Anyone outside of the legal cannabis industry probably assumes that companies generate massive profits. After all, the number of reported cannabis users has grown steadily for more than two decades and governments have increasingly passed laws allowing medicinal and recreational cannabis sales.
Despite these positive trends, 2022 was a tough year for the legal cannabis industry. Many companies are struggling to survive. What makes the industry so challenging right now, and can investors expect more success in 2023?
Factors That Contribute to the Cannabis Industry’s Struggles
Several factors aligned in 2022 to make the legal cannabis industry extremely competitive. Some of the biggest challenges include:
- Falling cannabis prices caused by overproduction and competition;
- Supply chain disruptions that started during the pandemic;
- Labor shortages;
- Lack of access to capital needed to fund growth; and
- Excessive taxes and licensing fees.
To make matters even worse, most US financial institutions refuse to work with businesses in the cannabis industry. States can change their laws to build legal, regulated cannabis industries. However, banks and other financial institutions in the United States must follow federal law. As long as the federal government considers cannabis a Schedule I drug with no medical use and a high potential for abuse, banks will not work with the industry.
2023 Could Bring Some Relief to the Cannabis Industry
Business owners and investors shouldn’t expect to see the cannabis industry change radically by the end of 2023. However, they could see some significant shifts in policy that make it easier for them to profit.
The US Government Is Finally Taking Cannabis Seriously
President Joe Biden could become an unlikely hero for the legal cannabis industry. As a member of Congress, Biden helped establish minimum sentences for drug offenders. Decades later, he seems to have a more informed perspective. That could mean big changes for the cannabis industry.
The Biden Administration has already pardoned felons convicted of simple marijuana possession. The White House has also started making moves towards rescheduling cannabis. A memo from the Executive Branch correctly states that cannabis is in “the same schedule as… heroin and LSD, and even higher than the classification of fentanyl and methamphetamine.” Finally, a US President has acknowledged that the current law doesn’t make sense and causes more harm than good.
Rescheduling cannabis would make it easier for Congress to legalize or decriminalize products. It could even open the door for financial institutions to work with licensed cannabis businesses. That change would eliminate massive fees and inconveniences that hobble today’s industry.
California Reconsiders Its Cannabis Taxes
States often adopt laws legalizing medicinal and recreational cannabis because they want the tax revenues the industry can generate. Unfortunately, many states have set such excessive taxes and licensing fees that legal cannabis companies can’t stay in business. Perhaps even worse, the high taxes make buying legal, regulated cannabis much more expensive than black-market cannabis products. As long as the financial burden remains high, legitimate companies will struggle and black market sellers will thrive.
California has started to recognize the problems created by high taxes and fees. During the summer of 2022, Governor Newsom signed a bill that eliminates taxes for cannabis cultivators. Previously, cultivators paid $161 per pound of flower.
The measure also creates new tax incentives for cannabis businesses in California.
No one knows whether these changes will have the required impact. Other states are certainly paying attention to California to find effective policies that steer cannabis users toward the legal market instead of black markett sellers. If lower prices can attract enough consumers, California might discover that it can generate higher tax revenues by cutting tax rates. That might encourage other states to lower their tax rates.
More Governments Are Changing How They View Cannabis
Many industries can rely on international markets that help them make money from consumers around the world. That approach doesn’t work for cannabis, though, because nearly all governments have strict rules that criminalize cultivation, sales, and possession.
What happens when more countries liberalize their cannabis policies by legalizing or decriminalizing products? Some investors hope it could lead to international trade.
Countries with legal recreational cannabis currently include:
- South Africa
Even among these countries, though, the laws vary significantly. Some laws make it legal to grow and use cannabis, but businesses cannot sell cannabis products to consumers. None of the countries allow exporting or importing cannabis.
That could change as more countries consider changing their laws. Germany looks poised to legalize recreational cannabis in the near future. If that happens, other European countries would likely change their laws to keep up with Germany. Just as a state like Ohio loses tax revenues to cannabis consumers crossing the border to Michigan, France would lose money as people traveled to Germany to purchase legal cannabis products.
The Future Is Uncertain, But There’s Room for Optimism
It’s impossible to predict how the cannabis industry will evolve over 2023 and the upcoming years. As more governments reconsider their strict laws and hefty taxes, though, everyone interested in the industry’s success has reason to feel optimistic.