs face disadvantages in normal industries, and cannabis’s unique complications amplify them. Some jurisdictions have created or want to create equity licenses, reserved for groups deemed to have been victimized by the war on drugs and sometimes coupled with financial support.

The programs have struggled so far. An Ohio judge recently overruled a carve-out for minority businesses, arguing it placed too much of a burden on non-equity businesses.

City and state governments lack the resources or expertise to offer anything more than very limited support, relative, to say a company like the tobacco company Altria, which has deep expertise navigating regulated markets, bottomless pockets and experience marketing and distributing products all over the world.

The equity business programs have yet to prove themselves. But numerous cities and states are trying to undo some of the effects of the war on drugs by clearing—or allowing people to apply to clear—their criminal records of past low-level cannabis offenses.  Those charges can still make it difficult for people when they apply for jobs, student loans, and public housing.

Marijuana: the most interesting case in states rights since the Civil Rights Act

When California legalized medical marijuana two decades ago, it did not create a regulatory framework akin to those for alcohol and pharmaceuticals. What arose in the absence of these regulations was a messy gray market where, according to a later law, some non-profit “collectives” could grow or distribute cannabis, but the laws they had to follow were not necessarily clear. Meanwhile, local jurisdictions often had their own laws and levels of tolerance for pot shops. Local, state and federal prosecutions often followed. Many heroes of the movement operated during this time; some of them are now feted on the conference circuit and others are in prison. In some cases, whether someone ended up in one group or the other can be attributed to little more than luck.

For cannabis consumers, there was a lot to like. High-quality weed was abundant. In Los Angeles, Oakland, and other cities, dispensaries operated openly—even as their operators risked arrest and prosecution. Companies began experimenting with manufactured products like edibles. And while California was technically a medical-only state until November 2016, medical cards were available for the asking. Once diagnosis-via-video chat was available, you could get a medical card from your couch after a very brief consultation with a doctor.

Today every US state is at a slightly different stage in the legalization process, between vaguely considering legalization and having an operational $1 billion market, even though the federal government considers marijuana illegal.

In some ways it makes sense to leave marijuana laws to the states, as liquor laws largely are. Utah was able to determine what its cannabis industry should look like: Under the conservative state’s new medical law, it will be far more difficult to obtain a medical card than it ever was in California, and the vast state will be limited to seven dispensaries, which it is calling “pharmacies,” selling a meager product range. 

In other ways, the state-by-state approach looks ridiculous, if not dangerous. States are not as well-prepared as the Environmental Protection Agency (EPA) to determine which pesticides can be safely used on cannabis, but they have been forced to figure it out, because the EPA, like much of the rest of the federal government, has largely kept its distance from the legalization process.

Similarly, it doesn’t make sense for each state to determine which conditions medical marijuana does and does not effectively treat, but that’s the current situation. Some states recognize marijuana as a treatment for PTSD, for example, and others don’t. Meanwhile, marijuana’s ongoing Schedule 1 status makes it difficult for scientists and doctors to study whether medical marijuana actually benefits patients with PTSD or make progress on safe and effective dosages, consumption methods, and all the other questions one would have about a new medicine. To add yet another dimension to the PTSD confusion, the Veterans Affairs Department, which provides veterans with healthcare, does not offer medical marijuana recommendations to patients even in legal states, because it is against federal law.

Until recently, a 2013 document known as the Cole Memo (for its author, then-deputy US attorney general James M. Cole) guided the states on what the federal government would tolerate. The document essentially allowed states to establish their own marijuana laws as long as they respected eight federal priorities like no tolerance for sales to minors, cannabis-impaired driving or product “leakage” onto the illegal market.

While it wasn’t necessarily the intention, the Cole Memo catalyzed the green rush because entrepreneurs no longer feared feared that starting a cannabis company could lead to federal prosecution. While estimates vary widely, the industry now employs more than 100,000 people and that number is widely expected to climb. In January 2018, Attorney General Jeff Sessions rescinded the Cole Memo, but without new rules to follow, its guidelines effectively remain in place.

What’s next?

Nobody knows when full legalization will happen, but there are signs that the most egregious quirks could be ironed out soon.

Legalization is popular enough that there are hardly any national politicians anymore who vocally oppose it. Nobody except lawbreakers benefits from zombie tax rule 280E or the US industry’s inability to access banking services, and it’s likely changes to both could pass both the Senate and the House. In recent years, House Rules Committee Chair Pete Sessions (R-TX, no relation to former Attorney General Jeff Sessions, who also hates marijuana) has blocked cannabis-related reforms. But Sessions lost his bid for re-election and the newly Democratic-controlled House will have more debate about legalization.

If there was a vote today on 280E and banking access, chances are that both would pass with bipartisan support and be signed by President Trump, who has been relatively consistent in his support for medical marijuana. While Trump famously said he could shoot someone on Fifth Avenue and not lose any supporters, he likely grasps that the same can’t be said if he took away the people’s weed.

When legalization does happen, most, if not all, of the factors that make it so hard to profit from cannabis will go away, and the great American marketing machine will rev up. Many of the larger existing companies will be acquired—by alcohol and tobacco companies, but also possibly by Big Food, Big Agriculture or Big Pharma. There will be a great deal of money spent in the race to create market leaders. The industry could grow to resemble wine, where there aren’t dominant brands, or beer, where even though mega brands like Budweiser and Miller own the market, craft or micro brands have also found profitable niches. In either case, like it or not, marijuana is the next great American industry.

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