A question of quotas

Cupo allocation is the next hurdle in a race against red tape. Bigger companies with the wherewithal to negotiate the process may leave smaller players behind.

By: Mat Youkee

Building a Colombian cannabis company is like tackling assault course in which the obstacles get progressively more difficult. First up was the government licensing process, a test of patience and tenacity rather than technical skill or financial clout. Then came the fuente semillera challenge in which companies raced to register their cannabis strains with ICA (the Colombian Agricultural Institute) before a tight end-of-year cut-off point. Now another deadline looms. By the end of April companies must convince the Technical Quota Group (GTC) that their business plans and market research are sound in order to receive their cupo, their defined commercial production limit for the coming year.

The issue of quotas is fraught with misunderstandings. There is no international cap on the production of marijuana and, despite what you may have heard, the International Narcotics Control Board (INCB) does not divide up production limits between sovereign nations (see box on page 3). Colombia’s government does put restrictions on production of marijuana with over 1% THC by dry weight, however.

“Getting a license is like having a passport,” says Andrés López, Director of the National Narcotics Fund (FNE). “You can get one, but that’s very different from having the funds and ability to travel. It’s possible that some of the companies who have licenses have not evaluated whether they can operate.” Application fees for licenses vary from USD$3,000 to USD$10,000. While many Colombians have access to a plot of land that they could turn over to cannabis cultivation, the low initial start-up costs may have obfuscated the true cost of developing a project, estimated at between USD$1- 3 million.

RESEARCH: Once a project is up and running there are three types of cupo offered by the government. The first – and simplest to acquire – is a research cupo, which permits firms to conduct research and clinical trials but not commercialize their product. “It’s the simplest quota because you can’t commercialize drugs in clinical trials or the scientific research phase,” says López. “Companies present a research project, the GTC evaluates it to ensure it’s coherent, secure, and has a real purpose. Approval is given on the condition that anything that comes from that research has to be destroyed.”

“Getting a license is like having a passport... You can get one, but that’s very different from having the funds and ability to travel.”

- Andrés López, Director of the National Narcotics Fund (FNE)

THE TRICKY PART: The cupos for cultivation and fabrication, however, are trickier affairs. Companies need to present the genetics they will use, as well as details of the cultivation and fabrication processes, harvest dates and a detailed feasibility study. Cultivation firms can acquire their cupo based on a contract from the fabrication plant for a defined volume of plant. However, fabrication plants have to provide “a detailed justification” for the volume of cannabis processing they request (see table).

This last item requires firms to provide detailed and well supported market research regarding the demand from their target market, be it domestic medicine production or exports of extracts. López insists that these projections will be rigorously checked for accuracy and feasibility. Early applications for cupos have included projected exports to Colorado and counted traffic accident victims in the projected domestic patient numbers – one is an impossibility given federal illegality in the US, the other inaccurate because medical marijuana would not be used for such injuries. In such cases the GTC has the ability to revise production quotas downwards.

“In the domestic market, companies have to define what illnesses they want to treat and we look at market research studies,” says López. “The most important factor is that it is supported with hard evidence. Epilepsy and pain treatments have been proven but, for example, while there is a proposal to replace other addictive drugs with cannabis, we can’t grant that quota because we know it’s still not backed by regulations or medical research.” In the case of extracts for export, the GTC doesn’t perform due diligence to ensure the purchaser will use it legitimately, but it does notify the relevant authorities in the destination country, for example Health Canada, who ensure that the recipient is licensed to operate and receive imports.

FIRST PRODUCTION: Application for the cupo requires that all planted seeds and strains are registered with the ICA, but given the mad-rush at the end of the year to register plant genetics, many firms are still waiting for this crucial approval. Nevertheless by mid-March around 20 firms had filed for their commercial production cupo although more are expected to come in by the end of April. By June we should have a better idea of the projected production for the coming months. Firms that miss this deadline can apply for a supplementary cupo allowing production for up to 12 months, provided they can justify why they were unable to make the April deadline. We expect a number of companies to seek supplementary cupos in the second half of the year, using delays with seed registration as their justification.

Early applications for cupos have included projected exports to Colorado and counted traffic accident victims in the projected domestic patient numbers – one is an impossibility given federal illegality in the US, the other inaccurate because medical marijuana would not be used for such injuries.

SEPARATION: The allocation of cupos could be one of the great differentiators in the Colombian cannabis sector. While big firms have the cash, technical expertise and legal support to blaze ahead, smaller firms may find the path from license to production far more difficult and costly than anticipated. Exaggerated media reports about the “boom” of the cannabis sector has led to a form of speculation where companies apply for a license believing it could be easy to profit in the future. This is against the original intention of the regulation, according to López. “Many companies will get licenses but never receive a quota and the legislation allows us to remove a license if its not used within a certain period,” he says. “The market will define which companies progress, but I can assure you that in five years many of the nearly 1,000 awarded licenses will not get renewed.”

In late 2019 the Colombian cannabis industry will start to separate the bud from the stem.