The Blooming Cannabis Industry in South Africa

The legal cannabis industry in South Africa is rapidly growing and shows great potential to boost the country’s economy and create jobs. However, there are challenges that need to be addressed to ensure its sustainable growth and enable participation of small, local businesses.

Introduction

The South African cannabis industry is tentatively valued at about 36 billion Rand. The legal hemp and cannabis sector has the potential to create around 130,000 new jobs in South Africa. However, there are some key challenges that need to be tackled to realize this potential.

Small-scale farmers face difficulties in entering the legal cannabis market due to the high costs of licensing and setting up facilities. There are also concerns that large foreign companies could dominate the industry and lock out local players.

Proper regulations and policies are required to create an inclusive cannabis industry, where small businesses can thrive along with larger corporations. South Africa needs to find the right balance between controlling cannabis and enabling business opportunities.

The Current State of the Cannabis Industry in South Africa

  • The private use and cultivation of cannabis was decriminalized by South Africa’s Constitutional Court in 2018 based on the right to privacy. This opened doors for the legal cannabis industry.
  • There are over 100 cannabis-related companies that are now investment-ready in South Africa. Most of these are focused on cannabis cultivation.
  • Around 5 billion Rand has already been invested into the cannabis industry in South Africa by venture capital and private equity firms.
  • The legal cannabis industry involves medicinal cannabis, industrial hemp, and recreational use. Medicinal cannabis has the most potential for high growth.
  • The total economic value of South Africa’s cannabis industry is estimated to be over 36 billion Rand.
  • Legalizing cannabis cultivation and trade can create an estimated 130,000 new jobs as per estimates. Most of these will be in rural areas.

Growth Potential of Medicinal Cannabis

Medicinal cannabis presents the greatest opportunity for South Africa’s cannabis industry.

  • South Africa already has an established pharmaceutical market and exports medicines to many countries. Medicinal cannabis can augment this.
  • The global medicinal cannabis market is projected to grow rapidly from $13.5 billion in 2022 to $56.4 billion by 2028. South Africa can grab a slice of this pie.
  • Medicinal cannabis products like oils, tinctures, and concentrates have good export potential.
  • Clinical trials need to be conducted locally to collect data and get medicinal cannabis products registered and approved. This will boost exports.
  • Growing medicinal cannabis domestically will also ensure consistent supply of high-quality material for value-added products.

Challenges for Small-Scale Farmers

Small cannabis farmers and businesses in South Africa face difficulties in entering the legal market due to the following challenges:

  • High licensing costs – To obtain a license to cultivate medicinal cannabis from the South African Health Products Regulatory Authority (SAHPRA), farmers have to pay around 26,000 Rand. This is unaffordable for small, community-based farmers.
  • Expensive setup costs – Besides the licensing fees, setting up a medicinal cannabis cultivation facility as per the required Good Agricultural and Collection Practices (GACP) can cost 3.3 million Rand to 5.5 million Rand. This high capital investment is beyond the capacity of small growers.
  • Access to land – Many emerging black farmers do not own enough land to cultivate cannabis at scale. They have to rely on joint ventures and beneficiation programs.
  • Limited business support – Small cannabis businesses require acceleration, market linkages, affordable financing, and other support to grow. Such focused business development services are currently inadequate.
  • High compliance requirements – Stringent quality and compliance requirements pose a challenge for small businesses with limited technical skills and finances. Getting GACP certification and importing genetics also has complex procedures.

Risk of Domination by Big Foreign Players

One concern around cannabis legalization in South Africa is that large foreign companies could monopolize the sector and control most of the profits and resources. This may happen due to the following reasons:

  • Global cannabis giants have more capital, expertise, and experience than local South African businesses. They can operate at scale more easily.
  • International companies are able to import genetics, set up high-tech facilities faster, and develop value-added products.
  • They already have established marketing and distribution networks worldwide, making export easier.
  • Foreign investors and cannabis corporations have shown great interest in South Africa due to its ideal climate, availability of farmland, and low labor costs.
  • There are fears that these well-funded multinational corporations may capture the lion’s share of the profits, dominate the best cannabis strains, gain control over key infrastructure, and flood the market.
  • This could potentially cripple emerging local cannabis businesses. Without policy intervention, small players may get elbowed out of the value chain.

The Need for Inclusive Cannabis Industry Regulations

For South Africa’s cannabis industry to thrive in an inclusive way, the government needs to enact appropriate regulations and policies. Some suggestions are:

  • Set a limit on the size of cannabis cultivation operations. This will prevent large single entities from monopolizing production.
  • Reserve a minimum percentage of licenses for small, Black-owned businesses. Similar to how mining rights are allocated.
  • Implement strict quality standards for exports so that small players can enter the export market.
  • Tax larger producers at a higher rate and re-invest that revenue into supporting small cannabis businesses through training programs, subsidized infrastructure, etc.
  • Enable small farmers to form cooperatives and associations so they can pool resources and bolster their capacity.
  • Develop cannabis industry parks/hubs with centralized infrastructure to reduce capital costs for businesses. These parks could also provide training, product testing, processing, and export facilities.
  • Link small cannabis producers to existing pharmaceutical companies and fast track GMP certifications to jointly develop products and share expertise.
  • Provide tailored financing schemes through government grants, funds, and loans to make cultivation and licensing costs affordable.

Conclusion

The legalization of cannabis presents a sizeable economic opportunity for South Africa in terms of investment, jobs, and export revenue. However, the government needs to act quickly to put in place regulations that prevent small, local cannabis producers from being sidelined. An inclusive cannabis industry that shares profits across community businesses as well as larger players will ensure broad-based, sustainable growth for South Africa. The time to act is now before vested interests take root. Careful planning and partnerships can help South Africa avoid pitfalls and blaze a trail in ethical, responsible cannabis production.

References

  1. Mgiba, Sinothando. “SA’s cannabis economy can grow like a weed—but small businesses must be planted too.” Daily Maverick, 21 Feb. 2022, https://www.dailymaverick.co.za/article/2022-02-21-sas-cannabis-economy-can-grow-like-a-weed-but-small-businesses-must-be-planted-too/
  2. “SA Medicinal Cannabis Industry Still Hampered by Bureaucracy, Say Experts.” Business Report, 23 May 2022, https://www.iol.co.za/business-report/economy/sa-medicinal-cannabis-industry-still-hampered-by-bureaucracy-say-experts-fb66228c-0449-4301-ad7a-a7a661f7da5b
  3. Manoto, Sello. “Cannabis Construction Could Be a Field of Green for Small Business.” Daily Maverick, 23 June 2022, https://www.dailymaverick.co.za/article/2022-06-23-cannabis-construction-could-be-a-field-of-green-for-small-business/
  4. Nsehe, Mfonobong. “South African Cannabis Investors Eye Lucrative Lesotho Market.” Forbes, 11 July 2022, https://www.forbes.com/sites/mfonobongnsehe/2022/07/11/south-african-cannabis-investors-eye-lucrative-lesotho-market/
  5. Grand View Research. “Medicinal Cannabis Market Size Worth $56.4 Billion By 2028 | CAGR of 17.9%.” GlobeNewswire News Room, 13 June 2022, https://www.globenewswire.com/en/news-release/2022/06/13/2461627/28124/en/Medicinal-Cannabis-Market-Size-Worth-56-4-Billion-By-2028-CAGR-of-17-9-Grand-View-Research-Inc.html