The cannabis industry became a major center of attention over the past several years. In the wake of the legalization of cannabis products in Canada, vast streams of investment started flowing into the nascent industry. An increasing number of farms and companies have emerged and expanded at an impressive rate since then. On the other hand however, all of this excitement could very well result in tremendous losses & panic. The question then remains, what fate awaits the industry in the near, or not so near future?
The history of the use of cannabis dates back to the prehistoric times, when people in Eurasia and Africa were using the plant as a mind-altering drug for religious ceremonies. The oldest record of cannabis usage was Herodotus’s reference to Scythians taking cannabis steam baths. Cannabis was widely used as an industrial material to produce, among other things: paper, construction materials, clothes, ropes, etc.
The first outlawing of cannabis dates back to the 1300s, when an emir in Arabia outlawed the use of cannabis. Napoleon, while invading Egypt, became concerned with the influence of hashish and cannabis-infused beverages on his troops, resulting in him banning cannabis all together and the organizations providing it. A renewed wave of prohibition began in the 19th century, and by mid-20th century all major nations had effectively outlawed cannabis. There are various theories on why cannabis was banned globally, most of which revolve around the fear of the unknown and the desire to ban it. Some even speculate that the 1970 Controlled Substances Act in the US was in a way a response to the liberal drug use rampant in the hippie movement. By late 20th century production, distribution and use of cannabis became a serious criminal offense practically anywhere in the world.
Medical Marijuana. The beginning of the 21st century saw the rebirth in the interest for the medicinal use of cannabis. Clinical researchers obtained an increased freedom to study & apply cannabis in the treatment of nausea, loss of appetite, chronic pains, and PTSD, etc. In 1996, California allowed cannabis for medical purposes in defiance of the federal law. In 2001, Canada adopted a system that regulated the medical use of cannabis, becoming the first major economy to legalize medical marijuana. This laid the groundwork for research & commercial growth of cannabis that had and will continue to have a significant effect on the development of the industry. By 2019, more than 30 countries and 33 states have passed legislation legalizing the use of medical marijuana and the number is growing exponentially.
Recreational Marijuana. The Netherlands were the subject of ridicule and envy for their partial legalization of recreational marijuana in select coffee shops. This fame lasted until 2012, when the state of Colorado legalized recreational marijuana, followed by the State of Washington that same year, with three more states legalizing in 2014, and an additional five more in 2016.
However, once again, Canada was the primary newsmaker. As with medical marijuana, they became the first developed economy to fully legalize marijuana. The process began in 2017, with the bill being passed in the summer of 2018, and went into effect in October of that year. The result of this chain of events caused major spikes in the stock prices of publicly traded Canadian cannabis growing companies.
Since October 2018, Canadian cannabis farmers have been bloating with investment, growing many times their pre-legalization size in a matter of several quarters. However, as with most excitement in the market, it is often followed by a period of troubles.
These companies have been using their resources to expand production facilities and distribution channels, acquiring companies throughout and across the value chain whenever and wherever possible, in Canada or abroad. 2019 has been a year of mergers and acquisitions for Canadian growers, but by the second half of the year, investors anticipate results.
Spring 2019 showed net losses for most companies, unable to contain the growth of operational expenditure and to increase their revenues. This failure in part led to the firing of Bruce Linton, the co-CEO of the largest cannabis grower – Canopy Growth Corp. Vast stockpiles of finished and unfinished inventory have been reported, many times larger than the demand for the produce in Canada. Companies are predicted to soon hit a supply wall, having to significantly lower the price and incurring even larger losses; if the larger market fails to open up for Canadian marijuana.
The excitement can very well turn into panic and bankruptcies, and the long-term prospects are not too bright either.
Infant high-risk high-gain industries that are highly regulated, like the cannabis industry are largely unpredictable and can take almost any form imaginable in the future. Here are some hypotheses and factors that can have an influence on the development of the industry.
Stagnation & agonizing death. The current trend for legalization is not guaranteed to continue, likely leaving vast fortunes invested into cannabis to burn (the author successfully avoided making an unnecessary pun). The growth of supply can significantly exceed the growth of demand. High regulatory barriers for trade can become the first and the last nails in the coffin of the Canadian cannabis industry, leaving it handicapped for years to come. Its only hope is that another major economy opens up their market for imports, and this economy could be just across the border. Most states in the US have legalized some form of marijuana, with the majority of the US citizens being in favor of full legalization of cannabis. The question is, how much time will it take to lift the federal ban on marijuana? Can the swiftly expanding industry survive until then without serious turmoil?
Domination by the vice businesses. The growing giants of the Canadian cannabis industry could be easily dwarfed by the real giants – tobacco and alcohol companies. The only real factors stopping them are uncertainty and regulation. Many companies in any way connected to the cannabis industry experience legal issues, and many multinational corporations are not yet willing to take the risks. However, this might change if the legalization trend continues. In spring 2019, Constellation Brands Inc., the manufacturer of the famous Corona and Modelo beer brands, have invested $4 billion into the largest Canadian cannabis grower – Canopy Growth Corp, controlling more than 35% of the company. More acquisitions like these are expected on the horizon. If any of the existing cannabis companies survive the next several decades, they are likely to become a part of the corporate structure of the vice businesses, who have near to infinite funds to spend and little reputation to lose.
Shift into Developing Countries. As in most industries associated with growth and manufacturing, the main drivers of profits are low costs of production and superior technology. The 20th century was the century of industrial flight into developing countries, and the cannabis industry might follow the same path. The current emerging companies could eventually abandon growth, leaving it for cheap labor countries, focusing on brand management and investment into R&D. As of now, Canada might be one of the best places to grow cannabis due to regulatory reasons, however the northern harsh-climate high-HDI maple-leaf capital of cannabis could soon become a wasteland of closed farms and bankrupt firms.
If the legalization trend continues, the South American, African and Asian countries could have a significant advantage in the growth and exportation of cannabis. However, the most successful Canadian companies are still likely to remain among major players in the market, partnering with or owning overseas farms, providing technology and benefits to their brand umbrellas. Canada, being the first country to legalize the cannabis industry, might have secured a bright future for some of its growers. The accumulated large budgets are a potentially useful tool to dominate any new market emerging with gradual legalization.
The future of the cannabis industry is very unpredictable; however, one thing is already almost certain –global legalization is coming, the question is when and how. Investors making the right choices at the right times could turn incredible profits as the industry develops. Are you one of them? Only with the right business plan.