INSIGHTS BLOG > Why Is Cannabis Such a Tough Nut to Crack? A Synopsis of Supply and Demand Complexities

The Essence of Cannabis

The cannabis market, like any other product market, is about delivering the right product to each consumer, that is, providing the product that will most closely satisfy that person’s needs. While this doesn’t sound particularly complicated, it turns out that overcoming cannabis’ complexities to create and sustain financially viable legal market activity is a tough nut to crack.

Matching People with Products

The first set of complications that makes cannabis so complex involve understanding how cannabis generates specific types of effects – such as relaxation, euphoria, or pain relief – in people. It’s taken researchers decades to figure out that matching people to products involves several complex issues.

Consumers are unique. Cannabis acts on people’s endocannabinoid system (ECS), where each person’s ECS (and other body physiology) is unique. This means that what’s good for one person might not be good for another.

Profiles of cannabis compounds generate effects. There are specific compounds in the cannabis plant responsible for generating effects in consumers. Each cannabis plant contains hundreds of different compounds, many of them work together to generate effects, but we still don’t know exactly which of the many compounds are essential for producing the desired effects. 

Profiles of compounds in cannabis samples are a moving target. Cross-breeding and hybridization have created an unlimited variety of cannabis strains, where each strain contains a distinct combination of profiles of compounds. But even across plants within a particular strain, each cannabis plant contains a unique combination of the compounds that generate effects in users. Furthermore, the profile of compounds in a cannabis sample that are ultimately delivered into a user’s body depends on (i) the plant’s genetics, cultivation, harvesting, and drying/curing methods, (ii) the methods used to process the harvested plant into consumer end-use products, and (iii) the form of cannabis used to ingest the sample into the consumer’s system. Being able to scale a production process that delivers a consistent product to consumers has been one of the bigger challenges for suppliers of cannabis products. 

The fact that profiles of compounds change as products move through the supply chain, and the need to match particular profiles to particular customer needs, both make education and testing an industry-wide imperative. Education is needed to ensure suppliers and consumers alike understand which products meet users’ needs, and also to make sure those products are available for purchase. Accurate testing is also a must, to make sure that once consumers know which profiles will best meet their respective needs, they can be sure that the products they purchase and consume actually contain the desired substances, not to mention that the products are also free from toxins (pesticides, molds, heavy metals, residual solvents, etc.).

Market Complications

The second set of complications that makes legal cannabis market activity so difficult involve the informational and regulatory history of cannabis in society.

Cannabis has long been stigmatized. At least since the turn of the 20^th century, cannabis has been virulently stigmatized, for political and financial reasons. The demonization of cannabis has created a deep sense of fear and loathing in large swaths of the population. This resistance to cannabis creates a fierce headwind that all industry participants must battle on a daily basis.

Information surrounding cannabis is rife with inaccuracies. The long-standing stigmatization campaign against cannabis has created an enormous repository of deeply- and widely-believed misinformation about cannabis (e.g., cannabis causes brain damage, all users are stoners or addicts). At the same time, the legacy cannabis industry that has been forced to evolve covertly has lacked contributions from formal science to inform its understanding of how cannabis generates effects for users. Legacy market participants also have deeply- and widely-believed misinformation about cannabis (e.g., the indica/sativa paradigm, the quality = potency paradigm). More accurate, scientifically-supported information about cannabis is much newer and slow to diffuse throughout society. 

One plant, four different regulatory regimes. Hemp is legally defined as cannabis plants with low THC potency. Marijuana refers to cannabis plants with higher levels of THC potency. The supply and consumption of marijuana is further subdivided into either medical or adult use/recreational. Finally, home grow refers to marijuana the cultivation of cannabis plants by individuals for their own personal use. All four of these regimes – hemp, medical cannabis, adult use cannabis, and home grow – involve cannabis, yet each is regulated under entirely different sets of laws and regulations. 

Laws and regulations stifle legal cannabis activity. In states that have legalized/decriminalized cannabis activity, state and federal laws and regulations threaten the financial viability of legal cannabis businesses in several respects. State taxes, fees and regulations create heavy burdens on legal cannabis activity that make it difficult for legal businesses to survive. At the national level, the federal ban on cannabis (Schedule I status) creates additional, very costly burdens for cannabis market participants. Specifically, it prevents participants in legal markets from drawing upon much support infrastructure necessary to carry out business (e.g., banking/payment services, advertising services). Lack of access to payment systems forces most activity to be conducted in cash, which causes undue security problems. Furthermore, federal ban also places state-sanctioned cannabis activity under Section 280E of the Tax Code, making federal income taxes prohibitive for legal market businesses. 

Crime and Black Market activity further stifle legal cannabis activity. The fact that cannabis is a high-demand, valuable product that has been banned until very recently has engendered deeply embedded Black Market activity. The wide availability of Black Market cannabis by suppliers who are unburdened by taxes, fees, and costs of regulatory compliance creates a deep and constant threat to legal market cannabis activity. The fact that legal market activity involves valuable products together with large cash repositories make cannabis businesses ripe for theft. Crime and Black Market activity thus present strong threats to the financial viability of legal market activity.

In Short

Legal market cannabis activity will only become financially viable when the following conditions have been met:

• Society understand that cannabis has legitimate therapeutic and recreational uses.
• Cannabis market participants (suppliers and consumers) understand that people react differently to cannabis.
• Cannabis market participants understand that cannabis’ effects are due to constituent compounds, where different samples contain different profiles of compounds.
• Cannabis products are accurately tested and labeled, just like all other food and medicine products.
• State taxes, fees, and regulations are not unduly burdensome.
• Legal market cannabis businesses have access to banking services, enabling non-cash payment mechanisms. 
• Federal taxes are not unduly burdensome.
• Law enforcement minimizes the extent of criminal and Black Market cannabis activity.