Growth Potential in the Cannabis Industry
Read time: 5 minutes
Prior to diving into details on the cannabis industry and its growth potential over the next decade, it is important to clarify exactly what I mean when I say, “cannabis industry.” In the U.S., the cannabis industry has two distinct sectors.
One is industrial hemp and the other is marijuana, usually called cannabis because of the historical stigma associated with marijuana. The legal distinction between hemp and marijuana is the level of tetrahydrocannabinol, or THC, the main psychoactive compound in the plant. In the U.S., the THC limit is 0.3% for hemp, so any cannabis plant that contains over 0.3% is classified as marijuana. THC is one of more than 100 cannabinoids in the cannabis plant. Another is cannabidiol, or CBD, which is a nonintoxicating cannabinoid.
Marijuana is classified as a Schedule I substance under the Controlled Substance Act (CSA), meaning it is unlawful to sell, possess, conduct research on, or otherwise use. Schedule I substances are classified as having no medicinal value and a high potential for abuse.
Interestingly, neither Congress nor any of the various federal agencies involved in enforcing the CSA have expressed any desire to change marijuana’s Schedule I status, even in light of the majority of U.S. states now having some form of regulated marijuana industry and overwhelming scientific evidence to the contrary. Marijuana’s federal status prevents interstate commerce from developing among states that have regulated industries.
Hemp, on the other hand, has received some positive attention from the federal government since it was scheduled under the CSA in 1970 under the same restrictions as marijuana. The 2014 Farm Bill allowed states to launch limited pilot programs for hemp cultivation, creating the aforementioned legal distinction between hemp and marijuana around THC percentages. The 2018 Farm Bill expanded significantly on the 2014 iteration, allowing for broad cultivation of hemp and the explicit introduction of hemp-derived cannabinoids into streams of commerce, effectively legalizing hemp and hemp-derived cannabinoids.
The Size of the Cannabis Market
The size of the cannabis market in the U.S. is about $30 billion. The market can be broken down into four general categories that are defined by regulations. The first of the four is industrial, in which the fiber in the hemp plant is used to make textiles as well as numerous other applications like providing sound-insulation material used in car-door panels.
The second category is over-the-counter marijuana, which covers all the products sold intrastate. The OTC category includes smokable buds as well as distillates, edibles, oils, and other high-THC products derived from marijuana.
The third category encompasses nutritional products and nutraceuticals, often incorporating hemp-derived cannabinoids, like CBD, in capsule or topical form. Cannabis is an attractive plant for supplement and nutraceutical development as it has very high levels of omega-3s and extraordinarily high levels of protein. Finally, there are pharmaceuticals. The most recent marijuana- or cannabis-derived pharmaceutical to be approved by the FDA is a product called Epidiolex, which treats seizure conditions known as Dravet syndrome.
Growth of the Cannabis Market
Growth is likely to come in several areas over the next three to five years. One sector of the industry that will benefit from improved technologies and advances in absorption methods is ingestible products.
Currently, when cannabis is ingested through the stomach, it takes anywhere from 20 to 90 minutes for the cannabinoids to be absorbed and produce the desired effect. Emerging technologies like nano-encapsulation, which creates smaller and more readily absorbed molecules than naturally occurring cannabinoids, are likely to result in an increase in consumer use of edibles, tinctures, topicals, and other ingestible forms of cannabis.
Absorption is also an issue with cannabis beverages. Current brands are criticized for marketing a product to be “like alcohol” that either works too quickly or too slowly to produce a pleasant social effect. Cannabis beverages won’t gain wider popularity until the products become what is known as “sessionable” and can be consumed in a social setting the same way alcohol is. “Sessionability” will come from technology improvements in potency and absorption, so it is worth keeping an eye on firms and companies that work on those issues — their products or processes will impact multiple areas of the cannabis industry.
Technology improvements will create efficiencies on the production side of the industry as well. Most cannabis in the U.S. is grown indoors in controlled-environment agricultural facilities and requires lots of water. As a result, indoor cultivators are using technologies that allow them to be more efficient with water usage — like closed-loop water systems that filter, reintroduce nutrients, and then reuse water for future crop cycles. Indoor farmers also use LED lighting and other cutting-edge light technologies to maximize yield and shorten gestation periods, improving efficiency and allowing cultivators to increase production levels and drive down costs.
Areas to Watch in the Cannabis Industry
While there are many areas to watch for growth in the cannabis industry over the next three to five years, the federal status of marijuana as a Schedule I substance continues to temper those expectations — and rightfully so.
The current state-by-state regulation is cumbersome and inefficient, impeding the progress that would be realized if a federal framework existed. The first step toward realizing that federal framework will come through the passage of some type of legislation that opens up banking services and capital markets to the cannabis industry. With Canada, and soon Mexico, having legalized marijuana, there will be increased pressure from our neighbors for that to happen.
Giving U.S. cannabis operators access to banking and capital markets will seed exponential growth for the industry. That change will open the doors to large-scale corporate support for legalization of cannabis, which is likely to push it over the finish line. Actions by Amazon, Apple, and Shopify regarding CBD products, cannabis-related apps, and hemp retail sales, respectively, indicate that the large-scale corporate support is already building. As is generally the case, the private sector will have to force action from the public sector — and I expect that action to happen soon.
About Robert Hoban
As Co-Chair of Clark Hill’s Cannabis Industry Group and co-founder of Gateway Proven Strategies, a leading global cannabis industry consulting firm, Bob Hoban sits at the center of the world’s largest network in the commercial cannabis industry, an ecosystem he has cultivated since 2008. Bob has earned a reputation as a cannabis industry dealmaker representing start-ups, entrepreneurs, governments, and companies in all stages of development. Recognized as one of the most influential people in the global cannabis industry by a variety of organizations and publications, he has served as a C-suite executive in multiple companies and as a director on several boards. His pioneering Hoban Law Group is the world’s leading full-service commercial cannabis industry law firm.
This cannabis industry article is adapted from the GLG Webcast “Cannabis Growth Potential.” If you would like access to this webcast or would like to speak with industrial cannabis experts like Robert Hoban, or any of our approximately 1 million Network Members, please contact us.