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Legalisation of cannabis in North America and its effects

  • Recent effects of legalisation on cannabis industry
  • Major firms in the business and their prospects

 

The year 2018 marked a new beginning in the history of the United States as California, which is a significant contributor to the U.S. economy legalised cannabis for recreation. California houses the world’s largest information technology centre, the Silicon Valley and is also a headquarter for internationally renowned brands; Google and Facebook. It also has a very high proportion of foreign employees. The state also happens to be a major tourist attraction in the U.S. If it were a country, it would have been the sixth largest economy in the world. The legalisation of marijuana in California marked a new beginning in the cannabis industry.

In 2012, Colorado and Washington became the first states in the U.S. to legalise cannabis for recreation. Moreover, during the 2016 presidential elections, Americans in several states had to vote for one of the three options, namely the legal use of marijuana for only medicine, secondly; recreation and thirdly, the drug should continue to remain illegal. The states of Washington D.C., Oregon, Alaska, Massachusetts, Nevada and Maine legalised marijuana in the elections. Further, Marijuana was already legally available for medicinal uses in 29 states including the ones that voted for recreational legalisation. Arkansas, Florida, Montana and North Dakota voted for the legal use of marijuana solely for medicinal purposes. In addition, California legalised marijuana a year later on the 1st of January 2018.

In 2017, Canada became the second country in the world after Uruguay to legalise recreational cannabis. Likewise, the possession of small quantities of marijuana was legal in Mexico and the nation is planning to further reduce the restrictions on the drug. Furthermore, as the regulations on marijuana were relaxed on a large scale in Canada, a number of organised players emerged in the country at a much bigger scale than the U.S. marijuana was sold illegally in the U.S. prior to the lawful sale of the substance, which began in 2012.

The prohibition on the consumption of marijuana did little to dissuade the consumers from accessing the drug. Marijuana growers had their own methods of delivering the product to end consumers through the underground supply chain of dealers. Additionally, these dealers used peculiar techniques to market the product and supply this to potential customers. In 2016, the legal sales of marijuana in the U.S. were of USD 6 billion. It is difficult to find the exact figure of the total sales in the U.S. as the supply chain was mostly underground. However, it is estimated that in the same year marijuana sales were USD 31 billion out of which sales worth USD 25 billion were through illegal means.

The new legislation will put an end to illegal transactions as the companies selling marijuana for medical use will sell the drug for recreational purposes and new players are also expected to emerge in the industry. The total sales in the U.S. are also believed to rise. The industry will still be regulated and will be license driven. It will take around 2 to 3 years for the issuance of business licences to meet the entire demand of cannabis through legal channels. It is also anticipated that the legal sales of marijuana will reach USD 50 billion by 2026. The U.S. presently has small to medium-sized private players, which are planning to expand and organise. Consequently, 77% of the growers are preparing to add more area under cultivation in view of the rising demand that is no longer underground. According to the Cannabis Business Times, each of the growers intend to add on an average 22,300 square feet to their cultivated area. In the U.S., a lot of small players have also emerged within the industry in the past 2 to 3 years. Currently, the average annual revenue per business is USD 1.1 million. In addition, around 28% of the businesses are earning a revenue greater than USD 1 million.

Canada already has few big players in the industry that plan to foray into the U.S. market. Canopy Growth Corporation and Grand Cannabis are listed firms that are projected to witness a bright future. These two companies were growers and sellers of medicinal marijuana prior to the legal recreational usage came into existence. Further, another firm Aurora Cannabis saw its market capitalization go up by 200% after the legalisation initiative and its current value is USD 3.17 billion. Canopy’s growth also saw its market capitalization surge by 140% and at present, it is USD 4.18 billion. Aphria with a market cap of USD 2.26 billion is a fully integrated Canadian firm, which grows, produces, wholesales and retails cannabis. The company recently signed an agreement with an Arizona based medical marijuana grower. Aphria lately witnessed a significant increase in market capitalization. The industry is also witnessing a consolidation and the growth of ancillary businesses. CanniMed, a biopharmaceutical company producing cannabis products was acquired by Aurora Cannabis for USD 1 billion in January 2018. Similarly, Aphira acquired Nuuvera for USD 826 million in January the same year. Scotts Miracle-Gro Company that produces equipment for cannabis growers and pesticides for marijuana plants is also expected to see a surge in its revenue. The Canadian firm Cronos Group became the first marijuana producing company to get listed on the U.S. stock exchange, the NASDAQ in February 2018. Aurora cannabis is set to become a global leader in the cannabis industry.

The below charts show the steep growth in the revenue and sales volume of these companies. 

The illegal supply of cannabis resulted in an increase of prices as a premium was demanded by the underground dealers involved in the supply of the drug. The businesses legally selling marijuana for medicinal purposes were few and hence, these also sold the drug at a premium price. Thus, with the growing legalisation, regulation and with the foray of new businesses in the industry, Televisory expect the price of cannabis to drop. The prices per gram in the U.S. are already one-fourth of the rates in 2014 as sales through legal channels has gained momentum. The number of legal retailers selling marijuana in the states for recreation is twice the number preceding the legalisation.

Televisory believe that in the upcoming decade, the private players in the U.S. will organise and get bigger, the way it is in Canada. Further, in the future, there will be a rise in acquisitions of marijuana growers, distributors and retailers in the U.S. There is also an anticipation of vertical integration and companies will get involved in all activities from cultivation to retail. The businesses in the U.S. are likely to go public and this will give a tough competition to the Canadian firms venturing into the country.

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