For start-ups and businesses in other industries, establishing a supply chain, raising capital, and working with a banking institution are usual business processes. The same is not true, however, in the cannabis industry. This is because the industry has a web of regulations that make normal business processes difficult.
So, if you’re thinking of investing in the cannabis industry, you must first understand the cannabis supply chain. For example, it is a criminal offense to transport cannabis across state lines. From the onset, regulations make it difficult to enter or invest in the legal cannabis marketplace.
But the industry is still young and has great potential. In this post, we look at the cannabis supply chain and its potential barriers. Read on for more insight.
The Cannabis Supply Chain
Before looking at the major barriers, let’s first look at the key stages in the seed-to-sale process. Seed-to-sale is a term commonly used in the cannabis industry. It denotes the entire process that a finished cannabis product goes through. This is from plant cultivation to eventual sale.
- Cultivation: Growers and cultivators are licensed to cultivate cannabis within their operating state. The crops may be grown outdoors or indoors in greenhouses.
- Manufacturing: This is the transformation of raw cannabis into finished retail products. Examples include oils, tinctures, edibles, extractions, and concentrates.
- Lab Testing: Marijuana is tested twice within the supply chain. First, batches are allotted ID tags and logged into the state’s seed-to-sale system straight away after harvest. The other instance is after manufacturing or production. The lab tests reveal safety, THC content, residual pesticides, and foreign substances.
- Distribution: This is the movement of finished cannabis products from warehouses to licensed dispensaries by state-approved distributors. This process faces the most compliance bottlenecks in the whole supply chain.
- Retail: This involves selling packaged and branded cannabis products in dispensaries to customers. This is either done online or through walk-ins.
Factors Affecting the Cannabis Supply Chain
Cannabis is still illegal under federal law. This is despite its widespread legalization in several states. Thus, transporting cannabis from one state to another is a criminal offense. If found culpable, it may lead to federal criminal prosecution. This means retailers cannot set up a nationwide distribution network. Ultimately, it leads to product shortages in other states. It also restricts the financial impact on each state alone.
Due to this problem, cannabis brands are left with two options:
- Use an independent, third-party distributor. There are only a few state-approved distributors. They are licensed to ferry cannabis products between all players in the supply chain.
- Become your own first-party distributor. First, you’ll need to individually apply for a business transport license. As a first-party distributor, you will have to use your own employees, company-owned vehicles, and distribution facilities.
Debate Around Vertical Integration
Many cannabis-legal states allow for vertical integration. A vertically integrated marijuana company means that the business owns and controls the various stages of its supply chain. This starts from cultivation, manufacturing, distribution, and retailing.
For example, the states of Massachusetts, Colorado, and Oregon require vertical integration. This allows cannabis-related businesses to hold licenses for one or more stages of the supply chain. Proponents of vertical integration put forward the following points:
- It enables better oversight from cultivation to eventual sale.
- It protects retailers from buying black market products, as businesses are expected to produce and sell their own goods.
- It helps deal with federal tax issues. This is because cannabusinesses can’t subtract typical business costs according to section 280E.
- Vertically integrated dispensaries can share overhead expenses, including rent and utilities, when well handled. This can help ease the tax load of section 280E.
Some states have banned vertical integration. For example, Washington only allows cannabusinesses to hold only one supply chain license.
Opponents of vertical integration cite the following points:
- Vertical integration requires cannabusinesses to raise significant capital. So, small businesses have no opportunity to enter the marketplace due to limited resources.
- Vertical integration creates a jack of all trades but a master of none situation.
Some states allow vertical integration, while others prohibit it, so it’s much more difficult to establish a streamlined seed-to-sale process across the country. Also, multi-state operators encounter challenges in the variation of state requirements.
Cannabis is a Schedule 1 substance, just like heroin. Thus, it remains banned under federal law. Banks are fearful of accepting bank payments from cannabis-related businesses. This is because the federal government administers all banks and credit unions in the US. Therefore, the chances of attracting potential federal legal penalties when found guilty of conducting business with cannabis businesses are quite high. Banks could also lose their FDIC insurance.
Only a few small credit unions are conducting businesses with cannabis companies. But most of them won’t take above 30% of their deposits from businesses within a specific industry. This is the norm among financial service providers.
Yes, a few banking and financial services exist for marijuana businesses, but their capacity is strictly limited. And cannabis accounts incur thousands of dollars in banking fees to make up for the increased regulatory bottleneck. As such, financial services remain a pipedream for small-scale dispensaries.
With limited access to banking and credit card services, cannabis companies have in turn adopted different payment processing systems. They include cash, cryptocurrencies, and cashless ATMs. Cash payments, in particular, pose a host of challenges to retailers. These include inaccurate recordkeeping, storage issues, risk of Covid-19 spread, and potential for theft, among others.
A Legislative Solution
The SAFE Banking Act would help banking and financial institutions conduct business with cannabis companies without fear of federal prosecution. It would also help cannabis companies access various financial services and effectively expand their operations.
The Bottom Line
You want to join the cannabis industry, perhaps as a cultivator, producer, or retailer. But before you take your shot, you first need to learn the various challenges affecting the seed-to-sale process in the cannabis market.
There are a lot of intricacies to navigate within the cannabis supply chain. This is exacerbated by the variance in federal and state regulations. Yet, there’s no refuting the promising business opportunities in the cannabis industry.