Friday, August 17, 2018
Canada’s Legalization of Cannabis
Cannabis will be legal in Canada on October 17, 2018, making them the first G-20 country to legalize cannabis. Cannabis legalization will directly correlate to a huge boost in the Canadian economy and will have a major impact on the cannabis industry as a whole. But what does this head start mean for the U.S. players and beyond?
First, some context: According to Canada’s Bureau of Statistics, Canadians spend about as much on cannabis as they do on wine, spending $4.8 billion on cannabis and with new dispensaries, manufacturing facilities, grows and ancillary businesses emerging across the country the growth is expecting to be explosive. Canadian Imperial Bank of Commerce calculated that Canadians will consume 800,000 kilograms of cannabis, much of which will be for recreational use and by 2020, the legal market for adult-use cannabis will approach $6.5 billion in retail sales. For context, this is greater than the amount of spirits sold in the United States and approaches wine in scale.
While none of us have crystal balls, here are a few things I believe we’ll see come into play:
Rapid growth for North America: With that growth, the first impact will be that it propels North America’s overall growth for cannabis. According to ArcView, a cannabis investment and market research firm, legal cannabis sales in North America catapulted higher by 33 percent in 2017, and are on track to grow by an average of 28 percent per year through 2021, leading to nearly $25 billion in annual sales.
Cannabis pricing will take a big dip: However as the sales increase, cannabis pricing will take a bit of a hit. Priceonomics reports that cannabis is 30 percent less expensive in Canada than the United States and more pronounced in key cities; legal marijuana is 39 percent cheaper in Vancouver than San Francisco, for example. Prices will also decline as competition and supply rises for the region. Long-time cannabis veteran and co-founder of Denver Relief Consulting Ean Seeb reported that retail cannabis flower prices dropped by more than 64 percent over the last four and a half years. I expect most markets will see a similar trend as they mature and evolve.
More market up listings from Canadian to US exchanges: In an interesting twist, many Canadian companies are uplisting their shares from the OTC exchange to more trustworthy exchanges in the United States. Since Canadian cannabis companies are not subject to the same restrictions that keep U.S. pot growers away, this has become a very attractive option. Cronos Group started the trend last February when it listed on the Nasdaq. Canopy Growth Corporation soon followed when it uplisted on the NYSE. Both Cronos Group and Canopy Growth believe that by listing their shares on these prestigious exchanges, they’ll attract more investors, improve liquidity, and perhaps gain validity from Wall Street.
US cannabis companies will double dip in both US and Canadian markets: U.S.-based Cannabis companies are operating in reverse and heading north. MedMen began trading on the CSE (Canadian Stock Exchange) in June. The company underwent a reverse takeover of Ladera Ventures which is a shell company already listed on the CSE. By doing so, they avoided having to file an IPO. They also formed a partnership with Cronos Group. This seems to be a very interesting and creative way for MedMen to benefit from listings in both the U.S and Canada.
The free flow of investment dollars in Canada has also led to extensive investment in the U.S. and vice versa, which some feel reveals the U.S. is missing out on a booming industry. “Not only are Canadian investors buying up large portions of U.S. cannabis companies, but U.S. dollars are starting to pour into Canada to capitalize on their legal marketplace, according to Matthew Nordgren, Founder and CEO at Arcadian Fund. “The U.S. government needs to make some changes or our cannabis industry will continue to fall behind,” Nordgren stated.
Canada’s journey will be well watched by other countries: Canada’s willingness to legalize adult recreational use of marijuana has prompted other countries around the world to give medical cannabis another good hard look. South Korea, Paraguay and the former Soviet republic of Georgia are among the many countries that are either in the process of legalization or having serious discussions on the topic.
So, with Canada and others pushing ahead, where does that leave the U.S. cannabis market? Many who see the opportunity believe the U.S. is leaving a huge global market up for the taking; however, there is something positive that this challenging market is creating in its wake. The U.S. players that thrive in this market are more apt to dominate the global stage. These players needed to take on innovative practices, go global faster and learn to succeed against the grain.
Regardless of where the U.S. fits into the global cannabis market in a few years, these early players will be the ones to watch. The trajectory is still up and to the right.