Cannabis could soon be legal - including licensed cultivation and sale. German growers have been waiting for years for things to get going on a grand scale. In order to be able to compete with the black market, however, legal trade must meet a number of criteria, explains economist Justus Haucap ntv.de. He also advocates realism when it comes to expected returns in the cannabis industry.
ntv.de: Germany is slowly venturing into cannabis legalization and the growers are watching nervously. What mistake must the federal government not make now?
Justus Haucap: The first thing to do is make sure there is enough cannabis available - that would be around 400 tons per year. That's a lesson from Canada and California, where you didn't have enough in the beginning. The black market then inevitably remains. The second thing is that there are enough points of sale that are also easily accessible. Because otherwise, illegal offers may be more comfortable. Thirdly, the sales price must not be too high - about 10 euros per gram, which is currently the aim, is good. Only then is the price competitive with the black market. Federal Health Minister Karl Lauterbach has now presented key points for cannabis legalization. Where do you still see room for improvement?
There are two points that I think are critical at the moment. One is the 15 percent THC content cap. After all, we want to be able to keep up with the black market in order to push it back as quickly and as far as possible. The THC content should be at least 20 percent. Second, there may be limitations in product selection. For example, there should be no pre-rolled joints with tobacco, although it stands to reason that some consumers would roll them at home. Ultimately, however, the offer in the cannabis dispensaries should be as attractive as possible in order to make the black market unattractive. Otherwise we put in a lot of effort in the end, but didn't reach our goal.
German cannabis growers are in the starting blocks and some are already producing medicinal cannabis on a small scale. Could they ramp up production immediately if needed?
First of all, it is not the case that the Bundestag passes a law today and tomorrow they are then growing licensed. We know from other countries that it takes about 12 months to set up regulatory bodies, cultivation and trade. At the same time, I regularly get calls from companies that are really digging and standing by.
You don't actually need that many growers for the 400 tons of cannabis a year. At the moment it is only grown indoors under increased security conditions. I also understand the safety concerns when growing outdoors, which is why conventional greenhouse growing might lend itself. We assume that many farmers and nurseries will switch from tomatoes, cucumbers, lettuce to cannabis. It's not that difficult. Farmers are very entrepreneurial and when they see an opportunity for profit, they do it. Do you think the hype around the cannabis business is fair or overblown?
There is definitely a hype. It's not cannabis-specific at all. You can find it in all sectors where liberalization is taking place. However, there is often a consolidation after a relatively short time because not all competitors remain marketable - we also saw this after legalization in Canada.
We know this from Germany from the opening of the long-distance bus market. At the beginning there were a lot of companies and in the end we almost only have one provider. But I don't expect cannabis to be monopolized like long-distance buses. On the one hand, because the key issues paper also allows the self-cultivation of two plants per person and, on the other hand, because it is a different market. I don't need a lot of capital and I don't have the economies of scale that you have in logistics and the transport business. We will end up with a market structure similar to that of vegetable growing. The barriers to entry into the market are low and the plant is easy to grow.
Cannabis stocks, including German companies, have seen short-term price jumps following Lauterbach's announcement. Can the cannabis business also be economically successful in the medium and long term?
I do think that you can make money with it in the long term. But we're talking about "normal" returns here, which are based on those of the food industry - such as with tomato and cucumber cultivation. You can't make super returns or excess profits in the hemp industry or create superstar companies with it. Existing medical cannabis growers have only a small head start there, too. But if we are completely honest: There are already many Germans with cannabis expertise, because there is an enormous amount of illegal cultivation. Ultimately, it is a low-maintenance crop, the scalability is manageable and there is no know-how that can be patented. It's not like the pharmaceutical industry.
Can rising energy prices become a problem for producers?
Naturally. This makes all hemp production more expensive, especially indoor growing. We would have less of a problem with large-scale cultivation and with greenhouses we would be somewhere in between. That would also be a reason to be more careful with possible taxation in order to get a price of around 10 euros per gram. Ultimately, this would also be an advantage over the black market, which grows to a large extent indoors. Legal greenhouse cultivation would then have a relative advantage. What economic potential do you see for Germany if there is an established cannabis market?
We assume a fiscal amount of around 4.7 billion euros that can be realized by legalizing cannabis. On the one hand, this includes income from taxes and social security contributions of over 3.3 billion euros. On the other hand, we have great potential to save on the police and judiciary if the majority of cannabis offenses are no longer prosecuted - we are talking about an estimated 1.3 billion euros in savings.
Do you anticipate a rapidly thriving cannabis market?
I wouldn't assume so. On the other hand, politicians are a bit behind on their promises. I can imagine that a law requires a lead time of around 12 months, and then it still has to go through the Bundesrat. So I think anything before 2024 is very unlikely. The companies are watching this with great hopes and from what I've heard, they expect similarly positive experiences as after legalization in other countries. But the experience with all new markets is that there will be companies that miscalculate, that come up with something that people don't want. There will be bankruptcies and companies going out of business, and the cannabis market is no exception. Martin Schmitz spoke to Justus Haucap
