A federal judge in Indiana ruled last week that the state’s law banning smokable forms of hemp is unconstitutional and has issued a preliminary injunction prohibiting enforcement of the statute. In a ruling issued on September 13, Judge Sarah Evans Barker of the Southern District of Indiana said that Indiana’s law prohibiting the manufacturing, financing, delivery, and possession of smokable hemp is preempted by federal law.

Barker wrote in her ruling that enforcing the law would cause “irreparable harm in the form of a credible threat of criminal sanctions” without a preliminary injunction.

The federal government legalized hemp and removed the crop and all hemp products from the nation’s list of controlled substances with the passage of the 2018 Farm Bill in December. But when Indiana passed Senate Bill 516 earlier this year to regulate hemp agriculture in the state, it included the ban on smokable forms of hemp flower.

Smokable Hemp Confusing Cops

The legalization of hemp has led to a proliferation of smokable products that are generally rich in CBD, including dried hemp flower and pre-rolled joints. But the immense popularity of the products has led some states to ban smokable forms of hemp, arguing that law enforcement cannot readily determine if a substance is hemp or marijuana.

Barker ruled that the confusion was not a legal justification for treating some forms of hemp as a controlled substance, writing that “the fact that local law enforcement may need to adjust tactics and training in response to changes in federal law is not a sufficient basis for enacting unconstitutional legislation”

The judge also issued an immediate injunction to block enforcement of the smokable hemp provisions in Senate Bill 516, saying that the plaintiffs, all but one of whom are Indiana businesses that sell hemp products, should not have to wait to determine how much business was lost to the smokable hemp ban and file a lawsuit later.

“The likely unconstitutional portions of the statute cannot be easily measured or reliably calculated, given the novelty of the hemp industry in Indiana and the dearth of historical sales data to use as a baseline for calculating lost revenues,” Barker wrote.

Jim Decamp, the owner of Owlslee CBD in downtown Indianapolis, told local media that while he understands the concerns of law enforcement, he supports Judge Barker’s ruling.

“I don’t know the answer to that problem, but I feel like the benefits that clients get from THC-free hemp flower is something that they really want and need,” Decamp said.

Two other states, Louisiana and Texas, have also banned smokable forms of hemp and North Carolina is considering a similar measure. Tennessee has banned the sale of smokable hemp to minors.

The word on the street is that Congress is set to finally take action on legislation in the coming weeks that will allow banks to do business with the cannabis industry. It is known as the SAFE Banking Act, a measure that has attracted bipartisan support, and is quite possibly, depending on which naïve news force is reporting, the most likely step to ending federal marijuana prohibition in the United States.

But while the SAFE Banking Act has enough support to become the first concrete marijuana-related measure to make it out of the U.S. House of Representatives in all of history, there isn’t much hope that it will find the kind of endorsement needed to make it all the way. So if you’re feeling optimistic about the future of pot reform in America, don’t. Because Congress is still entirely too flawed to come together on this issue in 2019.

Cannabis advocates rejoiced earlier this year when the House Financial Committee approved the SAFE Banking Act, setting it up to go before the full House for a vote in the near future. Well, the time has come for lawmakers in the lower chamber to party. House Majority Leader Steny Hoyer recently told CNN that he intends to bring the banking bill to the House floor for a vote before the end of September.

“We’re discussing it with members, but it hasn’t been scheduled just yet,” Mariel Saez, a spokesperson for Hoyer’s office confirmed with the new source on Monday.

In all seriousness, as long as there aren’t any pesky amendments introduced in the 11th hour, the SAFE Banking Act has found the approval necessary to move out of the House, as is. The bill has attracted a massive outpouring of support from Democrats (180 co-sponsors) and it has more Republican backers (26 co-sponsors) than one might expect. In fact, the banking bill is almost keyed up exactly how marijuana legislation needs to be in order to stand a fighting chance at going the distance in the halls of Congress.

Only the support for this potentially groundbreaking legislation is, while bipartisan in some regards, still pretty much one-sided. The Senate, a crucial component in getting this thing stamped and sent to the desk of President Trump for a signature, is not at all enthused about pot banking, and there is no sign that the upper chamber is going to so much as entertain the bill, much less push it through.

Everyone keeps forgetting that no matter how much the House wants to pass pot reform in 2019, the Senate still isn’t there. Senate Majority Leader Mitch McConnell, the man who championed industrial hemp legalization 2.0, last year, still isn’t very keen on marijuana. He has said before that he has absolutely no interest in getting behind legislation aimed at legalizing marijuana in the United States. But more than he hates weed, at least the one that gets people stoned, the Kentucky Reaper despises the Democratic agenda. And while he didn’t expressly point to pot when he stood before his constituents earlier this year pledging to put a stop to any Democratic proposal that crosses his path, McConnell likely has a total ban on putting anything led by Democrats on the Senate docket.

“I would be shocked if Sen. McConnell wanted to spend a single second of floor time on weed,” one veteran lobbyist told Politico.

Even if McConnell is growing soft when it comes to marijuana, and that’s a big if, chances are the big cheese of the Senate still isn’t going to entertain the SAFE Banking bill if it makes it out of the House. Not with an election year on the horizon. He’s not going to want to show the American voters that the Democrats have any real power on Capitol Hill. And as of now, they don’t. No, the only way pot reform is going to make it out of Congress this year, regardless of whether it is a modest banking bill or one geared toward ending prohibition nationwide, is if it is a plan concocted by President Trump and Mitch McConnell behind closed doors. That’s the only way this plays out in 2019, and the potential of that happening doesn’t seem likely at this juncture.

House Democrats could also totally fumble on the banking bill prior to the vote, jamming it up with unnecessary amendments that not everyone agrees upon, putting it in a position where it doesn’t even make it to the Senate. One thing is sure, we are perhaps just weeks away from finding out who the real friends of the cannabis industry are in Congress. You’re going to want to take notes. 

Still, House lawmakers are optimistic that the SAFE Banking bill will find a way to succeed. U.S. Representative Jim McGovern of Massachusetts, who chairs the all-powerful House Rules Committee, said earlier this week that “It’s a political liability not to take action,” on the banking bill. Members of Congress and Senate will have to answer to their constituents if they don’t act on this,” he told the Boston Herald.

But do they really care?

It is not controversial to say that craft beer has transformed the beer industry, taking market share from big players such as Molson as consumers’ tastes have embraced smaller breweries.

Could the same shakeup happen within the cannabis industry with craft cannabis?

Craft cannabis is grown in smaller batches and some argue is higher quality than big license producers’ (LPs) cannabis.

However, for craft cannabis to disrupt the legal market, growers who have thrived in the grey market would have to go legal and accept some restrictions that come along with it.

Cannabis business accelerator Grow Tech Labs recently predicted that if just 15 percent of British Columbia’s 6,000 grey market craft cannabis growers got licenses and entered the legal market, they could generate nearly $3 billion in cannabis sales over two years.

Greencamp went deep on craft cannabis and talked to a few industry professionals to see if craft cannabis really can become the new craft beer.

What is craft cannabis?

Craft cannabis is smaller batch cannabis grown by smaller farms, but in simpler terms it is largely made up of the legacy market before legalization. This includes legendary cannabis strains such as B.C. bud, the colloquial name for cannabis grown in British Columbia that many knew as the good stuff before legalization.

Farmers can now get a micro-cultivation license from Health Canada that allows them to grow up to 2,150 square feet of cannabis, compared to the hundreds of thousands of square feet big LPs often have to grow their crops.

This limit in how much can be grown allows craft growers to give their product more love and care, which some say makes all the difference.

According to Lisa Campbell, who works for Lifford Wine & Spirits and helps craft cannabis producers find fair prices for their products, one of the biggest differences between craft cannabis and industrial cannabis is that it is hand trimmed versus machine trimmed.

Campbell explained that cannabis has trichomes — little crystals that look like tiny mushrooms with bulbous heads under a microscope. They cover the plant and produce its terpenes and cannabinoids, which contribute to cannabis’ flavour and effects.

Campbell says that big LP cannabis is stored in warehouses for a long time and becomes very dry, and when it is machine trimmed, the heads of the trichomes fall off.

“Almost every LP’s product that I look at through a microscope, all the trichome heads are bounced off,” she said. “That is definitely going to reduce the strength of your cannabis, if you knock off the trichome heads.”

Overall, Campbell says that because big LPs are publicly traded companies, they are mostly concerned about meeting volume commitments to provinces and keeping costs low, and that hurts quality in the long run.

“You can’t test every single package to make sure the consumer will be happy and getting quality products,” she said.

On the other hand, craft cannabis is often hand trimmed, which gives it more dense crystals and better aroma, Campbell says.

Patrick Brauckmann, executive chairman of craft cannabis collective Pasha Brands, goes even further than Campbell on craft cannabis’ advantages.

He says that craft cannabis has a different chemical profile than industrial cannabis, even if the genetics are the same. This means the cannabis’ levels of terpenes and cannabinoids are different, which affects its high as the chemicals play off the THC, the main psychoactive ingredient in cannabis, in what is known as the “entourage effect.”

Brauckmann says that craft cannabis’ different chemical profile is due to how it is cultivated — its food, light, air, and the farmer’s intentions.

“In many cases, [the farmers] are very artistic in the way they approach their business,” he said. “They want to get it right, they’re less concerned with economics than just growing something fabulous and they enjoy smoking.”

Micro-cultivator licenses a ‘challenge’

In order for craft cannabis to legitimately give big LPs a run for their money in Canada, farmers have to be tempted to switch from the grey market to the legal market.

However, this is proving to be a challenge for a number of reasons.

Campbell says a lot of farmers are hesitant to apply for a micro-cultivation license because they’re worried about high taxation, or they won’t get the prices they’d like for their buds.

“It costs a lot of money to apply, so if you’re going to apply you want to make sure your products fetch a good price,” she said.

It costs $2,500 for a micro-cultivation license from Health Canada, which allows producers to grow up to 2,150 square feet of cannabis either indoors or outdoors, and another $2,500 for a micro-processing license, which allows the flower to be packaged and processed. A micro-processing license allows 600 kg of dried flower to be processed a year.

Campbell says the size restriction of micro-cultivation licenses makes meeting consumers’ demands a challenge — even big LPs are having trouble satiating entire provinces.

Health Canada’s strict and lengthy licensing process also is a hurdle for craft cannabis producers, according to Brauckmann.

Applications can be up to 225 pages, and Brauckmann says getting a security clearance alone can take up to a year.

Some farmers not adept at bureaucracy might need to hire consultants, which can add to their costs, and now applicants have to prove they have a facility built before they can apply due to a change of policy from Health Canada, which means making a huge investment with no guarantee of a license.

Campbell says there are currently around 200 micro-cultivator applicants in the queue, but only two or three actual licenses have been given so far.

Could craft cannabis be the new craft beer?

It is still early in the game to really tell what impact craft cannabis will have on the market, but Campbell thinks it could definitely pose a serious threat to big LPs’ market share.

She likens craft cannabis to a group of small fish that take down the bigger fish piecemeal, and says big LPs are already reacting to the coming “craft revolution” by getting in on it themselves.

“Of course LPs are scared of the coming craft revolution and are trying to work with the smaller companies to capture market share by working with them,” Campbell said. “They know if they don’t work with it, it will consume their market share.”

Craft brands such as Broken Coast and Whistler have already been bought by bigger LPs Aphria and Aurora, respectively.

Big LPs also might start developing their own craft lines in-house, according to cannabis LP Aleafia’s Chief Medical Officer, Dr. Michael Verbora.

Verbora says Aleafia is already developing smaller growing spaces that could give it the ability to enter the craft market.

Although craft cannabis has a lot going for it, it does face some hurdles to gaining market share.

Verbora says that many consumers are price sensitive and tend towards higher THC products, not taking into consideration other cannabis components, such as terpenes.

At up to $22 a gram for some craft strains, such as ones from Whistler in the Ontario Cannabis Store (OCS), craft cannabis could be a tough sell to some consumers.

That higher price point could also limit craft cannabis in other product categories, such as concentrates and edibles that will be legal in Canada by the end of the year.

They are expected to be huge business, but Verbora questions whether consumers would pay extra for “craft oil” that might be made from higher quality cannabis and be more balanced than THC-heavy standard concentrates and edibles, such as by having higher terpene levels.

“The vast majority of patients are still going to use oils that are cost effective,” he said. “If patients are paying out of pocket, they will gravitate to the lower cost one typically because the issues they are dealing with.”

However, Bauckmann thinks consumers will want to go for a more balanced high compared to the knockout punch some edibles can provide.

“I fully expect oil products will be phenomenal going forward in the craft world,” he said.

In the end, Verbora thinks craft cannabis’ success really depends on marketing, similar to how craft beer got its footing with eye catching labels and brewery tours and tastings, but right now marketing restrictions are extremely tight in Canada.

Campbell, though, envisions craft cannabis could one day follow craft beer’s footsteps and offer its own “farm gate sales,” where people could tour from farm-to-farm and taste what’s on offer.

“If you had a micro-processing license and had a property, to allow people to buy on site and have farm gate sales would actually create a whole new tourism industry in Canada,” she said.

While such tours are currently illegal in Canada, Campbell says that it is “written in the legislation” in Ontario that producers will have the ability to have farm gate sales.

The Wrap

It is still very early in the game to tell whether craft cannabis will really hit it off with consumers, but with more opportunities to experience it themselves in legal dispensaries — and potentially one day consumption lounges — their tastes could change and mature. Given “craft cannabis” is what many consumed pre-legalization, the demand could be high for products to return to those glory days — the question is whether craft producers can deliver in the legal market.

When PharmaCielo, now a publicly traded company, formed in 2014 to cultivate medical cannabis in Colombia, some growers needed convincing. Some came from families that farmed chrysanthemums for generations. Cannabis was largely illegal and stigmatized. Scars from the nation's decadeslong drug war were fresh. A peace deal between the government and leftist FARC rebels was two years away. North America's marijuana stocks boom had not begun.

Talks with indigenous communities, regulators, the military and police took a couple of years. And after all that, PharmaCielo, which joined other marijuana stocks on the Canadian exchanges this year, has yet to report a dollar in commercial cannabis sales. But it is far from alone in its South American aspirations. Other marijuana companies are betting the region will supply the world with outdoor-grown cannabis at a fraction of North America's costs.

The upshot: A flood of cheap weed from the region could force big producers in the U.S. and Canada to rethink massive investments in indoor, climate-controlled grow houses. Some executives and analysts predict they might disappear further down the road or be re-purposed.

North American marijuana companies are already putting down roots in countries like Colombia, Peru, Brazil, Argentina, Uruguay and Chile. Sourcing that product from South America could fatten profit margins and reorder the global supply chain.

"In fact, we don't believe the Northern Hemisphere will be leading the cannabis cultivation industry in half a decade or less," Joseph Lusardi, CEO of U.S. cannabis producer Curaleaf (CURLF), said during a presentation in January. "We will likely be importing cannabis from the Southern Hemisphere and from countries such as Uruguay, where we can't possibly compete with those inputs."

Next Frontier For Marijuana Stocks

Free-flowing international trade of recreational weed is still probably a generation or more away. In the U.S., an act of Congress legalizing marijuana would be necessary. Figuring out the right way to import hemp will be a multiagency effort.

Regulations from nation to nation also seem likely to gum up emerging pathways of commerce. Even in Colombia, where regulations are more developed, few companies have been cleared to produce and sell cannabis products.

In Colombia, pot producers pack five or more outdoor growing cycles into a year. (©StockPhotoPro/stock.adobe.com)

But coffee, cut flowers and other agricultural products from Latin America have become bulk commodities. Pot industry insider increasingly believe cannabis will follow suit as more nations legalize it.

Marijuana companies able to capitalize on the trend could get an edge as the added competition lowers prices.

Meanwhile, Canada's producers are struggling to meet towering expectations. And the heightened interest in Latin America also comes as investors in marijuana stocks seek the next frontier for big returns.

'Huge Business Opportunities'

At the same time, Latin America is rethinking its drug policies after years of turmoil. Uruguay in 2013 became the world's first nation to legalize recreational marijuana. Colombia, Mexico, Argentina, Brazil, Peru, Paraguay and Chile allow at least some degree of medical marijuana usage or cultivation. But legal frameworks for business remain stiff or underdeveloped.

Legal business within those nations is expected to remain relatively small in the years ahead. The research firm BDS Analytics forecasts that legal spending on medical pot within those nations, excluding Paraguay, will reach $547 million by 2024. Mexico's $441 million will make up the vast majority.

By contrast, BDS expects overall legal spending in the U.S. and Canada to swell to $34 billion over that time. But insiders still see huge potential in Latin America.

"The sheer number of inhabitants, ideal growing conditions in large parts of the region and jurisdictions in favor of production for export signal potentially huge business opportunities," Alfredo Pascual, international analyst at the industry publication Marijuana Business Daily, wrote in a September report.

Colombia Leads The Way For Marijuana Companies

Mexico might have the biggest market inside its borders. But more investors believe Colombia, where medical marijuana was legalized in 2015, offers the best climate. That's literally and figuratively. When asked how much Colombia could export over the next five years, Tom Adams, BDS' managing director, industry intelligence, said in an interview: "More than the world could consume."

The equator cuts right through Colombia's lower half, affording crops a steady diet of warm weather and 12 hours of sunlight. That allows producers to pack up to five outdoor growing cycles into a year on open stretches of arable land and volcanic, organically-rich soil. In areas further north, producers can get around one outdoor cycle a year.

"We do expect to be the breadbasket of cannabis, I think," Kyle Detwiler, CEO of New York-based Northern Swan Holdings, said in an interview. His investment firm backs a cannabis company in Colombia.

Cannabis producers in Colombia can export cannabis oils, extracts and isolates. They can grow cannabis and also sell cosmetics infused with extracts that come from outside the nation. But they can't domestically sell it or export it in dry-bud form.

BDS Analytics, in a report in June, said that as profit-hungry marijuana companies descended on Colombia from abroad, their interest was "clearly shared" by Colombia's government. Regulators had doled out nearly 260 licenses as of the end of July, most for cultivation, according to Pascual's report.

Marijuana Stocks Eye Flower Power

While there's still plenty of red tape, the potential for cost savings for marijuana companies is immense.

In Canada, it costs $1-$2 to produce a gram of dry bud indoors, GMP Securities says. (Canna Obscura/Shutterstock.com)

In Canada, it costs $1-$2 to produce a gram of dry bud indoors, GMP Securities analyst Robert Fagan estimates. Much of that is from expenses to control lighting and temperature as the seasons change outside. But in Colombia, that cost shrinks to 5-10 cents when growing in the open air.

Labor costs in Colombia are also far lower, which keeps those costs lower. They sit somewhere around $15 a day in Colombia, said Dov Szapiro, managing partner at the cannabis-focused private equity firm Cresco Capital. Szapiro said the firm was weighing possible investments in the region.

Colombia already supplies a huge portion of the world's cut flowers. The skills in that line of work, the argument goes, translate well into growing and trimming cannabis plants, analysts say.

Colombia: 'Complete Opposite' Of Canada

Those lower costs have also proven attractive to Canada's most well-known marijuana companies. The likes of Canopy Growth (CGC), Tilray (TLRY) and Aurora Cannabis (ACB) have scattered their investments across Colombia and the rest of the region.

Anna Shlimak, Cronos Group's head of investor relations and communications, stressed that her company is committed to Canada. But Cronos has also found things to like about Colombia.

"It's not a surprise that Canada isn't the best place to grow cannabis — it's very cold," she said in an interview in June. "And in Colombia, it's not only the complete opposite, it's also not humid, which is also quite important."

Cronos in May said that NatuEra, a joint venture it runs focused on Colombia, has a cultivation license in Colombia for psychoactive cannabis, along with licenses to make non-psychoactive products. Cronos CEO Mike Gorenstein at the time said NatuEra would initially put most of its focus on hemp.

He also noted that, "having a low cost of production is going to be something that's going to be really important to drive margins long-term."

The Canadian Connection

Bigger Canadian marijuana stocks have also tried to buy their way into Colombia. Canopy Growth, the world's most valuable weed grower, announced last year that it acquired Spectrum Cannabis Colombia. Canopy said the move would help it serve the Latin American market directly.

Aurora Cannabis last year acquired cannabis producer ICC Labs, which is based in Uruguay but has operations in Colombia. Other smaller marijuana stocks, like PharmaCielo and Khiron Life Sciences, concentrate their operations in Colombia. However, PharmaCielo is technically based in Canada.

For now, PharmaCielo is only cultivating CBD plants, which have easier export regulations, with plans to sell products based on those plants in nations where it's legal abroad. It relies on its own facilities for cultivation but hopes to eventually fatten capacity by contracting with outside farmers.

Under that system, which Chief Corporate Officer David Gordon said was similar to the tobacco industry, PharmaCielo would own the plants. The farmers would grow those plants, harvest them and return them for processing. At least that's the plan. PharmaCielo had zero commercial sales in Q2. But Gordon expected some to trickle in during the second half of this year, with more next year.

Other marijuana companies with a focus on Colombia include Blueberries Medical and Clever Leaves, the company backed by Northern Swan.

A low-cost structure in Colombia, analysts argue, could help those businesses weather any global drop in CBD prices. That risk looms larger as more marijuana companies enter, bearing everything from tinctures to muscle wraps.

Marijuana Stocks Add LatAm To Supply Chains

Other Canadian companies are using Latin America as a node on their global supply network and a springboard into other markets.

Tilray, a top producer of medical cannabis, has pharmaceutical supply distribution agreements in nations like Peru, Brazil, Argentina and Chile. A global partnership with Sandoz, a segment of pharma giant Novartis (NVS), could also put more Tilray products on pharmacy shelves worldwide. The arrangement also saves Tilray from doing that work itself.

"We just have to add our products to their supply chains," Tilray said in a written response to questions. "We don't have to purchase a fleet of trucks and duplicate their sales and logistics teams."

The product flows go in the other direction too. After acquiring its local import and distribution partner in Chile last year, Tilray said it can send its products to Chile from its production facility in British Columbia. The company also said it "may" eventually supply Latin America via Portugal, where it is ramping up a production center intended to serve as the heart of its international business.

Aurora in December also announced that it would acquire Farmacias Magistrales in Mexico. Aurora, in an investor presentation this month, said the deal would make it "Mexico's first and only federally licensed importer of medical cannabis containing over 1% THC."

Marijuana Industry In International Limbo

But rules for the medical market are laxer, while international trade for recreational products is still illegal. Tilray said it doesn't see that changing "in the near future."

Cost saving from using South American supplies could be minimal in products like cannabis beverages. (Elaine Low/IBD)

In an interview shortly before his July ouster as Canopy Growth CEO, Bruce Linton agreed that the days of recreational weed legally crisscrossing the globe are far off.

"I regret to inform you that you and I will probably be dead before that happens," he said.

He also downplayed the prospect of low-cost, commoditized weed forcing an overhaul of Canada's vast indoor grow operations. And he said that as more producers use cannabis as an ingredient to go in other products like beverages, the cost savings might be overrated.

Thus, for cannabis beverages, he said, "If I'm putting 10 cents of THC in, and you can get it to me for 4 cents, does that actually materially improve my margin? No. Like, I'll take it. But it's really about the sales price and the loyalty to the brand and the frequency of sell-through."

Linton also argued that shipping costs could eclipse the value of the substance being shipped. And he suggested pushback could come from already-legal areas, where jobs, pot shops, production facilities and other infrastructure are more entrenched.

'Basic Rules' Of Agriculture

Demand at home and limits on international trade might keep Canadian marijuana companies plowing money into massive indoor growing facilities for now. But Szapiro, of Cresco, said investments in those operations eventually would become less meaningful than investments in intellectual property and technology. Grow operations will ultimately disappear or become research centers, with no major production hubs in Canada, he predicted.

Adams, of BDS Analytics, pointed to the cut-flower industry that went to Mexico and Colombia. Similarly, he said, today's North American cannabis market is "a short-term opportunity created by a regulatory environment that's going to go away."

He added: "But your long-term planning has to face the facts of the basic rules of any agricultural product, which is that Colombia can produce it cheaper."