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High potential

By Ed Zwirn and Mandy Kovacs

Confectioners are closely monitoring the growing legalisation of marijuana across the USA and Canada, offering them the opportunity to develop new products with an special, edgy ingredient.

The new Liberal government in Canada was elected in October 2015 on a promise to legalise marijuana, while in the US, the transition is happening state by state. Early experience in the states of Colorado and Washington, both of which have reported huge tax receipt increases following their legalisation of cannabis for both medicinal and recreational purposes, have lessened American opposition to legalisation. As we go to press, some 24 states (and the federal District of Columbia) have passed legislation permitting marijuana to be consumed for medical or adult-recreational use.

While the drug remains largely illegal at present, it is difficult to measure the money made from cannabis throughout the US, although reliable estimates have placed the total spend on cannabis (both legal and illegal) at around $70 billion annually. Legalised marijuana revenues are expected to generate about $10 billion this year. By 2020, assuming that year were to mark the complete end to prohibition, this figure would ramp up to nearly $35 billion, according to estimates compiled by GreenWave Advisors, a New York-based consultancy; 50 per cent would still be black market at that point.

And not all of this money is going up in smoke. An increasing number of marijuana consumers are choosing to eat rather than smoke this drug. A legal market for cannabis-based food products is expected to generate $1.6 billion US-wide this year (2016) and more than $10bn by 2019, according to GreenWave. Compare this to the approximately $35bn American consumers spent on less elevating confectionery products in 2015, according to the National Confectioners Association, and the opportunity for the confectionery sector is clear.

Based on the early experience of Colorado, which in 2014 became the first state to legalise marijuana for both medicinal and recreational pursuits, an increasing number of these new legal candy consumers may be new to cannabis consumption, either for reasons of discretion or because they had been reluctant to begin a smoking habit. “Clearly, there are some that purchase edibles that would not consume marijuana otherwise,” says Matt Karnes of GreenWave.

Dixie Elixirs and Edibles is one of the early beneficiaries of this trend. Founded in 2010, following the passage of Colorado’s legalisation of cannabis products for medical use, this Denver-based company currently sells ‘hundreds of thousands’ of chocolate bars, mints and other confectionery products each year, explains Joe Hodas, Dixie chief marketing officer. “The opportunity for this product is among people who believe that smoking is not good for you,” he says. “Also, an edible such as a mint is much more discreet.”

Its confectionery are made using processes similar to the techniques employed to create Hershey bars, with the additional step of infusing the product with THC, the active ingredient that makes the marijuana experience pleasurable. “Creating a chocolate bar is creating a chocolate bar,” says Hodas, adding that his company uses a CO2 infusion process “not dissimilar to other essential oil processes. THC is a tricky oil that doesn’t always blend easily. Very high pressure and high temperatures act as a solvent.”

Once eaten, the THC transforms molecularly in the human body, changing from THC9 to THC11, which results in “more of a body high, and is stronger and lasts longer than smoking,” explains Hodas, who relates that some tourists coming to Colorado from less permissive states make the mistake of overindulging and “find that they don’t like it.”

Medical/recreational mix

Rick Scarpello, founder and CEO of Medically Correct LLC, another cannabis confectioner that got its start in Colorado in 2010, says his company, which sells under its ‘Incredibles’ label using a hydrocarbon extraction technique, expects to book $10 million to $15 million of confectionery revenue this year alone, a figure with the potential to grow to $100 million given nationwide acceptance. In synch with other reports, he says his customer base has skyrocketed from the 120,000 or so cardholding patients who had legal access to medical cannabis in Colorado when the company started. “One year ago, our customer mix was 75 per cent medicinal to 25 per cent recreational,” he notes. “Now it’s 50/50.”

But Scarpello, for his part, said that all his confectionery products can legitimately be classified at medical in a practical, albeit maybe not a legal sense. “You had a tough day and you go home and have a glass of wine. Is that therapeutic? Absolutely.” Scarpello maintains that margins for his business are basically the same as in the more conventional confectioneries. “It costs us a little more to make it but we get to charge more,” he says.

The pressure on profits, according to Scarpello and other industry professionals, comes not from the actual operating costs incurred in manufacturing but in the tax and other hurdles that come from US government policy. On the state level, licensing regulations vary from Colorado’s strict statewide regime to what Scarpello calls the ‘Wild West’ atmosphere prevailing in California, which has legal medical use but leaves regulation largely to local governments, a setup which has dissuaded Medically Correct and Dixie Elixirs and many other cultivators and confectioners from doing large-scale business there.

In addition to the patchwork of conflicting prohibitions and licensing rules seen among the individual US states, the US federal government imposes major costs and operational hurdles on cannabis confectioners. It still considers marijuana a Class I controlled drug (with no redeeming medical value), effectively denying cannabis entrepreneurs access to banking and other financial services and forcing them to operate using large sums of cash and making it difficult to obtain leases and other long-term arrangements conducive to business stability.

Also, because of this classification, according to the National Cannabis Industry Association, under the tax code, as currently written, state-legal cannabis cultivators and dispensaries cannot take ordinary business expense deductions and so wind up paying effective tax rates of 50 to 85 per cent.

Pharma buyouts

But, as attitudes toward marijuana relax in the US, analysts are convinced that it is only a matter of time before major US companies jump on the bandwagon, a move which conventional confectionery industry groups deny: “No we are not,” was the only comment forthcoming from a Hershey’s spokesperson contacted by Confectionery Production.

“Nobody’s going to announce anything because it’s still illegal,” stresses GreenWave’s Karnes. But buyouts may happen in future, he says, and they would not necessarily come from the confectionery sector. “It could be considered a pharmaceutical product,” he points out. “It wouldn’t be surprising if one of these guys got involved.”

Whatever the buyout implications, and wherever this money comes from, it is not a prospect that particularly worries Medically Correct’s Scarpello. “Like many people, I’d like to build a business and either pass it on to my children or get bought out for the right price,” he says. “I expect to eventually go for the second of these two options.”

In Canada, not only is the federal government committed to nationwide legalisation, but edible medical marijuana products became fully legal in June 2015. The Canadian Supreme Court ruled that medical marijuana is legal in all forms, which includes confectionery products: “We are moving away from a smoking culture, and this legal win opens to the door to a tremendous variety of innovative products,” says Craig Jones, executive director of the National Organization for the Reform of Marijuana Laws in Canada. “I envision the market, being the creative engine it is, will see a huge proliferation of new forms of edibles, consumables, baked goods, gummy bears etc, as a result. The sky’s the limit.”

No full legalisation date has yet been set, but “if the government is smart, legalisation will happen in months, not years, so that by the time voters go to the polls again, the economic benefits of cannabis legalisation will be evident,” said Jones.

Tweed Inc, a medical marijuana producer located in Smiths Falls, Ontario, has begun producing and selling cannabis oil, and will soon sell baking kits to go with it. Jordan Sinclair, communications manager at Tweed, says the facility will not bake the goods in-house, but the kits will come with everything required to make baked goods such as brownies, cupcakes and muffins, with the correct dosage of cannabis oil.

“Right now, licensed suppliers still can’t produce an edible cannabis product, but that doesn’t mean we can’t sell ingredients that would make those products,” explains Sinclair. He mentions that in Colorado, where marijuana was legalised for recreational use in 2012, 40 per cent of products sold are infused products, which includes edibles, drinks, baked goods, etc.

“We think that the Canadian market would show the same demands as Colorado. We’re operating in an old Hershey’s factory too, so I think making chocolate confectionery is in the walls of this facility and it’s just a matter of time before that happens again, with a twist,” Sinclair adds.

Products sold by facilities such as Tweed are currently regulated by the Canadian health ministry, Health Canada. If and when marijuana becomes fully legal in Canada, Jones says this is likely to continue. Paul Hetherington, president and CEO of the Baking Association of Canada (BAC), says the group has no say in the regulations or guidelines of making confectionery marijuana products, and has not considered future possibilities.

“I can’t speak about what we’d do in future, but I can say that right now it hasn’t been discussed in any way,” he said. “We are a member-driven organisation, so it would depend on what the members’ positions and perspectives are at the time. I’d expect to see some kind of regulatory directions taken by Health Canada, rather than individual industry initiatives. I don’t think the BAC would set any guidelines; we don’t have the expertise or background knowledge.”

Contacts:

GreenWave Advisors: www.greenwaveadvisors.com

Dixie Elixirs and Edibles: dixieelixirs.com

Medically Correct: www.medicallycorrect.com; incrediblescolorado.com/products

Tweed: www.tweed.com

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