Cannabis Market Overview

Black Legend Capital Explains the Investment Outlook in the Cannabis Industry

As governments open more avenues for investment, the cannabis industry's advance toward legalization presents a unique opportunity given the cannabis market's numerous growth drivers including a large base of potential cannabis consumers, movement toward the end of federal prohibition, advancements in alternative forms of ingestion, and new product platforms.

In November 2000, Colorado voters legalized medical marijuana with the approval of Amendment 20. This authorized the possession of limited amounts of medical marijuana for patients and their primary caregivers. After this victory, the Colorado court's ruling paved the way for small, low-volume dispensaries to spring up quickly to meet the demand. Nonetheless, the sector's lack of regulation and credibility caused these businesses to remain loosely structured, informal, unintegrated, and unincorporated. Since then, there have been many attempts to fight the legalization process, but an uphill battle brought forth by patients, caregivers and supporters to the Board of Health hearing in July 2009 began to push for the establishment of commercialized cannabis.

 

While the United States cannabis market's immense growth continues as a result of the legalization effort, trends are global. Cannabis possession is illegal in most countries under a 1925 treaty called the International Opium Convention. But just like the U.S., some nations either disregard the treaty or don't enforce it. Outside the U.S., legalization supporters consider pot possession either legal or tolerated in Argentina, Bangladesh, Cambodia, Canada, Chile, Colombia, the Czech Republic, India, Jamaica, Jordan, Mexico, Portugal, Spain, Uruguay, Germany and the Netherlands. Marijuana is a global multi-billion dollar industry with programs for medical use that have been set and are up and running in places like Germany, Canada, Australia, Israel and the Czech Republic. Uruguay, Peru, Colombia and the Netherlands have been the few countries to legalize the consumption and possession of cannabis while in Spain, adults are permitted, in certain jurisdictions, to join "associations" where groups of collective adults consume and grow cannabis. Currently, many countries are exploring cannabis business opportunities by implementing and regulating this product for medicinal and recreational uses. For example, countries like Canada have already installed a fully functional nationwide medical program and will implement a recreational program by next year. In the United States California towns such as Adelanto have embraced large-scale commercial cannabis cultivation. Colorado still remains a central model of the modern cannabis economy. In 2010, the Colorado government ruled in favor of legislation as legislators passed the Colorado Medical Marijuana Code regulating the commercialization of marijuana. The Code proved the industry's legitimacy and prepared it for investor capital.

With recreational marijuana being largely inaccessible in the U.S., medical marijuana has been the main driver of the industry for the past 10 years. Time magazine reported that scientists from the University Hospitals Bristol conducted 79 randomized trials involving volunteers given either cannabis or a placebo. The scientists in the study noticed that improvements happened among the participants taking the cannabinoid products by relieving symptoms such as seizures in children and adults, nausea from chemotherapy, loss of appetite among HIV positive patients, multiple sclerosis spasms, depression, anxiety, sleep disorders, psychosis and Tourette syndrome. This will allow cannabis-based drugs to become a viable treatment alternative in these large markets. The U.S. population too has driven even higher demand for medical marijuana, since the elderly are more susceptible to chronic diseases treatable with cannabis and cannabinoids. To illustrate, IBISWorld, one of the world's leading publishers of demographic and government data, projects that the number of people who are 50 and older will grow at 1.6% to 120.1 million by 2020, increasing the demand for medical marijuana and encouraging the industry to increase in size and profitability.

More than 40 medical conditions are listed as qualifying conditions in legalized states and as the efficacy of cannabis treatments becomes more understood, a ramp-up of U.S. cannabis production will surge in order to meet the growing demand prompted by the ailing population.

 

The marijuana industry has been in recent years either one of the fastest or the fastest growing industry in the country, even while lacking legal and federal requirements. The industry experienced astronomical growth with revenues rising 54.7% during 2014, following the legalization of recreational marijuana consumption in Colorado and Washington. This year, the size of the legal marijuana market in the United States is expected to grow by $7.1 billion, according to ArcView, a premier hub for investment and data progress in cannabis. That represents 26% growth from 2015. Similarly, IBISWorld expects that as demand for legal cannabis and cannabis products soars, the number of operators is expected to grow at a rate of 12.2%, while industry employment will increase to 1.1 million people. If legalized at a federal level, estimates for the entire U.S cannabis industry's profits are projected at $37 billion with 22 million consumers. Furthermore, the cannabinoid based pharmaceutical market in the U.S has potential to exceed $50 billion annually as cannabis becomes a viable alternative to fighting off various illnesses, and the market could reach $100 billion annually with more than 50 million consumers.

 

Although a federal prohibition is in place, there are an estimated 20 million people in the U.S who consume cannabis every month, and $40 Billion was generated in 2010 in the illegal U.S market for cannabis. To put things in perspective, the lucrative tobacco industry has an annual revenue of approximately $100 billion and 45 million retail consumers. Within ten years, the cannabis industry is expected to reach a combined total market of $100 billion annually and more than 50 million consumers if federal prohibition is discontinued.

 

After a pivotal moment in the legalization effort, the finance industry swiftly went out of its way to invest in retail marijuana. U.S. investments in foreign cannabis companies, as well as ancillary services from transportation, storage to mobile applications rating potency and quality in the industry, were immediate indicators. Investments are going into additional ancillary businesses, which do not need to be regulated, such as nutrients, lighting, climate control, and all kinds of equipment. However, the real prize remained for a long while unreachable: the idea of taking an industry with such high demand already in place and introducing it to the world of institutional capital, vertical integration, and incorporation. The root cause of the problem is in the legal challenges cannabis faces in most countries. Although the push for cannabis has been strong, the decriminalization of cannabis does not necessarily mean one can directly invest in it. In fact, investors hoping to place more capital in cannabis can only do so in countries where it is legalized or by indirect investment in businesses supporting the cannabis market.

Nonetheless, we will begin to see more nations legalizing the use of marijuana, which will allow international investors to have more possibilities for profitable investment in the industry. The recent Colorado Senate Bill addressing the regulation of out-of-state investors in cannabis, which finds that "medical marijuana businesses need to be able to access capital…" and that "Colorado medical marijuana businesses need to have ready access to capital from investors in states outside of Colorado," characterizes the first step in this process. So why is the industry getting so much attention from government, banks, and investors?

About 62% of Americans live in states where cannabis is legal in either medicinal or recreational use. Also, with a higher demand for medicinal uses of cannabis, big pharma looks to meet this demand by creating CBD and THC pills for ill patients. This will allow investors to be fully invested in the massive pharmaceutical industry. As cannabis legalization spreads, there are other benefits to investing in dispensaries beyond its increased use and profits. For example, the ability to be involved in a brand new industry adds excitement and as the market predictably grows, the barriers are fewer now than they will be in the future. The cannabis market is no different than other markets in that once it matures, competitiveness and an upsurge in capital will bring more obstacles for entry. This represents an opportunity to enter a market whose potential is largely untapped before legislation opens the floodgates for commercialization. The combination of strong demand and high potential inherent within the industry, coupled with the regulatory changes coming soon, have created the best time for strategic investment in the cannabis industry.

We are in the early stages of a potentially powerful secular growth cycle for the cannabis and cannabis related industries. Ackrell Capital, a provider of objective research solutions, estimates that within 5 to 10 years there will be a substantial amount of mature companies who have the capacity to dominate the U.S based cannabis consumer market. Inevitably, well-resourced, well-managed, and well-positioned companies will have a myriad of opportunities for significant growth, and savvy investors quick to respond to this transitional period will be able to take advantage of it.