What will it take for Cannabis to become a global commodity, and what does success imply for the current and future marketplaces that are selling Cannabis in the U.S. and beyond? I zoomed with Claudia Della Mora, the co-founder and managing partner at Black Legend Capital – an investment and advisory firm based out of Los Angeles and an expert in international Cannabis legalization – to explore what the future holds for the plant, the industry, and our ability to consume Cannabis internationally.
Cannabis as a Commodity
Traditionally, a commodity is a raw material that makes up finished products like petroleum, sugar, or rice that can be traded internationally in large quantities with little restrictions, with pricing based on supply and demand as prices fluctuate. Commodity potential within the Cannabis industry includes THC flower, hemp biomass, THC/CBD distillates or isolates, and crude oil. While these have potential as bulk commodities and to one day be traded on the exchanges, there are three essential pieces to the puzzle that must be made to fit before Cannabis products can be sold as commodities globally.
While most U.S. companies see the future of Cannabis as a commodity coming from federal legalization, the real barrier to global trade is the United Nations Drug Treaty.
“Cannabis needs to get to a point of international legalization to have a commodity status, and that will require a type of standardization and minimum requirements for products to be traded and sold,” said Claudia Della Mora. “Although everyone looks at the U.S. as the biggest market, it’s only the biggest DEVELOPED market, but it’s not going to be the biggest manufacturing market. I do believe when everything is federally approved, Cannabis will be cultivated in low labor cost countries like China, Mexico, Columbia – so those countries will be very important while people buy from them.”
So, while the U.S. currently dominates the Cannabis conversation, it is far from the center of the world when it comes to pot’s future as a commodity. And while the U.S. can legalize at the federal level, that doesn’t mean they can export it lawfully. “It has to be the United Nations moving Cannabis to a U.N. Schedule II or III – that would allow countries and investors to create a market for products to be sold legally,” said Della Mora. “Right now to import and export MMJ, a narcotic license is necessary and it has to be compliant to the 1961 U.N. convention.”
For Cannabis to be treated as a commodity, there must be universally accepted standards for products. Currently, every state in the U.S. has different standards, as does each country across the globe. For there to be import/export of products, standards for quality, testing, ingredients and many other factors must be determined. There will be different standards for medicinal/pharmaceutical grade and recreational Cannabis, including cultivation, processing and the end user product.
There has to be a benchmark for prices, with differentiation, just like with the oil and gas industry. Once there are standards agreed upon internationally, there can be pricing set for types and grades of products, which would allow the ability for trade on a global commodity scale.
“In order to be a commodity, a product must be freely traded and sold,” said Della Mora. “Oil is a benchmark for pricing, but gas is refined from oil and priced locally. One interesting thing is that raw materials are sometimes a minor cost of the cost of the finished goods – sugar costs very little by the pound, while a two-liter bottle of Coke is above two dollars with little added expense.”
The Three Primary Verticals of the Cannabis Industry
While it is easy to think about the Cannabis industry as one giant melting pot, there are actually three distinct divisions that come from the same plant: industrial hemp, medical Cannabis and recreational Cannabis. Recreational Cannabis is like the alcohol or consumer packaging industry with lower regulations, medical Cannabis is similar to pharmaceuticals in terms of regulations and expectations, and industrial hemp can be used for either industrial applications, pharmaceutical grade medical products, or even recreational use. This is a complex web of overlapping products, and it’s important to understand how each vertical has a different function on a global level.
Industrial Hemp & CBD
Hemp is the only aspect of the three that is today at a commodity level globally, with import and export being legal in the U.S. at under .3% THC, or .2% THC in the European Union. As a commodity, hemp-derived CBD has crashed in prices globally, and the value continues to fall as supply outstrips demand and more farms come on-line globally to produce industrial hemp and CBD.
MMJ is a very specific aspect of the commoditization of Cannabis because processors use THC and CBD raw materials that are specialized, not just anything random. They often require specific ratios of cannabinoids and for the products to be grown or processed in a specific way, like European Union Good Manufacturing Processes certified. These raw materials are also used for specific types of treatments.
When you get down to specifics, the real difference between recreational and MMJ is not the end user, but the standards used to classify what category the Cannabis falls under. Apart from regulations like quality control or specific dosing, the only difference between MMJ and recreational is the label on the jar.
The Global Demand for Cannabis
While the global pandemic may have caused an up-tick in Cannabis consumption over the past year, the numbers appear to be here to stay. “Americans legally purchased $17.9 billion of legal Cannabis in 2020, not including the black market or states without legal Cannabis,” said Della Mora. “Which is $7.2 billion more than was bought in 2019 – so the pandemic saw a massive increase in sales – with the combined medical/rec market projected to reach $23 billion annually by 2025. Globally, the value is estimated at $130 billion by 2025, with Mexico alone estimated to be a $60 billion market.”
While there are U.S. based companies that have hundreds of employees and millions of dollars in revenues, even the largest U.S. producer/processor is woefully undersized and unprepared for a global Cannabis market. The market conditions that currently exist domestically have created an environment that has made Cannabis a cash crop in America, but this will not necessarily be the case long term. At the center of this bubbling market is the American idea that Cannabis producers have an inherent value that will make them ripe for acquisition from multinational companies, or that the products and brands they produce have enough domestic value and demand that there will always be a warm market for U.S. companies to sell their products domestically. However, this rose-tinted optimism has new competition on the horizon.
“A small number of companies can already supply all the commodity input needed to meet global demand for CBD,” explained Della Mora. “THC is limited state by state in the U.S., currently with high demand, but there is no sense in producing Cannabis in expensive countries or in climates not friendly to cultivation. Small producers might want to provide their knowledge, distribution networks and sales relationships to larger companies that will ultimately produce Cannabis in Mexico or elsewhere. That is the primary value that a small cultivator in the U.S. can provide to a large company once Cannabis is legal globally.”
In short, the current state of global legalization works in the producer/processor’s favor in the U.S., as does a lack of federal legalization. Even if the U.S. legalizes before the U.N., a national legal market would likely hurt small to medium U.S. producers in the long run, as they try to compete against multi-state operators and the rush of investment from major corporations.
“Of course, I don’t want to sound like a downer, and no producer/processor wants to hear this as they continue pouring money into companies, especially when there is domestic demand,” said Della Mora. “But from an entrepreneurial view, you have to understand your clientele before starting a business – and I think a lot of people are not sophisticated enough to make good decisions long term.”
Can American Growers Compete In A Global Market?
As noted previously, with commoditization comes standardization, meaning that Cannabis in Mexico or Columbia will have to follow the same rules, regulations and standards as Cannabis grown in the U.S. In reality, all Cannabis will be regulated similarly globally, meaning that the same standardized quality will come from countries with more favorable growing climates and lower production costs, which will make it very difficult for U.S. domestic producers to compete abroad. The biggest hope for U.S. growers will be local demand, and the potential for the U.S. Government to impose tariffs or taxes that make competition easier for U.S. growers producing the same quality of products as those in other parts of the world.
“I think that there will be consumers domestically and globally that want to choose ‘Grown in America’ products versus those grown in South America or elsewhere,” explained Della Mora. “Not all, but there will be those who choose domestic products if regulations allow disclosure of where the raw material comes from, like in food/beverages/clothing. If those trends follow, there will be a portion of the consumers that prefer locally-made products. ‘Made in America’ could be the stamp that keeps U.S. companies alive – just like the demand seen in the United Kingdom for Australian products that follow the commonwealth trade history of other commodities.”
In the European Union and most of the developed world outside the U.S., local governments control commodities like minerals and natural resources, and issue permits to companies to extract, refine and sell these products. From a regulatory standpoint, the less companies involved the better, as it takes fewer resources to regulate and hold accountable a couple massive companies than a large number of smaller companies. This means that globally the market is already tilted in favor of huge companies, especially those with experience in other industries.
“In Germany, three companies won the right to cultivate because it is a no-brainer for the government to work with three companies instead of dozens, with less management and risk, and everything being provided easily in big amounts on a silver platter,” explained Della Mora. “So any little company would be a waste of time for a regulating government.”
Nonetheless, Della Mora sees opportunity within the complex web of global Cannabis.
“There’s always opportunity when there are limitations, so I always encourage entrepreneurs or bright minds to think about solutions,” she said. “Because when you provide a solution, it’s a good investment of time. Obviously, whoever finds solutions in the meantime is going to make a lot of money, because it’s going to be a few years at least before full commoditization. Eventually, what we would like is for a real commodity situation, for Cannabis to be traded globally – and whoever is first to figure this out will take the market.”
Despite the challenges facing American companies on a global market, Della Mora is hopeful that the changes in international law will lead to a greater acceptance of Cannabis as a safe recreational drug and medicine, which will continue to create new opportunities for companies in America and around the globe.
“My hope is that it will be federally and internationally legal so that everyone can use it recreationally,” said Della Mora. “But I really hope that this plant can be recognized medicinally and wellness-wise everywhere because it really does help. We are discovering that Cannabis consumption might even help or protect against viruses like COVID, so we need more research and acceptance. I really hope that people who use Cannabis for medicinal uses can do so without the stigma and ignorance and that there is going to be global information awareness so that people can learn more about this amazing plant – not from the point of view of stoners, but from medical practitioners working to save lives.”