Published on Jan 19, 2023.

January 19, 2023 - As many readers know, 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. While some of this might be attributable to parallels experienced by the broader economy in the wake of COVID-19, it nevertheless resulted in numerous companies across the sector being hit by layoffs, cash crunches, and increased debt.

But 2022 wasn't all bad news. Three more states enacted laws legalizing adult-use cannabis, while recreational sales kicked off in several other states. On the federal level, the Biden administration took steps toward reform, pardoning federal offenses of simple marijuana possession and directing review of cannabis's classification under federal law. Congress also enacted the Medical Marijuana and Cannabidiol Research Expansion Act.

After enjoying a sales surge during the early stages of the pandemic, the U.S. cannabis industry showed signs of slowing down in the face of regulatory and economic challenges, including declining demand. As a result, legal cannabis markets across the country, particularly mature markets, are facing a supply glut that is driving down wholesale and retail prices.

In California, for example, wholesale prices are reported to have crashed by as much as 95% since the state voted to legalize cannabis in 2016. ("How falling cannabis prices killed a 3rd generation family cannabis farm," KSBW-TV Action News 8, Monterey Hearst Television Inc., Updated Dec. 14, 2022). And in Massachusetts, the retail price of an ounce has decreased from roughly $400 to under $250 over the last two years. ("Recreational cannabis prices in Mass. plummet as dispensary owners weigh future," Boston.com, Dec. 13, 2022).

At the same time, legal retailers continue to struggle with onerous taxes, regulations, and competition from the illegal market. Many of these same challenges are likely to persist throughout 2023, including the slump in wholesale and retail cannabis prices.

Federal legalization stalled in 2022, but there are glimmers of hope for 2023 and beyond

While Congress once again failed to pass meaningful cannabis reform — and federal legalization remains unlikely in 2023 — federal reform efforts made incremental progress in 2022.

In October, President Biden released a statement pardoning federal offenses of simple marijuana possession. In addition, the president asked the Secretary of Health and Human Services and the Attorney General to review cannabis's classification as a Schedule I drug — the highest level of classification — under federal law. Although not without drawbacks, rescheduling to Schedule II would be an overall boon to the medical marijuana industry, as (among other things) it would likely allow medical cannabis to be grown in one state and sold in another.

While the announcement marked the biggest shift in federal cannabis policy since the passage of the Controlled Substances Act (CSA) in 1970, its effects are not immediate. Administrative review of cannabis's status under federal law does not have a set timetable and is unlikely to be completed in 2023. Moreover, because state cannabis convictions far outnumber federal convictions, most pardons will have to happen at the state — not the federal — level.

In December, Congress passed its first standalone piece of cannabis-related reform: the Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA). The bipartisan legislation paves the way for more research into cannabis's medicinal uses by rolling back federal restrictions on research and the cultivation of research-grade cannabis (which are presently conducted exclusively at the University of Mississippi). The MMCREA also promotes the development of U.S. Food and Drug Administration (FDA)-approved drugs using CBD and cannabis.

We anticipate that several federal legalization bills will be re-introduced in 2023. Congressional Democrats are likely to re-introduce the Cannabis Administration and Opportunity Act (CAOA) in the Senate and the Marijuana Opportunity and Reinvestment (MORE) Act in the House. Both bills were introduced in previous legislatives sessions and aim to end the federal prohibition on cannabis.

The Secure and Fair Enforcement (SAFE) Banking Act is also likely to be re-introduced in 2023, which would provide protections to financial institutions and various other professional service firms doing business with state-legal cannabis businesses and is likely to get the most attention (as has been the case in previous years). The bill has now passed the House seven times and enjoys both bipartisan and industry support.

Another likely candidate for re-introduction is the States Reform Act (SRA), which would decriminalize cannabis at the federal level while deferring to state powers over prohibition and commercial regulation.

FDA guidance on CBD may finally be on the horizon

It has now been nearly four years since the FDA asserted regulatory oversight over cannabidol (CBD). Despite repeated calls for regulations from lawmakers and industry participants, the agency has yet to comprehensively address rules relating to CBD, leaving manufacturers and distributors without much guidance (aside from the periodic release of warning letters). 2023 is likely to be the year this finally changes.

Up to this point, the FDA has generally pursued limited enforcement activity regarding CBD, focusing primarily on food and beverage products that make unsubstantiated health claims. But recent shifts in the agency's internal and external approach to regulating CBD products and other cannabinoids could be an indication of what's in store for 2023, and beyond.

For example, in September, the FDA hired Norman Birenbaum — an experienced cannabis policy expert — as a senior public adviser at the Center for Drug Evaluation and Research. Industry watchers speculate that this could indicate that the agency is finally gearing up to develop a regulatory framework for cannabis-derived products, including CBD.

In addition, the FDA issued warning letters in the first half of 2022 to companies selling products containing Delta-8 THC, an intoxicating hemp-derived cannabinoid that is currently being sold on the unregulated market in certain states. And in November, the FDA again issued a series of warning letters, this time to companies selling CBD-infused food and beverages.

The FDA also announced in a recent interview with The Wall Street Journal that it is aiming to reveal its oversight plans in the coming months. ("FDA, Concerned About Safety, Explores Regulating CBD in Foods, Supplements," WSJ.com, Updated Dec, 29, 2022) The ultimate effect of the FDA's forthcoming oversight plans remains uncertain, but will likely have a significant impact on the existing CBD industry. So, stay tuned!

States continue to lead the way on legalization and reform despite facing challenges

According to a recent report by NORML, lawmakers and voters enacted more than 40 cannabis-related reform laws in over a dozen states in 2022. On the adult-use front, three states — Rhode Island, Maryland, and Missouri — enacted laws legalizing and regulating the market. Meanwhile, Mississippi enacted legislation legalizing medical cannabis.

2022 also saw recreational cannabis sales kick off in New Jersey, Rhode Island, and (to a very limited extent) New York. Retail sales in Connecticut also began earlier this month. Retail markets in Maryland and Missouri are expected to launch later this year. As it stands, 39 states have legalized cannabis in some capacity, with 21 states (plus the District of Columbia) permitting recreational adult-use.

Given that public support for reform remains at an all-time high (See "Americans overwhelmingly say marijuana should be legal for medical or recreational use," Pew Research Center, Nov. 22, 2022), we expect legalization and reform at the state level to continue in the year ahead. For example, lawmakers in Minnesota introduced a pair of bills earlier this month that would legalize recreational cannabis. Minnesota's newly elected governor, a known cannabis legalization advocate, has stated that he could see legalization happening in the state in the coming year.

Pennsylvania also recently elected a pro-cannabis governor and saw Democrats retake the State House, improving the Keystone State's chances of legalization passing in 2023. Oklahoma has an opportunity to legalize recreational cannabis in March. Ohio's Legislature is also considering a bill to legalize recreational cannabis, and lawmakers in several other states have already filed a handful of bills in the first few weeks of 2023 aimed at liberalizing cannabis laws (including Indiana and Kentucky).

But legalization is just the first step. The roll-out of state-legal cannabis programs can be complicated, time-consuming, and does not always progress in a linear fashion. For example, it has taken New York almost two years to launch its adult-use program, with the first sales occurring just at the end of December at a single location. To date, only 36 retailers in the state have been granted provisional licenses. Meanwhile, regulators have approved 318 conditional licenses for adult-use cultivators and processors, stoking fears that there may not be enough state-sanctioned stores, and that growers could be facing an oversupply issue. Early-stage growth of New York's market has also been blunted by competition from the "legacy" (i.e., unregulated) market.

Several other states' cannabis programs, including New York's social equity component, are facing legal challenge on the basis that their licensing requirements violate the dormant commerce clause (DCC) of the U.S. Constitution, which prohibits states from discriminating against interstate commerce by favoring citizens of their states over others.

In August, a split 1st U.S. Circuit Court of Appeals panel affirmed that the DCC applies to the federally illegal cannabis industry and that a Maine law mandating local ownership of cannabis businesses is unconstitutional. The decision throws into question states' ability to safeguard their cannabis industries from out-of-state competition, and has been used as the basis for a New York federal court to partially enjoin New York's Conditional Adult-Use Retail Dispensary (CAURD) program.

2023 could be the year the 2nd and 9th Circuits weigh in on this issue (as the same Michigan-based applicant has initiated litigation in New York and California on this ground).

Source: Reuters.