Uruguay Leading the Latam Market With 11% of Consumers
By Esteban Rossi I., Special Contributor to New Frontier Data
Despite the slow pace of regulatory processes and the socioeconomic calamities of the COVID-19 pandemic, Uruguay continues to lead South America’s legal cannabis industry. Since passing and implementing Law 19.172 in 2013-2014, the small country has navigated the challenges of a new industry and written the first chapter of the global cannabis playbook. To summarize two crucial milestones of the Uruguayan industry, it has established a successful system to sell and monitor adult-use cannabis, and strategically placed its products in the European wholesale market.
Those milestones are doubly remarkable given that Uruguay is thus far the only South American country to feature a regulated national adult-use market and large-scale exports. The success stems from three factors: committed political leadership, the creation of an agency exclusively dedicated to the cannabis industry, and — crucially — a clear focus on enhancing consumers’ well-being.
Uruguay’s regulatory framework combines three distribution channels supervised by the nation’s Institute for the Regulation and Control of Cannabis (IRCC). The law defined the channels as follows: 1) cannabis clubs, 2) home cultivation, and 3) pharmacies. Clubs host up to 45 members, and can produce no more than 480 grams per user/year, while home growers can keep up to six flowering plants. Pharmacies, in turn, provide flower to registered users under the supervision of IRCC.
National adult-use market
The Uruguayan adult-use market began operations in 2017, but from the very beginning faced logistical problems, supply shortages, and financial restrictions. Despite those challenges, the number of users reached 54,000 with flower sales increasing reaching 4,166 kilograms (kg.) according to the IRCCA). There are presently 14 pharmacies and 165 clubs in operation, with 45+ licenses granted for different purposes. Moreover, three new companies have obtained licenses to produce flower for the domestic adult market. By late 2020, sales of adult-use flower distributed in pharmacies added up to $2.7 million.
Over its first three years, the adult market evolved slowly. Multiple stakeholders noted the need to prevent THC consumption among teenagers, while the government took the concerns very seriously. Presently, data indicates that the regulation of adult-use sales did not increase prevalence of use among high-school students. The combination of positive incentives and steady growth, coupled with positive public perception, affirmed the government’s sound policy.
Moreover, in establishing a regulated adult market the Uruguayan state took a decisive step against illegal actors. So far, the regulated adult-use market has drawn more than 54,000 users from illegal markets, which corresponds to 10-11% of the country’s adult consumers. The trend is likely to continue as prices in the regulated market remain significantly lower: $1.3 (regulated) versus $3.8 -$4.8 (unregulated). Yet, the illicit market continues to have more and perhaps better products, along with a deeper understanding of customers’ needs. Thus, it maintains roughly 95% of the market value. As the regulated market matures, New Frontier Data expects gradual increases in product offerings and competition.
New Frontier Data has estimated the current size of the adult market using prevalence figures from the United Nations (UN), and price data from the IRCCA. UN surveys find that 15% of the adult population uses cannabis at least once a year. IRCCA records indicate that firms sell the dry flower to pharmacies at roughly $0.9 USD /gram and adult users purchase it for 1.3 -1.4 $USD per gram (a gram of dry flower being roughly equivalent to one cannabis roll). With the low prices set by the government to compete with the unregulated illicit market, Uruguayan users must register to obtain up to 10 grams of dry flower per week (i.e., 40 per month). Yet, annual consumption of registered users averages 49 grams per year.
Opening doors in Europe
Over the last two years, the Uruguayan industry reached the European wholesale market. In close collaboration with regulators, and after a substantial marketing effort, Uruguayan firm Fotmer Life Sciences shipped over $7 million (USD) worth of psychoactive flower between Europe and Israel. In partnership with a Canadian firm, Fotmer inserted itself into a fully compliant value chain to ensure that its products comply with the manufacturing practices of the European Union (EU-GMP).
Similarly, between 2019 and 2020, Cplant exported roughly $2 million (USD) worth of CBD flower to Switzerland. Though the buyers and final destination of the product were not reported, company sources reported that it would be used for industrial purposes and smoking, most likely in cannabis clubs across western Europe.
The commercial advances of Uruguayan firms, though smaller than initially forecasted, demonstrate formation of a new value chain. Presently, through various channels, South American quality flower is reaching a growing number of users and patients in various European countries. The milestone reflects a harmonization of technical standards and regulatory regimes across multiple countries. Moreover, it is testament to the efforts of Uruguayan legislators, regulators, and diplomats having carved a space for cannabis in foreign markets.
Lessons for Latam and investors
The milestones underscore the crucial role of government in building the Latam industry and facilitating commercial relations. Presently, thanks to the discipline of regulators and entrepreneurs, an active adult-use market and successful distribution channels exist in Europa. While no other Latin country has yet accomplished it, legislative advances indicate that Mexico will probably follow a similar strategy. Moreover, the public in general and investors particularly know that they can rely on sound empirical data to guide their future decisions.
Acknowledgments: United Nations Office for Drugs and Crime (UNDOC) data on cannabis use patterns.
