You may have seen the articles (e.g., link) and heard anecdotes lately about a surge in demand for non-hemp cannabis amidst the coronavirus pandemic. Taking that one step further, Marijuana Business Daily published an article on Tuesday considering how the cannabis industry might fare in a recession (link). The author focuses mainly on the demand side, projecting out how consumer buying habits may change in a downturn, generally concluding that the demand will likely hold. On the supply side, the article addresses how store closings due to the coronavirus and a shortage of labor could affect the ability of operators to meet that demand.

I would argue that the greater risk to being able to meet the clear consumer demand is the macro fiscal uncertainly of the industry, something I touched on most recently in my March 17th Musings (link). Generating positive net income is nigh impossible for many operators, what with the incremental costs of 280E, state and local cannabis taxes, security, compliance, etc. Generous equity capital markets papered over those losses for a while, but as those sources dried up (indeed, a number of private equity funds and investors that I have spoken to have not placed new capital in many months), the companies that had sufficient assets turned to debt and real estate sale/leasebacks.

With the latest turmoil in the broader capital markets, private (non-bank) credit is tightening up (link), and the Small Business Administration has made it clear that the low-interest relief loans that are being made available to other U.S. businesses as a result of the pandemic will not be available to non-hemp cannabis companies (link; link), despite the pleas of industry trade groups (link). Why? Well, because non-hemp cannabis is federally illegal and the SBA is a federal agency.

So how will the industry take advantage of the short- and long-term trends of growing demand for state-legal, non-hemp cannabis in the face of capital distress? With no federal regulatory relief in sight (280E reform, access to bankruptcy courts, descheduling), the industry is going to have to continue to reassess its strategy, seek out the new pockets of capital that are exploring the cannabis opportunity, and continue to find creative ways to adapt.