Comments and Observations from the International Cannabis Business Conference
San Francisco, February 7-8, 2019
Insight From Our Commodity Market Senior Executive
California
For many medical patients and “canna professionals,” California has led the cannabis reform movement in the United States, starting with being the first state to legalize medical cannabis in 1996. While a handful of states beat California to the polls for adult recreational use in 2012 and 2014, “the world’s sixth-largest economy” paved the way (led in part by a strong cannabis culture) to ending prohibition by placing the Prop 19 legalization measure on the ballot in 2010. With California passing Amendment 64 in 2016 and finally issuing permanent rules to govern its burgeoning industry, this economic powerhouse is again poised to help lead the cannabis community into the future.
Now, as the state continues to advance its legal cannabis market, lawmakers and industry leaders are working in concert. Although tax revenues fell short of initial predictions, legislation that is more progressive is making its way into law. Expect to see the Golden State explode as a nationwide, if not global, frontrunner in all things cannabis.
During a meeting with a prominent West Coast asset manager, it was indicated that most of his recent account openings or allocation requests are for the cannabis space… Surpassing, over short time, the flows he saw into cryptos.
International Cannabis Business Conference
The ICBC is a global organization that brings together top government regulators, cannabis industry leaders, and prominent cannabis activists to discuss permits, business models, and institutional opportunities arising from newly enacted laws and changing social attitudes. ICBC conferences have been held in Berlin, Vancouver, Hawaii, and Barcelona.
Federal Level
Today, 46 states have laws permitting or decriminalizing cannabis and/or cannabis-based products. As states began developing their own approaches to cannabis enforcement, the Department of Justice issued guidance to support these state actions and focus law enforcement resources. However, this guidance was withdrawn in 2018, causing legal uncertainty, public health and safety issues, and undermining the state regulatory regimes.
Many of the ICBC panel debates centered on the “States Act” – proposed federal legislation allowing states freedom to make their own legislative decisions about cannabis.
Essentially the States Act says that, in states which have approved medicinal or adult recreational use, the feds cannot come storming in and upend it all. Federalism at its finest!
The bill also contains common-sense guardrails to ensure that states regulating cannabis do so in a manner that is safe and respectful of the impact on their neighbors.
Strengthening the Tenth Amendment Through Entrusting States (STATES) Act
A bill proposed in the 115th United States Congress that would recognize legalization of cannabis and the U.S. state laws that have legalized it through their legislatures or citizen initiative. It was introduced on June 7, 2018, by Senators Cory Gardner (R – Colorado) and Elizabeth Warren (D – Massachusetts). A companion bill was introduced the same day in the House of Representatives, sponsored by Earl Blumenauer (D – Oregon) and David Joyce (R – Ohio). The act would amend the Controlled Substances Act of 1970 to exempt from federal enforcement individuals or corporations in states that are in compliance with U.S., state, U.S. territory, and District of Columbia, or tribal law on cannabis, with certain additional provisions such as minimum ages.
Source: Wikipedia
Product Phase
Until the modification or abolishment of the federal Controlled Substance Act (which lists cannabis as a “Schedule 1” completely prohibited drug – and we have Nixon to thank for that), interstate transport and banking is not possible for the cannabis industry. Yet conference delegates are already preparing for the day when the product becomes “commoditized” and is treated and listed like corn, wheat, or soybeans. The U.S. Wheat Associates recognizes six classes of wheat from Durham to Hard Red Winter. There are also six corn varieties and over 2,500 types of soybeans!
In cannabis, cultivars are categorized as hemp, indica, or sativa. Each has its own unique cannabinoid complexities, terpenes (essential oils), and medicinal value. Questions about whether standardization of products can be agreed on, given the known number of cannabis strains, were answered with suggestions that point to a commodity contract with a defined amount of THC or a set THC:CBD ratio in the product.
However – confirming what I’ve already seen happen on trading floors – the road to a traded cannabis product begins with…
Hemp
Ever since FDR signed the first farm bill back in 1933, the bill has been tweaked about every five years. Usually the modifications involve renewing agricultural subsidies, funding rural development, controlling energy costs, or promoting land conservation. The Farm Bill of 2018 was a seismic moment in the cannabis industry because the most interesting changes in the farm bill had to do with industrial hemp, aka cannabis.
The pro-business, pro-farmer voices were heard loud and clear in Kentucky, with Mitch McConnell lending his support. A not unexpected outcome was how much more attention cannabis gained as a discussion point considering it as a derivative or an asset class.
But first, let’s start with a definition. Hemp is cannabis. Period. But what needs to be factored in is that industrial hemp must not contain more than 0.3% of THC. So try as you might, hemp will not get you high, let alone produce euphoria. And for years, law enforcement did not differentiate between the various “versions” of cannabis. Moreover, thanks to the 1970 Controlled Substances Act (“CSA”), cannabis of any kind was prohibited. The CSA Schedule 1 deems cannabis to have “no medical value.” Oddly enough, you will find fentanyl on the less strictly prohibited Schedule 2 of the CSA. Medicinal value? Yes… when tranquilizing elephants.
So what does this newly reconfigured hemp policy look like, and what did it change specifically? According to the Brookings Institution, the 2018 Farm Bill “allows hemp cultivation broadly, not simply pilot programs for studying market interest in hemp-derived products. It explicitly allows the transfer of hemp-derived products across state lines for commercial or other purposes. It also puts no restrictions on the sale, transport, or possession of hemp-derived products, so long as those items are produced in a manner consistent with the law.”
What remains to be seen, however, is how the farm bill will allocate spending – if any – on hemp crop promotion. In 2014, the farm bill authorized spending of $489 billion, but less than 1% of that actually went to farmers.
Nonetheless, this type of legislation will lead to rapid growth in the hemp industry. Unlike THC-based cannabis, all parts of the hemp plant are used. As with other crops, this will result in market price fluctuations. Whether the end-product use of hemp is in paper, clothing, skin care, super-capacitors, or biofuel, purchasers of bulk hemp will need to consider hedging with a listed futures product. Each of the businesses noted in the summary, either hemp or THC-based cannabis, have market risk, currency risk, and/or supply chain risk.
Summary
There were more then 500 delegates at the ICBC conference. I spoke with farmers, distributors, and manufacturers. They all agree that it begins with hemp. And they agree that the THC variation between hemp strains will be a secondary consideration compared to the commodity status and market listing of hemp itself.
Of interest to market makers is that during this period of market adjustment, these hemp purchasers will need market education in order to maintain their positions in the cannabis “vertical.”
Huh? What I mean is that there is a genuine concern among conference attendees that big tobacco/alcohol/pharma will eventually usurp the role of the farmer, the processor, and the testing facility. In order to keep the market from being dominated by large players, other customers will need the opportunity to hedge hemp prices and have access to hemp derivatives once they are introduced.
The growers/farmers/distributors and the ancillary services supporting the hemp industry are no different from any other market participants. They have legitimate hedging concerns and market exposure risks. Other industries have tech exposure, so does the canna industry if you think of the seed-to-sale tracking that will be required using RFID technology. Other industries have energy positions or exposure. So does the canna crowd. An indoor cultivation facility has about ten times more energy cost per square foot than an office space of comparable size.
The cannabis industry is, in many ways, cutting edge and innovative. But, in other ways, it remains unsophisticated. Cannabis needs a crash course in Futures/Options Hedging 101.
Commodity Market Senior Executive X holds a top position in the capital market/exchange industry. He says, “I have embraced cannabis advocacy for purposes of affecting positive social change while weighing business and derivatives opportunities.”
