How Will Interstate Commerce & Competition Affect New York’s Nascent Marijuana Industry
(October 1, 2021) Marijuana produced in one state – raw material or finished product, wholesale or retail – cannot be imported from, or exported to, another state for sale. That’s known as interstate commerce, and each state’s laws limit the movement of marijuana to within the state. Marijuana is still considered a Schedule 1 controlled substance under federal law.
But looking forward to the federal legalization of marijuana, or at least a provision allowing for interstate transactions, sends chills up the spines of local growers, processors, distributors and investors.
The Commerce Clause of the U.S. Constitution prohibits state laws that unduly restrict interstate commerce under a well-established doctrine created by the U.S. Supreme Court. Under this doctrine, state laws prohibiting the import and export of state-legal marijuana would likely be unconstitutional, if challenged.
Until that happens though, states have an economic interest in protecting their home-grown farmers, processing facilities and distribution networks.
States that have long-established growing facilities and established supply chains (e.g. California, Oregon) would have a cost and logistics advantage over states that have more recently legalized recreational use (e.g. New York, New Jersey), and could adversely affect or even prevent the development of local industry. Those established states already have an oversupply of product and production capacity. Exporting cheaper marijuana grown out west to states like New York and New Jersey would hamper local efforts to establish local supply networks, processing plants and distribution facilities. Facilities in northern states have the added costs of climate control as most year-round growing will likely take place in indoor greenhouses and other energy-hungry facilities.
“Interstate Commerce is the worst thing that can happen to small farmers and social equity businesses. It would benefit California and Oregon to alleviate their oversupply. But, it’s a disaster for newly legalized states to play catch-up with an established supply chain infrastructure as robust as California or Oregon. Building greenhouses and outdoor operations take years to build,” says Allan Gandelman, president of the New York Cannabis Growers and Processors Association.
“And in those two states, specifically, people are selling their cannabis at a low cost of production, which does nothing but drive the market prices to the bottom. The only people who will survive in that system are overcapitalized giant corporations that can scale up and have the financial resources to take a loss for a few years.”
The interstate movement of marijuana may still be some time off, but in all likelihood will be a reality. Newer states need to accelerate the development of their local industries to fend off competition from established states and eventually imports from Mexico and Colombia, where growing costs are significantly cheaper.
Also, Interstate commerce could happen before federal legalization, such as through agreements among neighboring states (an idea being spearheaded by the Oregon-based Alliance for Sensible Markets).
“Even with federal legalization, retail would probably remain local through licensed shops (similar to licensed liquor stores), and Congress would likely ban shipping marijuana products through the mail (similar to nicotine products),” says Marc D. Hauser is an attorney and vice chair of the Cannabis Practice Team at the Reed Smith law firm.
Federal descheduling (or rescheduling) of marijuana could quickly bring a wave of investment, consolidation and competition, all of which could dramatically change how New York businesses and state government might approach the development and acceleration of a New York-based marijuana market.