The evolving tapestry of cannabis regulation in Colombia

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Colombia is synonymous with cannabis farming, but are there more challenges creating cannabis regulation than it would appear?

For Canada’s leading cannabis producers, Colombia has emerged as the choice location for outsourced production. With an equatorial climate and mountainous topography, the country provides a steady 12 hours of sunlight per day as well as a wide range of growing altitudes. An inexpensive and plentiful labour force – many with experience in a world-leading flowers-for-export industry – means that companies estimate future Colombian production costs of $0.50 (~€0.45) to $0.80 per gram of dry cannabis flower, compared to over $2 in Canada. So, where does cannabis regulation come in to play?

What do you know about cannabis regulation in Canada?

Canada’s three largest pot firms – Canopy Growth Corp, Aurora and Aphria – have all acquired licensed producer (LP) companies in Colombia and many mid-tier international players are following suit. Colombian owned companies including PharmaCielo and Khiron Life Sciences have tapped Canadian stock markets to super-charge their own growth and marketing strategies whilst hundreds of smaller LPs seek international finance and expertise.

In May 2016, Law 1767 – allowing for the cultivation, processing and export of medicinal marijuana – passed Colombian congress by a wide margin. To prevent the diversion of product into the recreational market the law prohibits the commercialisation of flower; all cultivated cannabis must be processed and an end client must be established early in the licensing process, usually by a letter of intent (LOI) for purchase.

By opening the door to exports – a recognition of the commercial potential of the industry – Colombia’s regulation has been deemed amongst the most attractive in medicinal cannabis world and has become a reference point for other Latin American countries developing their own legal marijuana framework.

The challenges

However, Colombian cannabis entrepreneurs are coming to discover what oil and mining investors have known for some time: that laws are subject to frequent change and the country lacks the institutions to implement and enforce regulations. By making licences relatively cheap to apply for, the government gave the impression that the barriers to entry, in general, were low. Licence requests were filed well in excess of the government’s capacity to process them. The lucky first-movers sold out their projects for tens of millions of dollars, the licensing rush increased, the line grew longer. By mid 2019 there were over 1000 applications awaiting approval.

The Colombian cannabis industry is like an assault course in which the next obstacle is harder than the last. In addition to applying for licences Colombian firms had to register their existing, supposedly endemic, cannabis strains in the Colombian seed bank before the end of 2018. It’s an open secret that many of those strains were North American in origin and brought into the country. Now the regulatory body responsible for registering new seeds and strains faces an unprecedented wave of work, with thousands of strains needing to be checked and catalogued.

In addition, while climactic conditions might be prime, soil conditions in Colombia could be a looming challenge for the country’s growers. Anecdotal evidence suggests that north American strains have struggled to adapt to soils tainted by previously unencountered pesticides and tropical pests. The country’s most skilled geneticists are working hard to breed more resistant strains that lose none of their potency. At the same time master growers have to ensure that their facilities – from greenhouses, security systems, processing facilities and transportation – are up to local and international quality standards.

The regulatory framework

LPs also have to navigate various strata of political and regulatory risks. At the local level, new guidelines require companies to conduct prior consultation activities with local communities prior to establishing the project and 10% of the total flower processed in fabrication facilities must be sourced from small growers. Establishing long-lasting relationships with such growers and ensuring the quality of product will be key to successful projects.

At the national level, last year’s election of a right-wing government with a more stringent anti-recreational drugs stance makes it difficult to promote the medicinal industry without being accused of double standards. Meanwhile a resurgence of guerrilla violence and organised crime in certain rural areas is a reminder that the country’s 2016 peace deal still has a rocky road ahead.

These challenges should be borne in mind when one reads press releases relating to Colombian cannabis companies. While those projects backed by ‘big weed’ firms now have the finances and expertise required to plan and develop expandable low-cost production centres designed for their own medicinal products, a second tier of companies is clamouring for investor attention. Some, such as Khiron Life Sciences, have invested heavily in marketing across the region, boosting brand recognition through the release of CBD infused cosmetic products. Others, such as Clever Leaves, have exported limited quantities of product abroad for scientific research, while others have focussed on the B2B market, with the goal of producing reliable extracts for various medicinal customers, such is the case with Plena Global.

The future of the Colombian cannabis industry

However, none of the projects are currently in commercial production – that will have to wait until production quotas are doled out by the government in the coming month – and only around 30 strains have currently been approved by agricultural authorities. The coming year will be the litmus test for Colombian cannabis companies. If the first-mover companies can navigate the regulatory and technical challenges and successfully export product at their forecast production costs, investment in the industry could boom. With the country’s oil production stagnating and coffee prices at record lows, cannabis could provide a vital source of jobs and tax revenues. The country has vast tracts of underutilised agricultural land. Already the country’s palm oil producers and sugar cane farmers are rumoured to be investigating the possibility of switching over to a more profitable crop.

That would provide a powerful political impetus for the industry. As the country’s powerful business families recognise the potential of cannabis and hemp production they are likely to lobby hard for further pro-business reform. Already in Antioquia, one of the country’s more socially conservative areas where marijuana still suffers from a negative reputation, the local university and regional development office has established its own LP.

For small and mid size growers, however, the outlook appears more murky. Adjustments to the regulatory code proposed in June 2019 increase barriers to entry and many fear that they will be unable to source the finance necessary to bring their projects to fruition under the necessary international standards for export.

It could take upwards of $100m to build a competitive cannabis project capable of exporting to the EU or Canadian for medicinal production. Some may try to wait for congress to save them. In June an opposition senator proposed a bill to legalise adult recreational use of cannabis.

While the bill is unlikely to pass the right-leaning congress, a future change of government, continued shortages in Canada and a powerful domestic lobbying group could mean that legal exports of Colombia’s famous marijuana could be a less distant prospect than many currently think.

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