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With a feud raging over what’s a regulated “intoxicant,” billions of cannabis dollars hang in the balance.
Forming America’s sixth-largest crop yielding 48.8 million pounds of flower and projected to generate $33.5 billion in 2023 legal sales, marijuana’s plunging price-per-pound and the availability of cheaper, unregulated hemp-derived tetrahydrocannabinol (THC) products is thwarting the cannabis industry.
Whether cultivated indoors, outdoors or in a greenhouse, over the past two and a half years cannabis wholesale price-per-pound has dropped 40% nationally curtailing production and crashing businesses across legalized marijuana’s supply chain.
Further, mirroring legalized marijuana’s THC’s (Delta-9 THC) effects, hemp-derived THC (Delta-8 THC) requires no license, is readily available online and over the counter, and is cutting into legalized cannabis’ revenue despite growing state illegality, confusion over federal legality, and concerns regarding these untested and unregulated products’ safety and potency.
Cannabis and Delta-9 THC
Cannabis can be grown in the ground, water (i.e., hydroponically), or pots outdoors, indoors, or in a “greenhouse,” a structure made of transparent material enabling natural sunlight and fresh air cultivation. Whether deemed “medical” (purchasable only with state-issued card to treat residents’ statutorily defined “covered medical condition”) or “adult-use” (purchasable by anyone over 21 from any state with a valid identification), Cannabis takes four forms: “flower” that is smoked; “oils” ingested by vaporizing; “concentrates” consumable after being heated to a high temperature and “infused” products ranging from eye drops to “edibles.” Those cultivating, processing, infusing, transporting or dispensing cannabis are deemed to be “plant-touching” marijuana related businesses (“MRBs) and, despite being legal in 38 American states, cannabis remains federally illegal.
The Controlled Substance Act, 21 U.S.C. Sections 801, Et. Seq (1970) (CSA) currently lists marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision.” See 21 U.S.C. Section 812(b)(1). The CSA prohibits marijuana’s cultivation, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s supremacy clause, state laws conflicting with federal law are generally preempted and void. See U.S. Const., Art. VI, cl. 2; Wickard v. Filburn, 317 U.S. 111, 124 (1942)(”No form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).
Because the CSA prevents cannabis from being sold outside of each respective legalized-marijuana state and, thus, no “interstate cannabis commerce” can occur, state regulators like California’s Department of Cannabis Control, and not federal agencies like the Food and Drug Administration, issue licenses and regulate MRBs.
Impact of Cannabis’ Plunging Price-Per Pound
According to spot-market-index tracker, Cannabis Benchmarks, marijuana’s wholesale price-per-pound has dropped 40% over the past two half years from $1,658 a pound to $955 with pricing currently at $1,284 a pound for indoor-grown flower, $688 a pound for greenhouse cultivated cannabis and $424 a pound for outdoor-grown marijuana.
Specifically, over the past year, Colorado’s average wholesale price dropped from $1,316 to is $658 per-pound, California’s price dropped 57% to $660 per-pound, Oregon’s volume-weighted average price dropped 39% to average $700 per-pound, and Oklahoma’s overall volume-weighted flower price is down 42% to $921 per-pound. According to cannabis industry financial news source Green Market Report, over the past year Colorado’s medical and adult-use marijuana sales are down, respectively, 47% and 20%, and Cannabis Benchmarks reports that, due to the price-per-pound depression, California is enduring production cutbacks ranging from 30% to not harvesting resulting in a 24% (or over 40,000 pounds) shrinkage of wholesale flower entering California’s commercial market per quarter.
Because a MRB’s entire business model hinges on receiving a set price-per-pound, plummeting wholesale prices are causing havoc across the entire cannabis supply chain. For example, envision a recently licensed grower building its operation, and raising funds, using 2019 price-per-pound market price as the foundation for its projections to construct a $23 million indoor grow facility. Regardless of its markup, when the per-pound wholesale price drops 39%-57%, a grower’s ability to sell its product, subsidize its operations, service its debt, remunerate its investors and raise additional capital is severely impaired.
The loss and reduced production gets passed along the cannabis supply chain ranging from cannabis giant Canopy Growth slashing its workforce by 60% this year to nationwide multistate grower, processor and dispensary Curaleaf laying off over 100 employees in 2023.
Hemp and Delta-8 THC
A fast-growing, sustainable, and inexpensively produced plant, hemp is a variety of cannabis sativa L. containing less than 0.3% plant chemical Delta-9 THC. Agricultural Act of 2014, 7 U.S. Code Section 5940. Hemp yields more than 25,000 oil and fibrous products including cannabidol (CBD), which offers broad health and wellness uses, serves as a food additive, and is contained in many beauty items. Farmed in all states under a USDA general license or approved state plan, South Dakota, Oregon, Montana Missouri and Kentucky lead the nation in hemp cultivation.
The Agriculture Improvement Act of 2018 (2018 Farm Bill) both legalized hemp and its derivatives and removed plant cannabis sativa L. containing no more than 0.3% Delta-9 THC on a dry-weight basis from the CSA and Drug Enforcement Administration’s (DEA) purview. 7 U.S.C. Section 1639o(1). The Farm Bill permits importing, exporting and transporting hemp and hemp derived products like any other crop, and tasks the United States Department of Agriculture (USDA) with promulgating hemp regulations, and charges states, territories and Indian tribes with submitting hemp-growing regulations plans to the USDA including “THC testing procedures.”
A cannabinoid of the THC “family” of compounds commonly derived from the cannabis plant, Delta-8 THC is a double bond isomer of Delta-9 THC, the federally illegal psychotropic-effect-producing cannabinoid sourced from cannabis. An isomer is a type of “chemical analog” comprising one of two or more compounds containing the identical number of atoms of the same elements but differing in structural arrangement and properties. There are 30 known THC isomers, and Delta-9 THC and Delta-8 THC differ regarding the single double bond’s location. Stated another way, while similar in molecular structure, Delta-8 THC is a different molecule than Delta-9 THC.
Delta-8 THC is derived either directly from the hemp plant or converted from the CBD isolate. Because hemp cultivars do not express Delta-8 THC in sufficient concentrations or quantities to be economically viable for commercial extraction purposes, and CBD is cheap and abundant, deriving Delta-8 THC by converting from CBD isolate is the faster, cheaper and more popular method.
Because they are less regulated, cheaper and, unlike Delta-9 THC, can be sold virtually anywhere (including online) and as consumables, Delta-8 THC smokable flower, vape, and edibles sales are exploding and severely cutting into the legalized cannabis market.
Gauging 2022 hemp product sales in excess of $28 billion, research firm Whitney Economics reports that the hemp industry employs 328,000 workers earning $13 billion in wages.
Delta-8 THC’s Murky Legality
Presently legal in the majority of the states, Delta-8 THC products’ federally legality appears to hinge on whether derived directly from hemp or converted from CBD.
At the state level, Delta-8 THC products are as follows:
- Legal: Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland. Massachusetts, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma (explicitly excludes Delta-8 from Marijuana’s legal definition), Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Washington D.C., West Virginia, Wisconsin and Wyoming
- Illegal: Alaska, Colorado, Delaware, Idaho, Iowa, Montana, Nevada, New York, North Carolina, North Dakota, Oregon, Utah, Vermont and Washington
- Legal But Restricted or Regulated: Arizona, California (products with more than 0.3% Delta-8 THC are state regulated), Connecticut (only purchasable from a licensed cannabis retailer), Hawaii (except for edible/inhalable products {gummies, vape, flower and drink), Delta-8 THC is legal), Louisiana (while barring inhalables like flowers and vapes, consumable Delta-8 products like tinctures and gummies up to 8mg THC per serving allowed), Michigan (only purchasable from licensed Cannabis retailer), Minnesota (Delta-8 plants may contain up to 0.3% of any THC type and consumables up to 5 mg THC/serving allowed), Rhode Island, and Virginia (except for food/drink THC-containing product).
Whether Delta-8 THC is federally legal depends on whether derived directly from hemp or converted from CBD. Because the 2018 Farm Bill’s “hemp” definition encompasses “cannabinoids” and “derivatives” of hemp, hemp-derived Delta-8 THC is probably not prohibited by the CSA and Delta-8 THC derived from CBD is probably also exempt (if not containing Delta-9 THC concentrations exceeding “0.3% by dry weight” legal limit).
First, because the Farm Bill’s “hemp” definition distinguishes it from illegal marijuana, hemp falls outside of the CSA, which, in turn, excludes “hemp, as defined in Section 1639o of title 7”, from its “marihuana” definition. 7 U.S.C. Section 1639o(1); 21 USC Section 802(16)(B). Further, because, under the Farm Bill, hemp-derived “cannabinoids,” “derivatives,” “extracts,” and “isomers” are themselves “hemp,” Delta-8 THC comprises Farm Bill defined “hemp” beyond the CSA’s scope.
Second, while clear that Delta-8 THC naturally expressed in the hemp plant is not a controlled substance, the legal status of Delta-8 THC derived from CBD or other hemp-derived cannabinoid requires satisfying the Farm Bill’s broad “hemp derivative” definition. Framed differently, is a derivative of a derivative included in the Farm Bill’s hemp definition or is it a “synthetic” falling out of this CSA “safe harbor.”
A division of federal authority exists. The “source rule” (i.e., that a cannabinoid’s source determines its legal status) suggests the former. Conversely, the DEA’s November 2023 internal “Scheduling Actions, Controlled Substances, Regulated Chemicals” document, the “Orange Book,” flatly lists “Delta-8 THC” as a “Schedule 1 Tetrahydrocannabinol” without any regard as to “source.”
However, under the “Lex Specialis Doctrine” (i.e., that when two federal laws appear in conflict on an issue, and one is older and more general than the other, the more recent and specific law controls), the more recent and specific Farm Bill would take precedence over the older and more generalized CSA, encompass Delta-8 hemp in its hemp definition, and remove it from the DEA’s purview. See In re Lazarus, 478 F.3d 12 (1st Cir. January 9, 2007).
With the 2018 Farm Bill “extended” until Sept. 30, 2024, by the recently signed “Further Continuing Appropriations and Other Extensions Act,” until Congress, the DEA, or the USDA take action, Delta-8 THC’s federal legality remains unclear and proceeding hinges on the following.
First, is the Delta-8 THC derived from Cannabis (i.e., containing Delta-9 THC concentrations exceeding “0.3% by dry weight” legal limit) or hemp? Producing or selling Delta-8 products without a permit to produce or sell THC violates the CSA and risks criminal and civil sanctions from the DEA, USDA, Federal Trade Commission, and state law enforcement and regulators.
Second, if not cannabis-sourced, is Delta-8 THC derived directly from hemp or CBD and what is the seller’s risk tolerance? While seemingly fairly settled that hemp derived Delta-8 THC falls outside of the CSA, questions remain whether CBD derived Delta-8 THC is allowable under the Farm Bill or impermissible as a “synthetic.” Further, unlike “fly-by-night sellers,” licensed cannabis and hemp growers, processers and sellers are subject to, and face the wrath of, their respective regulators.
Third, in which state is the online or over-the-counter purchase and sale occurring, has that state prohibited Delta-8 THC, and how robust are these respective enforcement efforts?
Fourth, even if not illegal, what risk management concerns exist and what tools are available to manage them? Tremendous safety, potency and torts risks and exposure are imposed by selling untested products in an unregulated market for which neither product certification nor insurance coverage is available.
Reprinted with permission from the December 12, 2023 edition of the Legal Intelligencer © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].
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