This has turned out to be another game-changing year for the legal marijuana industry. According to cannabis research firm ArcView, sales of legal pot in North America surged by 33% to $9.7 billion in 2017, and they're on pace to grow by an average of 28% per year through 2021. That'd put North American sales on track for almost $25 billion in annual sales by the end of 2021.
But it's not just the sales figures that have enthusiasts and investors in awe. It's the progress being made at the legal level. On June 19, Canada's Parliament, after months of debate in the Senate, and just shy of two weeks of back-and-forth between the House of Commons and the Senate over bill C-45, passed the Cannabis Act. This marked the first time an industrialized country passed legislation to give recreational marijuana a green light. Per Prime Minister Justin Trudeau, sales are expected to begin on Oct. 17, 2018.
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Legalizing adult-use cannabis has its perks
Giving the thumbs-up to adult-use pot comes with a number of possible perks. For example, the sale of recreational marijuana will carry an excise tax rate of roughly 10% of the per-gram price. Three-quarters of this collected tax will go toward provinces, with the remaining 25% headed to the federal government, according to a two-year tax-sharing agreement forged in December. In other words, the sale of recreational cannabis will be a tax boon for provinces and the federal government.
Legalizing marijuana also means an influx of jobs in Canada. Not only will direct players benefit, such as growers, processors, distributors, and retailers, but the ancillary market could see its own job boom. Think about the role marketing and packaging companies will play in developing cannabis brands, or how financing companies will aid in providing capital for capacity expansion and hiring. More jobs might mean more income, which leads to a healthier economy.
And, of course, there are the investors who hope to take advantage of the $5 billion in added sales that'll likely be generated by legalizing recreational marijuana in Canada.
Here's who's worried about legalizing adult-use marijuana
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According to a recently released survey of more than 2,600 people by the National Post, a conservative publication, Canadians have serious concerns about the expediency with which legalization has been proceeding. The survey asked Canadian residents to agree or disagree with three statements:
- "We should delay the introduction of marijuana for up to a year because we're not ready for it to happen."
- "Our province has plans in place to deal with automobile drivers who have used marijuana."
- "I'm concerned that despite best efforts, there will be a large black market for lower priced marijuana."
In total, 55% agreed that marijuana's legalization should be delayed by up to a year, with 60% of female respondents and 68% of seniors aged 55 and older agreeing with this statement. Comparatively, just 49% of males and 44% of those aged 18 to 34 agreed with the first statement.
Overall, only 45% of respondents agreed that their province had regulations in place to deal with drivers who are under the influence of cannabis. Persons aged 18 to 34 were the only group where a majority of respondents (57%) believed driving under the influence plans are in place in their respective province.
Lastly, 69% of all respondents are in agreement that the black market will be difficult to expel. This included 57% of young adults aged 18 to 34, as well as 85% of seniors aged 55 and over.
As is consistent with most surveys on marijuana, seniors had a decidedly negative take on pot relative to younger adults.
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A lack of regulation and the black market are serious concerns
While this poll isn't going to change Canada's recent vote to legalize marijuana, it does raise two very valid concerns about the legal pot industry.
First, despite the passage of the Cannabis Act, legalization designed to broaden the authority of peace officers with regard to screening drivers for cannabis use and impairment has yet to be passed. This could put the public's safety at risk.
Building on this point, measuring impairment is a lot harder to do with marijuana use compared to alcohol consumption. Alcohol stays in a person's system for less than a day, and a breathalyzer device can be used in determining a level of impairment via a blood alcohol content reading. The guidelines for alcohol impairment behind the wheel are pretty clear.
But with marijuana use, there are no line-in-the-sand guidelines, and no approved breathalyzers, even though multiple companies have these products under development. Additionally, since tetrahydrocannabinol (THC) can stay in a person's system for days or weeks, recency of use, and therefore impairment behind the wheel, becomes difficult to decipher.
The second major concern here is that the black market may not relinquish sales as expected. Even though the excise tax rate is a mere 10%, black market providers aren't paying this tax, and don't have licensing fees or store rent to contend with. The gap in pricing between legal marijuana and black market pot might be wide enough to keep consumers in illicit channels. That'd be terrible news for the federal government, provinces, and investors.
Image source: Getty Images.
The big takeaway for investors
So, what's the big point here? Namely, that with all of the unknowns associated with the rollout of recreational cannabis in Canada, we could very well see some choppiness in sales and demand after the Oct. 17 launch date.
In many ways, marijuana stocks have been priced as the greatest thing since sliced bread. Canopy Growth Corporation (NYSE:CGC), the largest marijuana stock by market cap, and the first pot company to uplist to the prestigious New York Stock Exchange, has seen its share price rise nearly 1,000% (on Canadian exchanges) over the trailing two-year period. Yet in spite of its $5.6 billion market cap, and 5.6 million square feet in eventual growing capacity, Canopy Growth Corp. might lose money in fiscal 2019. Since Canopy has been reinvesting every cent of operating cash flow, as well as diluting investors via bought-deal offerings in order to raise cash, any chance at meaningful profits are still a few years away.
Canopy Growth's profit expectations could become even more strained if consumers don't move into legal channels as expected, or if Canada doesn't move quickly to pass resolutions to protect drivers.
It's concerns like these, raised by Canadian citizens, that'll be paramount to monitor in the months and years that lie ahead.
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