Why Hemp is Good for Cannabis

The topic of cannabis has always been a messy one in the US. Despite a strong demand for the plant, and studies showing its relative safety compared to America’s favorite recreational drug – alcohol – the prohibition on cannabis has been a long hard battle.  From Reefer Madness to the unmistakable damage done by the Reagans’ “Just Say No” campaign, the government and mainstream media have succeeded for decades in making it almost impossible for Americans to access cannabis.  

But has this state-by-state system actually benefited consumers, business operators, and investors? 

Kind of. 

Each new state opening up a market has the opportunity to make improvements from the mistakes and failures of the previous ones. While I would like to believe that rules and regulations are created with good intentions, the unintended consequences that hamper consumers’ access and business viability are evident in every state rollout.

But then in 2018, an unlikely hero came into view: hemp. In the 2018 Farm Bill, hemp was officially classified as a non-controlled substance as long as it was <0.3% THC by dry weight. Hemp is the same plant as cannabis, and its only real difference is the legal classification. Just think of hemp as a less potent version of cannabis. 

With this, people figured out that by using large amounts of hemp extract, you could derive delta-9 THC, allowing consumers to access the psychoactive side of the plant without all the red tape of the regulated cannabis industry.

For the first few years, this was much more of a fringe movement, but these products have now become commonplace, with major cannabis operators like Wana, Kiva, Cann, and Keef all launching their own hemp product lines in conjunction with their cannabis businesses.

It now begs the question, is the hemp market a viable route, and maybe even better solution for low-dose cannabis products?  Here are 4 reasons why hemp is good for cannabis:

1) Hemp allows better access to the cannabis plant and helps fight stigmatization.

At the end of the day, the ultimate goal of American legalization efforts should be rooted in the goal to improve access to the plant. Because hemp is not a controlled substance, you can sell it on-premise and ship it almost anywhere in the US. It can be sold in most stores without restriction, and at most, you have to acquire a hemp license from your local state which is much easier to do than a cannabis license.

Through the hemp channel, THC, CBD, and other cannabinoid products are already being distributed in hemp shops/dispensaries, liquor stores, grocery stores, and other C-store concepts. 

Is this a flawless system yet? 

Absolutely not. 

ID verification enforcement is a #1 priority. But if these very same establishments can be trusted to sell alcohol and tobacco, two substances that kill thousands of people a year and ruin the lives of many, why can’t they sell hemp products too?  

The fear-mongering of children getting their hands on hemp products is a weak argument. These bad actor smoke shops are no different than the shady liquor store at the edge of town that is loose with ID’s. As long as there is an age restriction on recreational substances there will always be youth trying to access them. The response to occurrences like this should reflect more on these retailers, not the substance itself. 

A counterpoint to this may be that there are already dispensary channels set up in many states that are in a better position to handle these products. Here are some of my questions in regards to this:

  • Why do so many dispensaries in every state fail to pay bills to their vendors?

  • Why have some of the most well-funded multi-state operations failed to consistently turn a profit, with some even filing for bankruptcy?

  • How is it fair that even when cannabis is made legal in a state, every municipality can still make an individual choice to ban cannabis businesses within their domain?

  • Why is it so hard to get new consumers into dispensaries and make it a normal part of their weekly retail routines?

  • Why must a consumer show up to a windowless building and show their ID up to 3 times just to get a substance that is far less harmful than alcohol?

The answers to these questions point to a system that has made a valiant effort but has ultimately failed the consumer. Stigmatization, greed, and oppression are at the heart of many of these issues, and unfortunately, it is typically the government at fault.

With hemp, we now have the opportunity to sell these products right alongside alcohol and other common food items, helping to normalize consumable cannabinoid products in more retail environments.

2) Hemp provides an opportunity to reconsider fair taxation.

In regulated state cannabis markets, once you add up the standard state sales tax, the state cannabis sales tax, and any local taxes, you typically arrive at a total tax rate of at least 15% - 30%. Washington takes the top spot, with a cannabis tax of 37%.

Compare this with alcohol and tobacco. 

While alcohol taxes vary, let’s take beer as a specific example, as it is one of the most popular products. The average price of a 6-pack is $10. The average state tax on beer is $0.20 per gallon. There is roughly a half gallon of beer in a 6 pack, meaning the average tax rate is 1%.

Now tobacco. The average price of a pack of cigarettes is $8. The average tax on a pack of cigarettes is $1.89. This is an average tax rate of 23%.

Taxes are supposed to help prevent and aid negative externalities. So what these state governments are effectively telling us is that alcohol has the lowest risk for negative externalities, tobacco has a higher risk, and cannabis has a similar or higher risk than tobacco. 

Does that sound fair?

Cannabis taxes are unreasonably high, and it's time for this to change. If states can realize the opportunity for improved quality of life, better health of their citizens, and lowered amounts of violence and other adverse events, they may realize that by reducing taxes and improving access, they will make more money!

3) Hemp helps solve common cannabis business problems like interstate commerce, profitability, and tax implications.

As mentioned before, because hemp is not a controlled substance, it can be shipped and sold anywhere in the US. This is quite the opposite of the current state-run cannabis markets, where the fractured system does not allow for interstate commerce, a “free market”, or any version of economies of scale because businesses are confined to only working with other operators in their state.  

With hemp, operators can leverage the wide variety of raw material suppliers across the nation, find the best manufacturing and logistics partners in the country (not just in their state), and set up redundancies in their supply chain and operations to scale their business to a level that was never possible in regulated cannabis.

Hemp also avoids another major pitfall of the state-by-state system, which is an artificially controlled supply of business licenses. These state cannabis licenses are typically distributed through lotteries or auctions, making it more likely that the first few businesses will be run by institutional, profit-hungry investors, and not people who have had genuine passion for the plant long before it was legalized.

On the contrary, hemp licenses are much cheaper and easier to obtain, and promote a truly competitive market, instead of one that is concerned with protecting the first movers.

Finally, hemp avoids the messy tax implications of cannabis. This included tax code 280E, which meant that — unlike any other business in the country — cannabis businesses are prevented from deducting normal expenses like rent, marketing, salaries, etc. This meant that companies had a higher tax burden, so they charged more for goods and services, ultimately hurting consumers just trying to access the plant.

The recent move by the DEA to reclassify cannabis as a Schedule III drug could help cannabis avoid 280E, but it still seems that hemp is by far the most free and clear solution to running a viable business in the cannabinoid space.

4) Hemp creates a good on-ramp for higher-dosed cannabis products, allowing space for both markets to co-exist.

I have spoken with some of the most fierce advocates of hemp, and pretty much all of them see hemp as complementary to the existing cannabis markets. Here is how many of us see this playing out:

  • Hemp could include any consumable products that are 10mg THC or less, making it easier for consumers to access cannabinoid products in normal retail channels. This only includes edible products like gummies, beverages, and tinctures.

  • More consumers now try and integrate cannabinoid products into their weekly purchasing and consumption habits.

  • Eventually, some percentage of these graduate beyond low-dose products and now want stuff with a real kick. Now they visit dispensaries, which have higher-dose edible products as well as smokeable products like flower, vapes, and concentrates.

This also helps solve the problem for customers who never set foot in a dispensary because of the typical unfriendliness of the retail environment: 

  • They are set up like bank vaults, typically with no windows and multiple ID checkpoints.

  • They follow much harsher constraints than alcohol outlets such as: 

    • Required to be located further from schools.

    • Don’t allow anyone under 21 to enter (parent cannot bring their kid inside).

    • Often forced to locate themselves in hard-to-find / out-of-sight locations, away from the public.

    • Consumers must pay with debit cards or cash, credit card payments are unavailable.

    • Delivery is either unavailable or expensive since existing delivery providers cannot be used.

But it seems that with hemp, some of these consumers could first experience cannabinoid products in typical retail locations, and then move on to dispensaries once their habits change.

This would only increase the broader demand for consumable cannabinoid products, and everyone would win here.

Some evidence of this is that recent estimates find that the hemp space has grown at 3x the rate of cannabis, and the potential for the symbiotic relationship between hemp and cannabis was discussed by a panel of industry leaders at the 2024 Benzinga Cannabis Capital Conference in Miami.