Germany’s plan for legalisation flips its current supply model
Karl Lauterbach, Germany’s Health Minister, recently laid out the country’s plans for the legalisation of recreational cannabis. Perhaps most interesting for investors is the exclusion of imports for the recreational market. This will likely have significant effects on the German and wider cannabis sectors.
The Health Ministry’s own report states that imports of recreational cannabis would violate international treaties which Germany must adhere to as an EU member state. As a result, “complete” domestic cultivation will be pursued for the recreational market. Whilst many operators and investors alike had suspected that this could be the case, this confirmation will severely disrupt the current cannabis supply model in Germany.
Since legalising medicinal cannabis in 2017, Germany has seen a dramatic increase in cannabis flowing into the country, becoming the world’s largest import market. This is driven by extensive production in more mature markets (Canada provides 38% of German imports) and, more significantly, strict regulation around cultivation in Germany. Extensive licensing and extreme financial barriers have resulted in only three cultivators operating in Germany: Demecan, Aurora and Tilray.
Of course, the prospect of a ban on imports for the recreational market is welcomed by these domestic producers (although, this is a razor-sharp double-edged sword for Aurora and Tilray who also import significant quantities of cannabis into Germany). However, the domestic supply only accounts for a fraction of current German consumption. This has led to concerns that, if legalised, there will be crippling undersupply issues in the recreational sector. This would serve to fuel the illicit market, the very thing Germany’s legalisation aims to combat.
It has been suggested that, as cannabis will no longer be considered a narcotic post legalisation, regulations governing growing facilities will be relaxed. Currently stringent requirements stand as significant barriers to entry – concrete bunkers with 24cm thick walls and motion detectors don’t come cheap! This, again, would benefit the current domestic cultivators as it would allow them to expand production at reduced costs. However, it would also improve the conditions for new companies to exploit the novel recreational growers’ market with significantly reduced upfront capital expenditure. Furthermore, it seems that the licensing of processes along the recreational value chain will be issued independently to those of the medicinal market. This should further level the playing field for potential new growers in Germany and expand the competitive landscape.
With a proposed launch in 2024, these plans are a starting point for Germany’s path to recreational legalisation. Indeed, a blueprint of the reforms must first be approved by the European Commission to ensure compatibility with EU and global drug laws. The legislative process will only continue after this approval, suggesting that the proposals put forward by the government may well change in the future to meet EU requirements.
The development of this new framework will be watched intensely by the whole cannabis industry. With Europe’s largest economy and most progressive cannabis policy, Germany’s legislation will act as a model for the rest of Europe hereafter. By extension, companies (both medical and recreational) that can cement themselves within Germany will be best placed to move into other European markets going forward.
Irrespective of this legislation’s content, the mere fact that the most advanced economy in Europe is proactively legislating in this market presents a significant value inflection point for the sector as a whole, and although there remains uncertainty, these events will unlock significant growth throughout the flourishing European ecosystem.
UPDATE, 07/11/22:
The Czech Republic have announced plans to legalise recreational cannabis in coordination with Germany. We are already seeing the sway Germany commands over EU sentiment!