Growing Pains: Supply-chain risks posed by marijuana legalisation in North America

The legal cultivation and sale of marijuana for both medical and recreational use is becoming increasingly prevalent in the United States and Canada as lawmakers move towards legalisation. In the U.S., state governments are making the decision to legalise and regulate the drug, while in Canada, the federal government is hoping to legalise marijuana this summer. Firms operating in the marijuana business face unique compliance challenges and supply-chain risks in this rapidly growing industry.

Marijuana Factory Plants

Background

According to the U.S. federal government, marijuana is an illegal drug. The Drug Enforcement Agency (DEA) classifies marijuana as a Schedule I controlled substance, the highest classification as determined by abuse potential and the drug’s medical use. Schedule I substances, which include heroin and LSD but not cocaine, are defined as ‘drugs with no currently accepted medical use and high potential for abuse’. Despite the federal government’s stance, 29 states and the District of Columbia have legalised marijuana for medical use, while nine states and the District of Columbia, allow recreational marijuana use. Due to the federal government’s stance, companies operating in the legal marijuana business therefore cannot transport marijuana across state borders without facing felony drug trafficking charges. Because of this, sellers in states where the sale of marijuana is legal must either run their own grow operations within the state or purchase from in-state growers.

While the plant is cultivated, both legally and illegally, in all 50 states, it is mainly grown on the west coast, particularly in California, where both medical and recreational marijuana is legal. Mexico is the largest foreign supplier of marijuana but the amount trafficked across the border is declining; there was a 24.2 per cent decline in the amount of marijuana seized by U.S. Customs and Border Protection along the south-west border with Mexico from 2015 to 2016. The figure was 948,068.45 kilograms in 2015 and 723,932.63 kilograms in 2016. In the DEA’s 2017 National Drug Threat Survey, 80 per cent of responding field divisions said there was a high availability of marijuana in their jurisdiction, and 35 per cent reported increased availability over the past year.

Due to the federal government’s stance, companies operating in the legal marijuana business therefore cannot transport marijuana across state borders without facing felony drug trafficking charges.

In 2016, people spent over USD1.5 billion on legal recreational marijuana in Colorado and Washington states. According to U.S.-based media outlet Marijuana Business Daily, the legal cannabis sale had an economic impact of between USD16 billion and USD18 billion in 2017; it expects that number to grow to between USD47 billion and USD68 billion by 2021.

In states that have legalised the sale of recreational marijuana, many have chosen a commercialisation model allowing private businesses to manage the sale, rather than allowing the state to control it. Many of these private marijuana businesses face punitive tax bills of up to 70 per cent of revenue and are unable to deduct business expenses from their taxes as most businesses do. This is due to a lag in legislation as politicians struggle to pass new laws regulating the industry.

Compliance challenges

As more states legalise recreational marijuana, state authorities will begin regulating the trade, similar to state-regulated alcohol and tobacco markets. The regulatory bodies that oversee the drug are shifting from health authorities, that regulate medical use, to alcohol control authorities. Marijuana producers are now faced with the choice of remaining in the medical supply side of the industry or switching to recreational distribution, which has much more stringent regulations.

Compliance with state regulations is the largest issue facing firms in the marijuana industry. Companies must obtain appropriate licensing and train staff, among other things. The most common compliance failings are incorrectly assessed inventories, inaccurate accounting, and failure to keep required paperwork and licensing documents on-premise, which is necessary in the event of site visits by state authorities. Further complicating operations is the fact that compliance regulations vary depending on whether a firm is growing, dispensing, or manufacturing a product.

The federal stance also causes companies involved in the marijuana business to largely operate with cash rather than via bank accounts, over fears of compliance issues. The compliance problems and supply-chain risk have sparked the creation of specialist companies that help marijuana businesses to deal with these risks through human-resource management, among other services. Business-to-business e-commerce platforms have sprung up to assist with vendor management and invoicing.

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