Cannabis ban in Congress raises fears of mass layoffs and growth of black market

The cannabis industry is bracing for layoffs, production cuts and billions in lost revenue after Congress passed a government funding bill late Wednesday that contains a surprise provision banning nearly all cannabis-derived consumer products.

Hemp, a derivative of the hemp plant, was legalized in the 2018 Farm Bill for industrial uses such as rope, textiles and seeds. But the law’s broad definition created a loophole in federal rules on tetrahydrocannabinol (THC) — the psychoactive compound responsible for the high — experts said, allowing producers to extract psychoactive cannabinoids from federally legal hemp. Companies used this opening to flood the market with gummies, drinks, and vapors capable of delivering a marijuana-like high.

The new ban, included in legislation that ended the longest lockdown in history, prohibits products containing more than 0.4 milligrams of total THC per container. This threshold will eliminate 95% of the $28 billion retail cannabis market when it goes into effect within a year, industry executives said.

For reference, a single cannabis candy typically contains 2.5 to 10 milligrams of tetrahydrocannabinol (THC), according to the Journal of Cannabis Research.

“We lost the battle this time,” said Jonathan Miller, general counsel of the US Cannabis Roundtable. “In effect, this is a comprehensive and comprehensive ban on cannabis products in the United States.”

The new cap replaces the 2018 definition of hemp in the Farm Bill, which was based on THC concentration and permitted products containing less than 0.3% THC by weight rather than total quantity.

“We have a year to figure that out, but in the meantime we could see losses across the industry if we don’t,” Miller said.

More than 300,000 jobs tied to the cannabis economy are at risk, according to Whitney Economics, a cannabis and hemp research firm, from growers and extractors to manufacturers, logistics companies and retailers.

Ripple effects could affect land use, contracted acreage and equipment financing, as growers who expanded cannabis cultivation after 2018 may suddenly face canceled contracts or restructuring, said Michael Gorenstein, CEO of marijuana producer Cronos Group. States with the largest cannabis infrastructure, such as Kentucky, Texas and Utah, are likely to face the harshest economic fallout, cannabis executives said.

“There are a lot of small retailers, small businesses and farmers who rely on cannabis sales to survive,” Gorenstein told CNBC. “It will create a lot of stress when they start losing business, losing jobs, losing crops.”

The crackdown represents a dramatic reversal from 2018 when Sen. Mitch McConnell, R-Ky., championed hemp legalization to create a new national agricultural commodity and economic engine for Kentucky.

But after that bill passed, the absence of federal rules allowed a patchwork market to emerge, with wide-ranging safety issues ranging from mislabeled and untested products to potency items that rival recreational marijuana, according to government officials and industry experts.

McConnell and other Republicans argued that the new restriction “restores the original intent” of the farm bill. McConnell said closing the loophole is key to protecting his legacy on farm policy before he retires next year.

“This was him [McConnell’s] “The signature law, the cannabis law, and he wanted to fix it,” said Boris Jordan, CEO of the cannabis company Coralevto CNBC. “Normally the Senate backs a retiring senator, especially one as senior as him, as their last act. This was a last-minute request of his.”

But not all Republicans agree with that. Kentucky Sen. Rand Paul has sparred with colleagues for months over hemp and criticized the provision as an overreach that “kills jobs and crushes farmers,” adding that “all hemp seeds in the country should be destroyed.”

“This is the most reckless and ignorant proposal for an industry I have seen in a very long time,” Paul said after the ban passed.

While leaders like Jordan have said the legal market will shrink sharply from prohibition, they warn that consumer demand for hemp-derived THC will not. Studies have shown that demand for marijuana and other THC-based products has continued to rise in recent years as some consumers turn away from alcohol and drink less overall.

Cannabis executives have warned that the growing popularity could drive billions into black market sales, where products are subject to no testing, no age restrictions and no tax compliance.

“What this ban will do is it will force all these small players now into the illegal market,” Jordan said. “Companies have invested a lot of money in this, and the demand is still there and growing [companies] “Not only will it go away, but they will enter the illicit market and put more people at risk.”

As products move underground, law enforcement agencies may have difficulty tracking supply chains, Gorenstein said.

“Bad actors thrive when things disappear from the formal economy,” Gorenstein said.

State and local governments could lose millions in tax revenue associated with cannabis sales, Gorenstein and Miller said. Many states use these funds to support addiction services, county budgets, and public health programs.

Going forward, industry leaders see the only permanent solution as federal standards, not bans. Many favor a model of dividing responsibility between agencies: the Food and Drug Administration to oversee product safety, and the Alcohol and Tobacco Tax and Trade Bureau, responsible for taxation and distribution.

Executives also compared the current environment to the early e-cigarette boom, when products like Juul offered fruity, candy-like cartridges that went viral, with uneven oversight, before the Food and Drug Administration got involved.

“A lot of people have taken liberties that put the end user at risk,” George Arcos, CEO of cannabis company Verano Holdings, told CNBC. “We like strict regulation. We want to keep consumer safety in mind for every product that is produced, and that’s what we hope to achieve.”

Meanwhile, the industry is bracing for a full-court lobbying campaign aimed at replacing the ban with federal testing and labeling rules and age restrictions.

“We already have members of Congress introducing regulatory bills,” Miller said. “We are pledging our support and working at the grassroots level to energize citizens around this issue.” “We are activating across the sector.”

At the same time, the Trump administration is “considering” reclassifying marijuana from a Schedule I drug — along with heroin and LSD — to a Schedule III drug. Advocates said the move would not legalize recreational marijuana, but would make it easier to sell.

“Big changes are expected across the board next year, but what they will be could determine the future of investments and the industry,” Gorenstein said.