Strength in numbers

The unfounded outcry over the new INCB quota should not overshadow the publication of a white paper containing realistic industry predictions.

By: Mat Youkee

“Reports of my death have been greatly exaggerated,” said a bemused Mark Twain in 1897 upon hearing of the publication of his obituary in a US newspaper. In August, the Colombian cannabis industry faced a similar scenario when the United Nations International Narcotics Control Board (INCB) announced that Colombia would be awarded a quota of 1.2 tonnes of cannabis oil for internal medicinal and scientific use. That compared with a quota of 47 tonnes the previous year, prompting Colombian broadcaster W Radio to pronounce a “fatal blow” to the industry. In fact, it received a healthy dose of reality.

REDO THE PRESENTATIONS: Why Colombia? It’s one of the first questions any prospective investor will ask a medicinal marijuana start-up operating here. And they expect numbers not platitudes. For the last 18 months, most company presentations have used the INCB figure to boast that Colombia would produce 44% of the world’s medicinal marijuana in 2018. For those who haven’t been paying attention: It did no such thing.

To reach such lofty numbers, the country would have to be in full-blown commercial production of medicinal cannabis. But it wasn’t until August this year that Medcann received the first government allowance for the fabrication and export of high-THC product. Over the course of 2018, just over 100,000 plants were grown for research purposes. In a brand new industry statistics and forecasts are hard to come by and greedily consumed. But serve them up wrong and they can leave a nasty taste in the mouth.

THE ROLE OF THE INCB: Back in the April edition of Colombia Cannabis Investor we highlighted the overuse of the INCB’s 2018 44% figure, pointing out that while it was “certainly a juicy figure... the reality, however, is more prosaic.” The role of the INCB had been fundamentally misunderstood both in terms of the products it measures and the way in which it allocates “quotas” to countries.

We reminded readers that, while the INCB does implement a global cap on the quantity of opiates produced globally for medicinal purposes, for marijuana the quotas apply only for the internal consumption and scientific use of psychoactive cannabis, i.e. those over 1% of THC. Given that a large proportion of Colombia’s licensed producers (LPs) are focused on high-CBD, low THC-products (thus bypassing the need to apply for THC production quotas from local government) they will not be affected.

Those companies that are growing THC- rich product are also doing so primarily with an export market in mind. As Medcann is currently the only company to receive a THC production quota from the Ministry of Justice a 1.2 tonne quota doesn’t look unfair for 2019. In fact, it would be a minor miracle if this quota was even half filled over the course of 2019.

TOOTHLESS: Even for THC products, however, the workings of the INCB’s quota system have been framed in a misleading way, as Francisco Thoumi, Colombia’s representative at the INCB pointed out in a January 2019 article in Razón Publica. He noted that a 2018 article in El Tiempo had falsely spread the assumption that the INCB decides a total volume of medical cannabis for production and then countries compete for an allocation. He reminded readers that it is the national authorities – in Colombia’s case the Technical Quota Group (Grupo Técnico de Cupos, GTC) – that set production limits for producing companies.

The role of the INCB had been fundamentally misunderstood both in terms
of the products it measures and the way in which it allocates “quotas” to countries.

The INCB’s role is simply to keep track of the forecast demand and supply for medicinal cannabis in the countries it covers and the movements of exports between them. It does this to ensure that supply and demand are roughly in-line and thereby to determine if large volumes of marijuana are being grown for the black market. National governments are, ostensibly, meant to comply with their own limits but the INCB has no real measure of enforcement. Canada, one of the world’s largest producers of medicinal marijuana has no quota from the INCB, yet its companies continue growing and selling.

In effect, by applying for 47 tonnes of medicinal cannabis allowance in 2018 and growing just over 100,000 plants, Colombia’s over ambitious LPs tested the credibility of the INCB. If the institution is to serve any purpose, it can’t allow its forecasts and quotas to be so out of step with reality. The lower quota is a slap on the wrist, a brief, and basically painless, lesson. Should Colombia’s LPs start to produce – and its patients start to consume – growing quantities of THC medicines in the coming years, there is no impediment to the growth of this quota.

BIG GUNS: But before investors despair at the dearth of data, fear not, help is at hand. Not content with becoming the front runner for THC products, Medcann has also done the rest of the sector a favor by contracting top local research firm EConcept to develop an 80 page white paper on the Colombian cannabis industry. In September the paper was presented by Juan Carlos Echeverry (previously Minister of Finance and CEO of state oil firm Ecopetrol), Mauricio Santamaría (former Minister of Health) and Tomás González (former Minister of Energy). All three are well-respected technocrats and the key industry figures they provided were broad but believable.

The caption: “These figures will fundamentally depend on the market share we achieve,” appears on the key slide in EConcept’s presentation, in bold font and red text. Sensibly, the economic forecasts cover a range of scenarios, including best-case, worst- case and average performance. It also sends a clear message to the government that the success of the industry depends on institutional support. By 2022, under the median scenario the Colombian cannabis industry will be worth just under $6 billion, with $5.9 billion coming from the export market. A total of 1,558 hectares would be sown, providing jobs for 21,000 people and $300 million to the Bogotá taxman.

DREAM SCENARIO: That seems like a reasonable starting point for a nascent industry. But in case you want the 99th percentile figures – in which Colombia maximizes its potential and becomes the global marijuana superpower – imagine this scenario for 2022: Colombia’s cannabis market would be worth a whopping $17.8 billion, with $17.7 billion of that being shipped overseas whilst 101,000 employees tended to 7,358 hectares, providing over a $1 billion in tax revenues. Cannabis, not oil, would become the country’s number one export.

Echeverry, the man hired to balance the books at Ecopetrol after his predecessor’s profligate expansion plan, is not the kind of guy to undermine his credibility with dodgy forecasts. “We believe that cannabis can become the new petrol for Colombia, a product with huge potential for growth, job creation and exports,” he told press. “In the next year or two we have to be very judicious, very aggressive in order to take advantage of this window of opportunity...but medicinal cannabis is the biggest business opportunity in the country in the near future.”

The publication of the study could not have been better timed, considering the at-first-glance negative appearance of the INCB’s 2019 report. At CCI we do our best to check and verify the information and data we come across in the local press and in company investor presentations, but until firms are up and running, precise statistics will be in short supply. We were skeptical of the 2018 figure – Colombia was never going to produce half the world’s cannabis – but the Medcann-EConcept report confirms what we knew all along. Colombian cannabis has the potential to change the national economy and be very profitable indeed.