How reclassifying marijuana could benefit beverages

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A change in the way cannabis is federally regulated signals a step toward progress for cannabis beverage producers eager to go national with their products, but experts say more regulation remains for the industry to achieve its potential.

The proposal is meant to reclassify marijuana from a Schedule I, the same classification heroin holds, to a Schedule III controlled substance. The change would make the product share the same classification that drugs such as ketamine or Tylenol with codeine now hold. 

The change would recognize the medical uses of cannabis and acknowledge it has less potential for abuse. However, it would not legalize marijuana outright for recreational use.

Xochitl Hinojosa, the director of public affairs at the Department of Justice, said in an emailed statement the proposal was circulated by Attorney General Merrick Garland, indicating the Biden administration’s interest in the decision.

“Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act,” Hinojosa said.

The rescheduling of cannabis marks a triumph for the beleaguered cannabis-infused beverage category, which has faced difficulty in scaling nationwide as companies are only legally able to sell their products in a select patchwork of states.

President Biden first expressed interest in changing how the law handles the drug last fall, when he asked his administration to review how cannabis is classified under the Controlled Substances Act. At that time, the U.S. Department of Health and Human Services recommended the drug be reclassified. The industry did face a roadblock earlier last year when the FDA chose not to federally regulate THC-infused food and beverage products.

Cannabis company stocks spiked after the news dropped Tuesday, with a 26% increase in the AdvisorShares Pure U.S. Cannabis ETF, which tracks the industry’s investments.

Thus far, large CPGs who have entered the space have faced financial blowback from betting too big on cannabis too soon, making some hesitant to enter until federal legality is secured. Constellation Brands distanced itself from Canopy Growth last month after it lost over $1.1 billion on the venture in 2022.

Incremental progress

While reclassification is a step toward greater availability for cannabis products, use of the drug is still not legal federally, and the law still does not permit cross-border commerce. Euromonitor analysts Erwin Henriquez and Spiros Malandrikos said the news is a “half-measure,” focused on optics and incremental legislative progress ahead of the presidential election this fall. The most concrete benefits, they said, will come in federal tax relief for companies producing cannabis drinks — namely, eliminating the 280E tax provision which deducts expenses for “trafficking” Schedule I substances. This could allow producers to attract more capital investments.

According to Malandrikos, the move to reschedule will not mark a radical departure in the short term, as the law could take months to take effect, but can be seen as a “step in the right direction in the long journey to federal legalization.” The tax benefits, he said, could allow more robust funding for the efforts of beverage companies in the space, which will benefit the industry in the long run.

“The tax code elimination will boost the finances of cannabis producers and operators and provide much needed support that will hopefully translate in increased investment in innovation and activity – areas that could, ultimately if not immediately, provide additional momentum to cannabis beverages,” Malandrikos said.

One factor that has the potential to be aided by the rescheduling, Henriquez said, is research. Big Pharma companies interested in medicinal products looking to capitalize on the growing interest in the category are more familiar with handling controlled substances and may be more willing to fund costly studies that companies in the space are not able to foot the bill for.

“We’ll get more funding for research, and that will help us better understand the functional benefits of the different cannabinoids,” said Henriquez.