Are legal marijuana businesses in the US and Canada ready for primetime? The world is watching.

From the 1930s cautionary tale that is Reefer Madness to the Woodstock era, the War on Drugs since the 1990s and finally the landmark legalisation streak across the West and East coasts (Colorado and Michigan didn’t fit in this generalisation as neatly), attitudes to cannabis and consumption of it in the United States have changed wildly through the years. Canada has been markedly more comfortable culturally and therefore politically with the issue, which showed in the faster adoption of the legal status across the states and territories.

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The businesses that sprung up like mushrooms after a rainy afternoon have created thousands of jobs and sucked capital in at unbelievable rates. Just in California, over 3 billion USD’s worth of recreational marijuana and associated products were sold in 2018. Stock has been offered, corporate structures entrenched and the market has matured.

Even more interestingly, despite the public conception that it’s just weed for smoking, a whole industry dedicated to research, medicine, CBD products and cooking with weed(as opposed to cooking on weed, which is a wholly different experience).

Fed vs States

However, it’s not all sunshine and rainbows for the many companies in the legal marijuana business, from the store employing a handful of people to the corporation mass-producing gummy-bears. There is a massive disconnect between state and federal law in the United States and this reflects the unique system the country has. While 10 states have legalised both recreational and medical marijuana and another 23 medical marijuana alone (all the states bar 3 allow medical marijuana but about half of them limit the THC content allowed in treatment), the federal government still has cannabis on its Schedule I. It is described as having ‘high potential for abuse and no accepted medical use’ and is likened in its destructive power to cocaine and heroin.

And this is where the first contradiction rears its head. While there are risks to consuming marijuana, research suggests they are nowhere near as severe nor is it as addictive as some of the other Schedule I drugs. We’re ignoring the risks inherent to smoking since that adds another layer to it and there’s an entire industry dedicated to edibles, making smoking just one of the ways of consuming marijuana.

This is only considering all the studies on people on medical marijuana, mostly for pain and spasm relief (the chief symptoms for which it is prescribed by a doctor). Since 2001, when the first amendment protecting medical cannabis users was attempted in the legislative chambers in the US, millions of patients have treated pain, anxiety, nausea and sleep disorders with it. As of 2018, ProCon estimates around 3.5 million patients in the whole country, of which the majority (916,000) were in California. This indicates a large enough sample that would point out any major risks. So far, there have been negative interactions, but most of those are to do with marijuana interacting with pre-existing mental health issues. Arguably, the most notable effect outside of those is the lethargy it commonly causes, meaning it is contraindicated if you drive or operate heavy machinery.

Going back to Schedule I, there has been some legislative support or at least efforts to not stamp out medical marijuana usage. The 2001 amendment was expanded upon by Rohrabacher and Blumenauer and attempted again multiple times until 2015, when it passed with rare bipartisan support. This prohibited the Dept. of Justice from going after medical marijuana businesses, from a budgetary point of view but, being an appropriations bill, meant it had to be re-evaluated every year. As of 2020, it has not been repealed. This created an interesting loophole, where states could legalise marijuana for recreational use and companies producing it could make both medical and recreational types (which have some differences) and be shielded from federal prosecution. Even the current Attorney General has stated he will not go after businesses in states where it is legal.

The tide of public opinion has been shifting, even among Republican-leaning groups, historically averse to it. With bipartisan support, federal decriminalisation seems likely within the next couple of years.

However, the disconnect is causing issues in a different way — banking. Since the businesses are in a federally illegal industry, they are not allowed access to banking services. As stores and producers, this almost always leads to an overreliance on cash and being open to a risk of property crime and theft. There are some attempts at using challenger banks and online services such as Venmo but without federal acceptance or the passage of the SAFE banking bill, this is unlikely to change.

The final contradiction I want to bring up is the FDA. From a regulatory standpoint, there’s been little movement until June 2018. But the approval of Epidiolex as a Schedule V drug (small potential for abuse) marked a turning point and since then the FDA has made multiple comments that can be interpreted as willingness to change marijuana’s status in the future.

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Big Weed

Despite the industry having existed for a couple of years now and over a decade if we include producing medical marijuana, only a handful of companies have truly expanded beyond the small footprint of the industry as a whole. However, with existing companies shifting to accommodate the new demand, such as Scotts Miracle-Gro creating a line-up for prospective hydroponics growers, the industry is beginning to crystallise.

And while the hundred-percentage growth era from a year or two ago might be over, the industry is always eager for the next big thing. I wouldn’t be surprised to hear about machine-learning blockchain-powered marijuana soon.

Constellation Brands, who runs the breweries making Corona, bought a stake and subsequently invested 4 billion into the largest cannabis grower in Canada, Canopy, with a plan to distribute into the United States as well. Cronos, another Canadian company had another considerable investment from Altria Group, the producers of Malboro cigarettes.

In terms of product categories, the CEO of Cronos identified flower, followed by vaporiser, edibles, topicals and finally beverages as the cannabis markets, in order of consumption. This was in May 2019. However, these markets are changing and edibles has been steadily growing. ArcView and BDS Analytics estimate the edibles market is going to quadruple from 1B USD in 2019 to 4B by 2022 in the US and Canadian Markets. A study showed over 60 percent of marijuana customers in Colorado had tried edibles, with 55 percent in California. The market for edibles is set to grow to 14% of the total cannabis market, while the flower variety drops from 50 to 36% by 2022.

But beverages have also been making big plays. Heineken’s Lagunitas already sells a THC-infused drink and Molson Coors has plans to launch one too. There is big money in this new market if you are a first mover.

In 2019, the edibles market in Canada was estimated at around 1.6B CAD and an additional 400M from beverages. With numbers like that, it’s no surprise the Ontario Cannabis Store crashed multiple times from demand spikes and its soft-chew gummies sold out in half an hour.

Beyond North America

Uruguay also legalised access to cannabis around the same time as Canada. Out of South America, analysts predict Mexico to be the next one to decriminalise consumption and legalise access to the hitherto drug. Colombia, Peru, Venezuela and Argentina have also decriminalised consumption and legalised the medical variety.

In Europe, Luxembourg and the Netherlands stand out among a sea of half-decriminalising and turning a blind eye. It seems there’s some interest in Italy and Spain but this remains to be seen after the current crisis settles and the political landscape settles.

Australia made medical marijuana available in 2016 and New Zealand recently followed too.

The conclusion

With political will present, the barriers to widespread cannabis availability seem all but ready to fall. Most predictions say the next 5 to 6 years will see it fully legalised in the States and at least 20 other countries around the world, from stalwart Germany and surprisingly restrictive Norway to India and South Africa, where laws (written and unwritten) mean growers are rarely prosecuted and penalised.

However, there are other issues — a lot of cannabis growing is still loss-making. Constellation Brands has written off its investment in Canopy in early 2020 and it’s estimated either more economies of scale from wider adoption or higher prices will be needed to catalyse profitability. And when they do, I fully expect another round of highly visible corporate acquisitions. But until then, the industry is stuck at half-speed and hampered by all kinds of strange regulations and work-arounds.

The other main criticism of the industry has been that it tries to pawn intoxication as wellness. Research into the effects has been limited and its effects are still nebulous, leading to all kinds of claims about what it can treat and cure. But, once again, until full legalisation occurs in a large market, medical research will be scant.

Apart from the tax revenue and reduction in crime rates, which are both beneficial, there’s not really a consensus on what happens and even where there is, not all decision makers are evaluating cannabis on its merits and pitfalls. Instead, attitudes to intoxication (and attitude to alcoholism within each respective country is a good proxy) are the best predictor. The jury is still hung. But I’m sure if a large country fully legalised it, the effects would be much more clear and political will will crystallise either way. Until then, the eyes are on the United States and Canada.

References:

  1. https://www.nhs.uk/live-well/healthy-body/cannabis-the-facts/
  2. Statistics — https://americanmarijuana.org/medical-marijuana-statistics/
  3. An estimate of cannabis patients in the US, 2018 — https://medicalmarijuana.procon.org/number-of-legal-medical-marijuana-patients/
  4. https://www.prnewswire.com/news-releases/cannabis-edibles-market-projected-to-quadruple-in-us-and-canada-to-4-1-billion-300893850.html
  5. https://www.marketwatch.com/story/ceo-of-pot-producer-cronos-talks-about-altria-deal-weed-drinks-and-the-rise-of-cbd-2019-04-27
  6. https://www.greenentrepreneur.com/article/323292
  7. https://www.drugpolicy.org/issues/marijuana-legalization-and-regulation
  8. https://www.prnewswire.com/news-releases/cannabis-edibles-market-projected-to-quadruple-in-us-and-canada-to-4-1-billion-300893850.html
  9. https://www.thedrinksbusiness.com/2020/01/constellation-brands-canopy-growth-investment-a-cautionary-tale-for-companies-exploring-cannabis/

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