America's green rush is finally beginning to take hold. There are 33 states that now allow medicinal cannabis, while 11 have legalised it for recreational use.
The industry—which presently employs more than 250,000 people—saw an explosion of growth over the last twelve months, resulting in the total number of active marijuana licenses in the US skyrocketing from 9,522 in January last year to 17,350 as of December 10, 2018.
And although for now marijuana remains illegal at the federal level, the US still possesses the world's largest legal cannabis market, totalling an estimated $10.4 billion in value. According to a recent report from Barclay's, this number would immediately balloon to $28 billion—if the plant becomes fully legalised—before eventually increasing to $41 billion by 2028.
If it were taxed similarly to tobacco, then this would also allow it to generate almost $28 billion in tax revenue.
"While no bonds backed by cannabis tax revenues have been placed thus far, if federal approval is granted, the cannabis muni-bond market will likely flourish, amounting to billions if not tens of billions of dollars, in our view," Barclays said.
The sector is clearly booming, as companies race to find new opportunities to feed what has become one of the fastest growing consumer industries in the world. Even without nationwide legalisation, the US is market is already a behemoth that is only growing larger, as numerous companies jockey for position in an increasingly crowded market.
In April Curaleaf Holdings (CNSX: CURA)—the largest American cannabis company by market valuation—entered into a $950 million all-stock agreement to purchase the cannabis oil producer, Cura Partners. Only a few weeks earlier the Canadian cannabis juggernaut, Canopy Growth (TSE:WEED), also announced that it had signed off on a $3.4 billion deal to acquire Acreage Holdings (CNSX: ACRG.U). However, this deal will go ahead once cannabis is fully legalised in the US.
Clearly, the American cannabis industry is starting to attract some serious heat. But, before you go jumping headfirst into this increasingly valuable investment space, it's important to understand the specifics of how the sector actually works.
Surveying the Market Landscape
Although Canada became the first country in North America to completely legalise cannabis in 2018, the US market has remained ahead of its neighbour by a wide margin. While analysts expect the Canadian cannabis market to hit $4.5 billion in value over the next three years, a recent study conducted by Arcview Market Research and BDS Analytics, predicted that the US market could swell to $20.9 billion by 2021.
An October 2018 the survey also found that 66 percent of Americans currently support the idea of legalising cannabis at the federal level, which means that future attempts at legislative progress are likely to enjoy increasing support from mainstream voters.
The biggest piece of cannabis-related news coming out of the US last year was the passing of the US Farm Bill 2018, which had massive implications for companies involved in the CBD side of the industry. The bill's passing officially removed hemp from the list of schedule one substances. Because CBD can be derived from hemp plants, this also effectively legalised hemp-derived CBD products at the federal level.
This has presented a huge growth opportunity for American cannabis cultivators, as most licensed producers typically also grow hemp as part of their business model—since the farming process is almost identical—leaving them well-positioned to begin distributing CBD products nationwide.
While the Farm Bill 2018 has already had a significant effect on the entire US cannabis market, it has naturally proven to be particularly beneficial for pot stocks that have a targeted focus on hemp products.
Companies like Naturally Splendid (TSXV:NSP)—a North American licensed producer—are having a field day, as their current offering already includes a wide array of hemp and CBD-based products, such hemp foods, wellness supplements, and even CBD-infused skincare creams.
Another factor to consider when it comes to predicting the US market's potential value is the country's ongoing march towards the complete legalisation of cannabis.
Following the initial decision by Colorado and Washington to legalise recreational cannabis in 2012, each subsequent year has seen additional states follow their lead. Last year Michigan became the first midwestern state to legalise marijuana for recreational use, and in June 2019 Illinois lawmakers approved a plan to make cannabis fully legal in the state by January 2020.
Each new state to legalise cannabis for recreational use will exponentially increase the overall size and expansion potential for the US cannabis industry, offering ample growth opportunities for established players and early stage market entrants alike.
According to a report from the Cowen Research Group, the three states most likely to move in favour of legalisation next are Connecticut, New York, and Rhode Island. Savvy investors should pay particular attention to any news coming out of New York, as the state is predicted to become a massive market with huge potential for further growth.
Potential Growth Opportunities
While many thought that Canada's October 2018 decision to legalise marijuana at the federal level would lead to the emergence of a new cannabis market powerhouse, thus far this has failed to materialise.
Despite its considerable head-start on the US in regards to legal regulation, Canada has been unable to match the sheer size or interest from investors that the American market has already been able to generate.
This may seem surprising, until you consider that California—which legalised recreational cannabis use in 2017—has a greater number of residents than the entire population of Canada. This may account for recent market trend which have seen interest from investors drift away from Canadian pot stocks in favour of US states that have fully legalised cannabis.
The biggest growth in the US market thus far has been in cannabis distributors, and 2018 saw a 205 percent increase in the amount of distribution licenses issued.
Cannabis cultivators and delivery companies also experienced strong growth last year, with licensee data showing a 114 and 110 percent increase, respectively. This trend seems set to continue when you consider that Oklahoma issued more than 2,000 licenses within a few months of legalising medicinal cannabis in 2018, despite recreational use remaining illegal within the state.
The market is so hot that venture capital firms like Vencanna Ventures (CSE:VENI) have begun coming out of the woodwork to provide capital to early stage cannabis companies that are looking to expand. iAnthus Capital (CSE:IAN) is another major player that is financing multiple US-based cannabis companies, allowing it to offer diversified investment opportunities in the retail, processing and cultivation spaces.
Recent reports have also stated that the legal cannabis market in the US will experience a 28 percent increase in the CAGR by 2021.
Although in recent years new medicinal cannabis markets have begun to develop worldwide—many with huge future potential, such as Europe, Asia and Australia—these industries are still in an embryonic stage of development. And even if these markets were to legalise recreational cannabis in the near future, it will still be some time before they can catch up with the value of the US market, due to its considerable first-mover advantage.
The Ancillary Market
When thinking about the cannabis industry, it can be easy to only consider the producers and cultivators of the plant, how many tonnes they can produce and the quality of the product, as well as the dispensaries where cannabis is sold.
However, growers and dispensaries aren't the only players in the cannabis sector. In fact, when you run the numbers they're actually only a relatively small chunk of the industry. If you compare cultivators and distributors to the size and scope of the ancillary cannabis market, you may be surprised.
The ancillary cannabis market operates behind the scenes. It is made up of companies involved with the packaging of cannabis products, the provision cash streaming to up-and-coming cannabis businesses, and the development hydroponic technologies for the growers, to name just a few categories.
Because those in the ancillary market don't have any direct involvement with the cannabis plant itself, they are often referred to as being a "non plant-touching" company, and therefore aren't subject to the same regulations or legislation that the plant-touching companies are.
Many of the ancillary markets which have popped up are areas that many interested in cannabis wouldn't even consider. For example, financial consulting and security. As the demand and scale of operations within the cannabis industry continues to grow, companies are beginning to turn to external organisations which can handle cash management, route-based logistics, ATM services etc.
One company capitalizing on this fact is The Brink's Company (NYSE: BCO.) The company is the world's largest cash management firm, with transport, logistics and security as their main areas of focus.
Brinks has entered into a multi-year agreement with one of the biggest players in the cannabis game—Canopy Growth Corporation (NYSE: CGC). Brinks will provide secure transportation and logistics for Canopy Growth both in Ontario, Canada as well as internationally.
US Cannabis Law 101
On a federal level, cannabis still remains a schedule 1 substance today. Though on a state level, there are now varying degrees of cannabis legislation depending upon which state you're in.
Cannabis can either be decriminalized, medicinally legal or fully legal. Decriminalization of cannabis means that those found in possession of cannabis would only receive a fine rather than being arrested. There are a total of 15 states that have now decriminalized cannabis possession, the first of which was Oregon in 1973, who reduced possession of cannabis to a $100 fine for carrying one ounce.
Following Oregon's lead in the same year was Texas, who reduced the possession of four ounces or less into a misdemeanour. Only two years later we saw Alaska, Maine, Colorado, California and Ohio reduce cannabis to a decriminalized status. Now the states which have decriminalized cannabis are North Carolina, North Dakota, Mississippi, Nebraska, Minnesota, Missouri, Ohio, New York, New Hampshire, Connecticut, New Mexico, Illinois, Delaware, Rhode Island and Maryland.
Decriminalization is at the very least, a step in the right direction as many of the states which decriminalize marijuana go on to either legalize it medicinally, or in some cases legalize the plant entirely.
Of the 15 states which have decriminalized cannabis, all but three have legalized it for medical purposes; North Carolina, Mississippi and Nebraska. Which brings us to the states that have legalized marijuana for medical purposes. Despite being considered of no medical use on a federal level, many US states and doctors are beginning to have a different opinion on the plant. Medical marijuana is being increasingly prescribed for chronic pain, epilepsy, insomnia, anorexia and even to help with the negative effects of chemotherapy.
Cannabis was first made medicinally legal in California after the state passed he Compassionate Use Act in 1996 which allowed for individuals suffering from chronic pain to use and possess cannabis for medicinal purposes. California's medical acceptance of cannabis served as somewhat of a linchpin for many of the other states, with seventeen states legalizing cannabis for medicinal use over the following decade and a half.
A big factor in the rise of medical cannabis related products was the 2018 Farm Bill which was passed last December, which authorized farmers to cultivate hemp plants. Since then, many companies are producing hemp-based CBD products, which are said to have many of the same health benefits that marijuana brings, without the psychoactive effect.
Now, a total of 33 states have medically legalized either marijuana or CBD products, despite there only being one cannabis-based product given FDA approval – GW Pharma's 'Epidiolex' which is used for the treatment of seizures.
Individuals with medical issues in these states have to visit their local doctor and find out if they're eligible for medicinal marijuana.
Mile High Club
In May 2019 the TSA updated the "what can I bring?" section on their website to address questions regarding hemp-derived CBD, stating that:
"Products/medications that contain hemp-derived CBD or are approved by the FDA are legal as long as it is produced within the regulations defined by the law under the Agriculture Improvement Act 2018."
The Agriculture Improvement Act which the TSA mentions, also known as the 2018 Farm Bill, removed hemp from the Schedule 1 category, rendering it legal for farmers to cultivate and distribute hemp crops. While this gave rise to the booming hemp-based CBD industry, on a federal level in the United States cannabis is still classified as a schedule 1 substance meaning the drug has no accepted medical use and is illegal under any purposes.
And on a state level, the laws are different again. Cannabis is legal for recreational purposes in 10 states and medicinally legal in 33 states. The enforcement of these laws falls under the jurisdiction of the DEA (the Drug Enforcement Administration) unless cannabis products are infused into foods or beverages, then you're dealing with the FDA – the Food and Drug Administration. And if you want to take those CBD snacks onto a plane, you'll have to talk with the TSA, the Transportation and Security Administration.
Welcome to the club.
In order to hash things out from the edible perspective, the FDA is hosting a hearing today on how to regulate CBD across the food and beverages industries given the varying legal statuses of the substance, with 140 people scheduled to testify regarding their stance on CBD.
And the TSA is now clearing the clouds away for air travel involving CBD. The TSA states that as long as a CBD product is hemp-derived rather than marijuana-derived, it's fine to bring it along with you on your flight. The announcement follows on from several instances where passengers were arrested for possessing CBD products which they'd likely bought at their local Whole Foods—legally.
According to the Atlantic only a few weeks prior to the announcement, the TSA's apprehension of CBD products had "skyrocketed" at the Dallas Fort-Worth International Airport in the past year. The spike in arrests was undoubtedly spurred from the confusion surrounding legislation. Passengers could go to their local Walgreens or CVS and pick up a CBD-based product without a hitch, only to be arrested for it at the airport.
Combating the Opioid Crisis with Cannabis
In the 1990's in the United States, opioid deaths began to sharply rise eventually leading to 47,600 deaths in 2017—over 130 deaths a day. Readily prescribed for pain relief, opiates were the go-to solution for many doctors and healthcare providers for a growing number of ailments, leading to a massive spike in prescriptions.
Prescriptions for opioid painkillers leaped from 76 million to 207 million between 1991 and 2013. Drugs had broken through the perimeters of the War on Drugs, and it was now doctors, instead of dealers, that were prescribing dangerous substances. In 2017, 1.7 million Americans reported suffering from substance misuse issues relating to prescription opiates.
There were 58 opioid prescriptions per 100 Americans in 2017, with rates higher in cities with greater unemployment. It seems like the current "Gateway Issue" is simply having access to healthcare, as many unquestioningly take what their doctors prescribe them when they're in pain. In fact, studies have shown that 70% of heroin users had previously first misused opioid prescriptions.
Though for most, they simply continue to take the painkillers. After their injury heals, the pain goes away and users find themselves continuing to take the painkillers because of the euphoria they get from them. Then, before they know it, they have developed a dependency on the drug.
So what can be done? Is all hope lost for those suffering from chronic pain? To receive an opioid prescription is both a powerful solution to your pain, but also a risky tightrope to walk upon. Well, now many are considering a new solution: cannabis.
As Medicinal marijuana rises in popularity and becomes increasingly legal across the globe, doctors are beginning to prescribe it for anxiety, pain relief, insomnia, appetite loss and many other symptoms. And perhaps most interestingly, in states where marijuana is legal, opioid prescriptions go down. This is a concept we covered with athletes who use cannabidiol, the non-psychoactive compound found within cannabis known as CBD, as an alternative to prescription painkillers.
Athletes in the NFL and the UFC are also beginning to turn to CBD, as they can still experience pain relief without the negative physical effects or addictive tendencies that come from opioids. And, as awareness continues to rise, more people are taking a similar tact to athletes, and self medicating using cannabis products as an alternative to opiates.
According to a study based on survey data from 2897 medical cannabis patients, patients overwhelmingly reported that cannabis provided equal relief to their other medications, but without the unwanted side effects. Ninety-seven percent of the sample also "strongly agreed/agreed" that they are able to decrease the amount of opiates they consume when they also use cannabis.
Now, given the fact that all this evidence flies in the face of marijuana being the "Gateway Drug," a new theory is emerging, that marijuana is actually the "Exit Drug."
The Racist Origin of the War on Drugs
Recreational marijuana is now legal in 11 states, and medical marijuana is legal in 33. In fact, Denver has just passed a referendum to decriminalize magic mushrooms. It seems the War on Drugs is finally coming to an end.
And yet, there isn't anarchy. There isn't chaos. Instead, it's quite the opposite. Barclays pegs the global Cannabis industry at being worth $150 billion today, and predicts that it is set to almost double over the next decade.
In the US alone, Cannabis has created 211,000 full time jobs and has helped children deal with epilepsy, helped athletes deal with muscle pain, and even helped dogs with their anxiety. At this point, you're probably thinking "hey, that doesn't sound too bad!"
And you'd be right. Which brings us to the question, why was there a war on drugs in the first place? Well, it's complicated. It wasn't so much a war on drugs as it was a war on some drugs, while others have been tacitly approved. Although Cannabis has been illegal since the war on drugs began, there has been 223.7 million retail opioid prescriptions filled annually over the past decade.
And of those prescriptions, 17,029 people overdosed in 2017. Meanwhile, nobody has ever overdosed on marijuana. In fact, Weed Maps recently released a documentary called 'The Exit Drug' which outlines all the ways that marijuana can be used to get people off of prescription painkillers.
The War on Drugs is often considered to be the result of one man in particular: A 1930's politician named Harry J Anslinger.
Anslinger was appointed to the Federal Bureau of Narcotics (which later became the DEA) in the 1930's, leading to his dedicated work in criminalizing all drugs—particularly marijuana. In order to demonize the substance, Anslinger relied on propaganda to ensure marijuana was seen negatively by the public. Anslinger labelled marijuana as "more dangerous than heroin or cocaine" and claimed that the plant had the ability to "lead to pacifism and communist brainwashing."
In fact, even the term marijuana can be accredited to Anslinger, who chose the term tactfully in order to link the drug to the Mexicans, who called it 'Marihuana' at the time. Relying on racial tensions and fear, Anslinger waged a war not only on drugs, but on people themselves—specifically African Americans and Mexicans
Anslinger infamously described Jazz—made exclusively by African Americans at the time—as "satanic", simply because the musicians toked on marijuana in jazz clubs. He referred to Mexicans as "Spanish-speaking degenerates" and even went as far to say, "reefer makes darkies think they're as good as white men".
Looking at Anslinger's comments now, it seems despicable that they had any weight to them whatsoever. Though he wasn't alone. Several newspaper companies worked alongside Anslinger to ensure his message was heard and that marijuana was demonized. Though the newspaper companies were more concerned with the threat of hemp paper than they were marijuana smokers.
Anslinger's efforts finally reached fruition in 1937 when the Marijuana Tax Act was passed, prohibiting the possession and distribution of marijuana.
Red, White and Green
It's not hard to understand why investors are so bullish in the US market, as even without backing from the federal government it has still managed to become the most valuable cannabis space in the world.
While other global cannabis markets are also expected to balloon in value in the coming years—with Europe estimated to be worth more than $123 billion by 2028—it seems likely that America will continue to dominate the sector for some time.
Further in-depth explorations of the US cannabis industry can be found in the articles listed below. Investors who are looking to learn more should watch this space, as we will continue to post further updates on the US market as they emerge.