What is in Store for the Cannabis Sector in 2023?

2022 was a mixed bag for the cannabis industry. While new markets showed healthy growth, legal cannabis sales declined in many mature markets, slowing, or even reversing, growth in those markets.

FREMONT, CA: In 2022, the cannabis industry had a mixed performance. New markets experienced strong growth, but many existing markets saw a fall in legal cannabis sales, which slowed or even reversed growth there. Even if some of this may be attributed to similarities the broader economy encountered after COVID-19, it nevertheless led to several businesses across the industry being affected by layoffs, cash shortages, and increasing debt.

While recreational sales began in numerous other states, three more states passed laws legalising cannabis for adult use. The Biden administration initiated federal reform by forgiving simple marijuana possession crimes and ordering a study of the classification of cannabis under federal law. The Medical Marijuana and Cannabidiol Research Expansion Act was also passed by Congress.

The U.S. cannabis sector exhibited symptoms of slowing down in the face of regulatory and economic hurdles, including falling demand, after experiencing a sales surge during the early stages of the pandemic. Consequently, established markets for legal cannabis across the nation are experiencing a supply shortage that is driving down both wholesale and retail prices.

For instance, it has been estimated that wholesale costs in California have fallen by as much as 95 per cent after the state passed a law legalising marijuana in 2016. And over the past two years, the retail cost of an ounce has dropped from around USD 400 to under USD 250 in Massachusetts. Meanwhile, the underground market's competition, high taxes, and other restrictions continue to be a problem for legal retailers. Numerous of these issues, like the decline in cannabis costs at the wholesale and retail levels, are projected to continue through 2023.

Congress failed to enact serious cannabis reform once more in 2022, and federal legalisation is unlikely to happen in 2023. President Biden stated that absolving individuals of federal charges related to simple marijuana possession. In addition, the president requested that the designation of cannabis as a Schedule I substance, the most serious classification under federal law, be reviewed by the Secretary of Health and Human Services and the Attorney General. Reclassifying to Schedule II would be beneficial for the medical marijuana sector generally, despite some negatives. For instance, it would probably permit medicinal cannabis to be cultivated in one state and sold in another.

The declaration represented the biggest change in federal cannabis policy since the Controlled Substances Act (CSA) was passed in 1970, but its ramifications took time to materialize. It is unlikely that the administrative assessment of cannabis' legal status under federal law will be completed in 2023. The majority of pardons will also need to take place at the state level rather than the federal one because state cannabis convictions outnumber federal convictions by a large margin.

The Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA) was the first cannabis-related reform legislation that Congress passed on its own. By removing federal limits on the study and the cultivation of research-grade cannabis, the bipartisan law opens the door for deeper investigation into cannabis' potential medical benefits (which are presently conducted exclusively at the University of Mississippi). The MMCREA also supports the creation of CBD- and cannabis-based medications that are FDA-approved.

The Secure and Fair Enforcement (SAFE) Banking Act, which would offer protections to financial institutions and various other professional service firms doing business with state-legal cannabis businesses, is also anticipated to be reintroduced in 2023. This measure is anticipated to garner the most attention. The bill has now been approved by the House seven times and is supported by both parties and businesses.

The States Reform Act (SRA), which would decriminalize cannabis at the federal level while giving states control over prohibition and commercial regulation, is another potential candidate for reintroduction.

Nearly four years have passed since the FDA declared that cannabidiol was subject to regulatory control. The EPA has yet to fully address CBD regulation despite repeated requests for regulations from lawmakers and industry partners, leaving manufacturers and distributors in the dark. This will most likely start to change around 2023. Up until this point, the FDA has mainly focused on food and beverage items that make unfounded health claims when it comes to CBD enforcement. However, recent changes in the agency's internal and external approach to policing CBD products and other cannabinoids may be a sign of things to come in 2023 and beyond.

For instance, the FDA appointed senior public adviser Norman Birenbaum, an expert in cannabis policy, to the Center for Drug Evaluation and Research. Observers in the industry believe that this may be a sign that the government is finally preparing to create a regulatory framework for CBD and other products derived from cannabis. Additionally, in the first half of 2022, the FDA sent warning letters to businesses that marketed goods containing Delta-8 THC, an intoxicating cannabinoid derived from hemp that is now available in several states on the black market. The FDA also sent out several warning letters to businesses marketing foods and drinks with CBD.

In more than a dozen states in 2022, lawmakers and voters passed more than 40 cannabis-related reform bills. Three states—Rhode Island, Maryland, and Missouri—passed legislation legalizing and governing the adult-use market. While everything was going on, Mississippi legalized medical marijuana. Additionally, recreational cannabis sales began in 2022 in Rhode Island, New Jersey, and New York. Connecticut also started its retail sales earlier this month. Maryland and Missouri retail marketplaces are anticipated to open later this year. Currently, 39 states have some kind of cannabis legalization, with 21 states (plus the District of Columbia) allowing adult recreational usage.

For instance, lawmakers in Minnesota submitted two proposals that would legalise cannabis for recreational use. The recently elected governor of Minnesota, a well-known supporter of cannabis legalisation, has said that legalisation may take place in the state in the upcoming year. Moreover, Pennsylvania just elected a pro-cannabis governor and saw Democrats capture the State House, increasing the likelihood that legalization would be enacted in the Keystone State in 2023. Oklahoma will have the chance to legalize cannabis for recreational use. Legislators in many other states, including Indiana and Kentucky, have already submitted several measures in the first few weeks of 2023 to liberalise cannabis regulations. Ohio's legislature is also exploring a bill to legalize recreational cannabis.

The first step to legalization is only the beginning. The implementation of state-legal cannabis programmes can be challenging, drawn out, and not always go in a straight line. For instance, New York launched its adult-use program roughly two years ago, with the first sales only taking place at the end of December at a single location. Only 36 retailers in the state have received provisional licences as of yet. The approval of 318 conditional licences by regulators for adult-use cultivators and processors has fueled worries that there may not be enough state-approved retailers and that producers may be experiencing an overstock problem. Competition from the legacy market has also slowed down the early expansion of the New York market.

The dormant commerce clause (DCC) of the U.S. Constitution forbids their licensing requirements. Constitution, which forbids states from discriminating against interstate commerce by favoring citizens of their state over others, several other states' cannabis programmes, including New York's social equity component, are being legally challenged. A divided panel of the 1st U.S. Circuit Court of Appeals ruled that the Maine legislation requiring local control of cannabis enterprises is unconstitutional and that the DCC applies to the industry, which is unlawful under federal law. A New York federal court used the ruling as justification to partially block the state's Conditional Adult-Use Retail Dispensary (CAURD) program. The decision calls into question states' authority to protect their cannabis industry from out-of-state competition. The 2nd and 9th Circuits may decide to weigh in on this matter in 2023. (as the same Michigan-based applicant has initiated litigation in New York and California on this ground).