Understanding the supply chain of the cannabis industry is critical for understanding how an incoming business can best make its mark. Compared to other industries, however, the regulatory uncertainty has made following the production process slightly more complex.
Europe, for instance, is still heavily reliant on subsidies and costly imports from countries with more liberal takes on the sector.
In the following article, Strain Insider will outline some of the major stepping stones from grower to retailer and bring to light some of the barriers the European industry is facing from a regulatory perspective.
Europe’s budding growth
In their most recent European Cannabis Report, the Prohibition Partners, a data firm working in the field, indicated that Europe is expected to be one of the most profitable cannabis markets in the world. This comes in spite of inconsistent regulations throughout the region.
On the one hand, Germany, Italy, and the Netherlands step ahead of the pack, other strong economies like France, Great Britain, and Spain, however, are still identifying the best local practice, so as to enjoy similar economic boosts. In either case, the promise of the cannabis industry in Europe cannot be understated.
The report reads:
‘According to our findings, Europe’s cannabis market is estimated to be worth up to €123 [billion] by 2028 and will likely become the world’s largest legal market over the next five years.’
The task, however, in tapping this potential is how legislators will deal with individual trade agreements between partner states and a consensus on quality standards. The upside can already be seen in Germany which legalised medical cannabis in 2017 and has been enjoying an influx of investment ever since. The country is still hashing out the particulars, which revolve around its heavy reliance on imports from abroad, but Germany’s future is striking.
Such forward-thinking has nonetheless triggered other European countries to reevaluate their approach.
Italy made medical marijuana legal in 2013 and decriminalised minor offenses, and the Netherlands has long since been a hub for cannabis enthusiasts. While slightly underdeveloped, the Netherlands’ medical marijuana legislation is up for reappraisal this year. Each country that has accommodated this burgeoning economy has enjoyed a boost in the myriad interconnected industries.
This map is only slightly different when examining recreational use. France is notably more conservative in its appraisal of making leisurely consumption legal. (Source: The European Cannabis Report, 4th Edition)
Having such conflicting approaches to the industry has made managing the supply chain of cannabis all the more difficult. First off, it means that Europe relies heavily on imports from both Canada and the United States, countries which are fast embracing recreational use throughout. As demand rises in Europe, import allowances rarely suffice, thus, creating a costly bottleneck for all parties.
To get a better idea of how these channels function, it’s important to gather a better understanding of where the imported cannabis is coming from.
Profiting from regulatory arbitrage
North American growers have a steep advantage over their European counterparts simply because both Canada and the United States are much more open to the industry. Canada, in particular, has dominated the cultivation sector with leaders like Aurora and Aphria benefitting from Germans’ demand for cannabis.
The two firms also recently earned the right to grow within a European state after winning a bid in Germany’s tender application.
Over 79 applicants participated in the bid, with only 13 lots awarded. Aurora and Aphria both bagged five, with Demecan, a Berlin-based medical cannabis producer, earning the final three. The conclusion of the bid wasn’t without its controversy, however. A key requirement demanded that applicants have experience in growing high-quality cannabis in a regulated market, and this immediately eliminated nearly all potential German suppliers as they could match neither the experience nor the grade of production facility from abroad.
Each of the three winners is only allowed to produce 200 kg of cannabis a year for a duration of four years. Commenting on the supply issues this will engender, the CEO of the German Hemp Association, Georg Wurth, said, ‘the planned quantity in Germany will not be enough to avoid further supply bottlenecks.’
Thus, as demand for high-quality medical marijuana in Europe continues to soar, regulatory barricades will impinge an efficient supply chain. This will raise costs as the region will have to continue to rely heavily on imports from companies outside of the EU.
Canada will remain a key player in this process, but the Netherlands is also legally approved by the German state to import cannabis. As of April 2019, Uruguay and Columbia will also join the list since the German Federal Institute for Drugs and Medical Devices (BfArM) approved Cansativa GmbH, a European importer of cannabis products, to work with the two Latin American countries.
Das BfArM erteilt erste Zuschläge für #Cannabis zu medizinischen Zwecken. Damit wird der Anbau von 7200 kg Cannabis auf den Weg gebracht. Die Zuschlagserteilung ist ein wichtiger Schritt für die #Versorgung schwer kranker Patientinnen und Patienten. https://t.co/ARrkftQgMD pic.twitter.com/TVjTHX9pLQ
— BfArM (@bfarm_de) 17. April 2019
The current lifecycle of medical cannabis is a striking example of regulatory arbitrage. Countries that are legally allowed to grow cannabis are profiting from many of the demi-markets that are stuck between full legalisation and outright prohibition.
Countries like Germany, for instance, have seen a massive upswing in demand, but have few local growers to supply it. This, all before moving to value-add producers and the retail side of this market.
From the farm to the buyer
Outside of the medical applications of marijuana and the recreational use of the plant, the cannabis industry is also gaining traction in the health and wellness market. The most notable manifestation of this traction can be seen when examining cannabidiol’s (CBD) development.
CBD is being marketed all over the world as a non-psychotropic supplement that reportedly alleviates anxiety, depression, schizophrenia, chronic pain and many other ailments. Scientific documentation from the medical world is backing up many of these claims, too. Products using CBD as a primary component also rely on intermediaries to synthesize crops into the teas, oils and extracts that have gained so much popularity.
The regulatory statute of CBD, its positioning in the wellness sector and an emerging interest in the extract’s benefits resulted in a swell of retailers capitalising on the opportunity.
The European Industrial Hemp Association (EIHA) has also listed a number of hemp suppliers who turn the plant into a high-quality textile. Despite being heralded as a superior alternative to cotton, hemp’s association with marijuana has mired the resource in misinformation campaigns and controversy. As different nations are becoming more pro-cannabis, the fibre is gaining new ground in many different fields.
According to The European Cannabis Report from 2018, France and the Baltic states have been responsible for 50 percent of Europe’s hemp supply long before the resurgence of cannabis in Europe. HEMP-it and Triballat Noyal have both been producing and distributing hemp-based products for over 50 years in France. From food and textiles to more industrial uses in the field of aeronautics and automobiles, both companies have found hemp alternatives to a number of different materials.
Similarly, in Lithuania, both SatiMed and Agropo have also been exploring the advantages of hemp. SatiMed is focused more on cosmetics and is using hemp extracts. Agropo, on the other hand, specialises in the distribution of organic hemp seeds and has the advantage of following its product from cultivation all the way to retail.
The chart above also indicates that Italy, the Netherlands and Germany are the top performers, but with more than 14,500 hectares dedicated to hemp agriculture, France is Europe’s largest supplier.
Arriving at a consistent set of regulations for the myriad cannabis-related products will mark the next boom in Europe.
While different non-psychotropic derivatives are already finding great demand, the current supply chain is inefficient and costly. Canada has taken advantage of this fact and now commands both experience and quality all over the world. Catching up to the northern American powerhouse rests heavily on regulator’s next steps.
Another part of this uncertainty is that much of the technical infrastructure needed to support an in-demand market is wholly absent. France and several other countries are taking advantage of their agricultural system, but these public works are dedicated to hemp production. The rise of health consciousness coupled with the purported benefits of products like CBD and even recreational marijuana means that a fundamental restructuring of these farming centers is necessary.
Keeping a close eye on how incoming laws will shape up in places like Germany and France should be an entrepreneurs top priority.
Like in Canada and the United States, savvy investors will need to move quickly to keep the benefits of shifting regulatory sentiments. A disparate supply chain will likely be a focal point for this change as key pieces still need major attention to support critical demand across Europe.