The North American Cannabis Market

The biggest cannabis market on the planet is still blossoming and has many, many years of growth ahead of it.

The North American market is growing at an explosive rate, fuelled by progressive legislative changes, and a burgeoning commercial market. We expect the total cannabis market to be worth US$47.3 billion by 2024.

 – Daragh Anglim, Managing Director Prohibition Partners

North American is the largest cannabis market on the planet. It also leads the world in legislative innovation and cannabis prohibition reform. The US is already the largest medicinal market in the world, and even if medicinal cannabis were only legalised at the Federal Level, it would still be the biggest cannabis market in the world. The primary driver behind the legislative changes in these markets could be put down to the following four factors.

Reduce the black market

The black market contributes to 3 major issues. The first is Organised Crime. The black market is supplied and run by criminal elements, which leads to a lack of quality control (issue 2) and of course, allows for ease of access for the teenage/youth market, as there is no ID required!

The opportunity cost of the war on drugs

The war on drugs has been especially vicious when it comes to cannabis. Thousand have been incarcerated as a result of marijuana-related offences, and the increase in arrests since the Nixon Administration has been noticeable. The impact has been especially hard on underprivileged communities, and the expungement of criminal records has become more prevalent in most of the States that have now legalised cannabis.

US Cannabis Industry

Then there is the opportunity cost of the money spent on the drug war tackling marijuana-related crimes. As a result, this budget could not be reassigned to support oppressed individuals and communities 

Tax

Tax is also a massive driver. Colorado legalised cannabis in 2015, and by early 2019 reports were flooding in that the State had raked in a cool $1 billion in taxes on cannabis sales. This money goes a long way in achieving a more balanced state budget, and the benefits to the community are two-fold. First off, there's job creation, and on the back of the taxes, there are upgrades to infrastructure and the community. It's win, win and win.

The North American cannabis market will be dominated by the US, accounting for some 85% of total sales in 2019. If cannabis is legalised in all states of the US by 2024, the total value for cannabis could be approaching the US$50billion mark.

The Medicinal Market

A recent publication from Prohibition Partners suggests that 40% of Americans suffer from a chronic disease and that this number is increasing. They went on to state that Research conducted by Yahoo News/Marist College in a 2017 survey found that almost 20% of cannabis users use it to relieve pain.

The opioid crisis is well documented in the US, with the mass slaughter of human beings through overdoses of blockbuster drugs like OxyContin, killing as many as 135 Americans every day. As of March 2019, two US states, New York and Illinois, have legalised the use of cannabis as an alternative to addictive opioids to help treat chronic pain.

Medicinal cannabis will dominate value sales in 2019, accounting for around 60% of the total estimated value.  Cannabis offers cheaper alternatives to prescription medication and a less addictive alternative to opioids, which is being utilised across the healthcare system in both Canada and the US.

The Recreational Market

On October 17th 2018, Canada became the first G-7 nation to legalise recreational-use cannabis at the Federal level. This game-changing moment in cannabis's long history marked the moment that could well define the tipping point of the global lifting of cannabis prohibition.

Legalisation got off to a very slow start, as lack of supply and physical stores heavily impacted growth. This has slowly started to come right, with more supply coming online, and populous Provinces like Alberta and Ontario started to ramp up brick-and-mortar retail locations.

Legislation also only included flower and low-potency oils, which left the star player on the bench. In mature markets (such as Colorado and Washington DC) edibles and extracts make up nearly 60% of the spend. Consumer keen to try cannabis, or regularly consume it, do not necessarily want to smoke it. 

A convergence of competition and technology is driving product innovations with a greater emphasis on quality, discretion, precision formulation and dosing.

In October this year, "Legalisation 2.0" is expected, which will legalised edibles and extracts for adult recreational use. Data from mature recreational markets, like Colorado below, show that over time; the vaping category itself grows faster than any other, and brand names slowly start to grab market share. This is expected to be a massive spark that should really fuel the fire for recreational growth in the coming years. After all, the Canadian black market for vape pens is estimated to be over $1 billion per annum.

Colorado Cannabis Industry

Spending on recreational products exceeds per capita spend on medical usage by a considerable margin. In addition, given the current long term decline in smoking and drinking, this is prime real estate for the alcohol and tobacco companies, so expect big strategic investments to be made in the coming years.

And CBD

In December 2018, President Donald Trump signed into Act the Farm Bill of 2018. This bill was historic, in that it removed the word hemp from the definition of Marijuana, and with it, hemp's Schedule 1 status. The passing of the bill opened the floodgates for the commercialisation of industrial hemp. More importantly, some would say, it gave birth to the hemp-derived CBD industry. And boy oh boy, is this a big baby.

There are many estimates on the potential size of the CBD market, with Cowen estimating around $8 billion by 2022, and the Brightfield Group estimating a whopping $22 billion by 2022. CBD is now seen as the new wonder drug and is being infused into everything from dog-treats to thick shakes. And therein lies the problem.  When the floodgates to a booming industry open, in flood the opportunists and chancers, ready to take advantage of the mostly uneducated, and completely insatiable, demand.

A recent hearing held by the FDA was so audacious in its outcome that it led the FDA to acknowledge there is a massive problem with the definitions and benchmarks surrounding CBD. Not only that, but quality controls were found lagging too. Many of the products tested returned significantly lower (in some cases zero) amounts of CBD as compared to the package advertising. The CBD industry is going to be a monster, with some believing it could rival the marijuana industry in size. 

But, and not for the last time, it would seem that legalisation has made the area even more grey, with the DEA also weighing in with their definition and ruling of CBD. An area for investors to keep a close eye on.

Canada

Canada has a very well developed and robust medical cannabis industry. Having been legal since 2001, a 2017 survey by Health Canada of medical cannabis users found that 97% of users said medical cannabis helped to manage their symptoms/disease, whilst 68% said medical cannabis helped to decrease their use of other medications. 

Data from Health Canada shows that in September 2018, there were 342,103 registered medical cannabis clients in Canada. The Alberta and Ontario regions combined accounted for over 78% of that number.

Canada Cannabis Industry

Canada is also leading the way in defining how fully legalised markets, medicinal and recreational, might operate. Whilst amateur in its launch, the industry is starting to find its feet, and the potential this market has always harboured is starting to shine through.

It was the medicinal market that drove the development of cannabis oils, as doctors were better able to titrate and prescribe. It's the oils that gave birth to the vape market, and the medicinal vape products then exploded into the retail markets, as consumers looked for cleaner and healthier ways to deliver the THC and/or CBD to their system. 

This is now one of the fastest-growing sectors in Canada. As edibles and extracts look set to be on the retail shelves in time for Xmas, the extraction companies (like MediPharm Labs and Valens GroWorks) have really started to gain significant investor attention, as the industry as a whole ramp up in anticipation.

The legalisation of edibles, extracts and high-potency oils is really going to drive revenue numbers for the coming years. Expect significant growth and legal uptake particularly in the vape category.

Prohibition Partners (PP) forecasts that by 2024 the Canadian market will be worth around US$3.4 billion, up 33% on 2019 estimates. 

USA

The US is the largest cannabis market in the world, and the most valuable. The current situation sees cannabis still defined as a Schedule 1 drug (alongside heroin and cocaine), and hence Federally illegal. However, as it stands, 33 States (and Washington DC) have legalised for medicinal usage, and 11 States have legalised for recreational use (along with Washington DC).

California, the fifth-largest economy in the world by GDP, boasts the highest number of medicinal cannabis patients as a percentage of the state's population which also outstrips the total number of medicinal cannabis patients in Canada.

US Cannabis Industry
Pew Research Center

The winds of legislative change continue to blow hard in the US, as cannabis continues to go from strength to strength. The pubic opinion of the drug has never been higher. The latest Pew Research poll sees over 62% of the population in favour of legalising cannabis (that's more people than those that are in favour of gay marriage).

Illinois was the latest State to legalise for recreational use, and the rolling stone continues on with Maryland declaring no more cannabis prosecution, Minnesota looking to legalise for recreational use very soon, Kentucky finally discussing a medicinal cannabis program and New Jersey and New York looking to legalise recreational use in early 2020.

New York could be the game-changer. According to the Prohibition Partners report, the citizens of New York City smoke more cannabis than do citizens of any other city in the entire world, by some considerable margin. 

They consume approximately 77 tonnes of cannabis per annum compared with Los Angeles (36) and Chicago (24). New York will be the largest recreational city in the US, and many of the larger multi-state Operators (MSOs) are trying to gain access to an awakening East Coast. Indeed MedMen splashed big dollars to get a flagship position on 5th Avenue.

Prohibition Partners (PP) forecasts that by 2024 the US market will be worth around US$43.9 billion, up a whopping 202% on 2019 estimates.

We have stated many times, that we believe the US to hold the greatest opportunity for significant gains in the short term. And there are a couple of key reasons why the US market could continue to grow and grow for the coming years.

There are continuing legislative changes happening right across the country. In 2018, Congress introduced the (STATES) Act, which essentially allows the States their own determination of the legality of cannabis. It would completely protect the States from any Federal intervention or interference.

And the SAFE Banking Act which would regulate the banking for the cannabis industry, and with it, bring a stream of investor confidence into the markets, knowing the capital markets now supported this growing industry.

And finally, just the constant momentum of change that is currently operating according to Moore's Law. His law related to the power of computing, wherein he stated that every two years, the power of computers doubled. Essentially cannabis legislation is moving at the same momentum. More legalisation leads to more legalisation, and so on. Each and every time happening a little faster than the last. Full US Federal legalisation is not too far off now. Perhaps one or two years away – three at worst. And it's going to be massive.

In fact, many analysts believe that by 2030, more cannabis will be sold in the US than soda drinks.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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