Lately it seems that everything is falling into place for the cannabis industry and early investors. Canada is on its way to legalizing marijuana and Australia and Britain may soon be considering legalization as well, certainly when it comes to medicinal cannabis. The potential profits seem sweet.
But this may or may not be the case. Recently, some articles have raised concerns that the industry is simply not mature enough for most investors to take the plunge right now, even after considerable due diligence.
The Motley Fool posted an article in early October that clearly presented some of the negatives the industry is facing, especially in the US where cannabis companies would seem to have made significant progress.
The article warned that challenges facing the industry remain “intense” and then went into some detail regarding these hurdles – which it suggested are both national and local.
On the federal level, Congress has not moved significantly from its stance that it is not going to explore decriminalization and legalization whether or not individual states make changes. As the federal government has sustained cannabis’s illegality, the banking system remains off limits as well, and this makes it difficult for businesses in the sector to operate normally.
On the national level, too, concerns about the safety of cannabis continue to be debated, in spite of compelling studies finding benefits in its use in treating certain health conditions as well as positive social outcomes in US states that have legalized adult-use cannabis to date.
“Early-bird” investors moved quickly to invest in cannabis on either a private or public level, believing the industry would move quickly in the direction of national legalization. But, what if this is not the case? The slower pace can have monetary repercussions as companies that counted on substantively expanding markets to sustain operations may face difficulties.
Anthony Wile, chief investment strategist for High Alert Investment Management, has similar concerns but a different emphasis, which he detailed in an editorial published in a November 2, 2015 Globe and Mail editorial, “Investors Should Take a Deep Breath Before They Try Cannabis.”
Anthony Wile cautioned investing in cannabis is not for the light of heart, not just because the industry is currently in flux but because nobody really knows how regulatory changes and the entrance of large corporate interests will shape the revenue-sharing streams of the industry in the near and medium term.
The Motley Fool emphasized the hurdles the industry – and individual enterprises – face in the US, but Wile’s concern is that major changes over the next few years would change the industry significantly on a global basis. What looks – and seems – profitable now might become untenable as regulations evolve and multinationals begin to enter the industry.
Anthony Wile presented his concerns this way:
As with any burgeoning new industry, including the Canadian cannabis industry as it ”whitens” from its previous black-market status, investors considering directing their capital there may want to take a temporary respite from hitting the go button. Investors who make assumptions today about what may be profitable tomorrow will likely find their wallets considerably lightened by a changing set of regulatory circumstances.
Wile’s vision of the industry seems an accurate one. With many billions of dollars at stake right now it seems unlikely and somewhat naïve to think that larger corporate players will not find ways to garner the lion’s share of the global cannabis market.
Many cannabis businesses have been started in colder climates because legalization and decriminalization have moved most quickly in countries like Canada and the US. But as countries better situated to grow cannabis year round – Colombia comes to mind – legalize, the initial crop of growers may find it difficult to compete. Already concerns are being raised about the amount of power and water indoor growers use.
Anthony Wile’s larger point is that better-situated participants may not even have emerged yet. And it’s not just growers, obviously. The multinationals that dominate tobacco and alcohol are readying their networks for maximum efficiency. The profile of the industry will be determined over the next several years. It will not be what it is now.
Importantly, an upcoming special session of the UN General Assembly on cannabis and other drugs may shift the very foundations of cannabis cultivation, production and marketing. The UNGASS conference in April in New York City may significantly change the global approach to dealing with the demand and supply of drugs in general, suggesting that member nations pursue legalization and provide treatment rather than incarceration for those who have difficulties with drug abuse. These conclusions will surely have a significant impact on the profile of the cannabis industry and its players.
Wile’s vision is broadly based and longer-term and The Motley Fool’s somewhat different concerns are no less valid. The business hurdles that are now in place may prove problematic because the industry is simply not growing fast enough and not removing encumbrances quickly enough. Here’s more from The Motley Fool:
Arguably the biggest issue the industry faces is black market growers and retailers. Operating in the legal marijuana business comes with a price … extra costs, such as licensing fees, and higher price points due to excise (and sometimes local) taxes along the way. Growers, processors, and retailers all want their pieces of the pie. What this does is push the price of legally grown marijuana up far beyond the cost of unregulated (and still illegal) black market marijuana. The response from some consumers is to simply bypass the regulated market and save money…. More than a year after legal sales commenced, some three-quarters of Colorado’s jurisdictions do not recognize marijuana as legal and still ban the drug. Enforcing marijuana laws and targeting consumers can be extremely tricky with this swiss cheese-like legalization.
Good points. Even without considering seismic shifts in the industry, the current crop of businesses may suffer simply because important aspects of their business (like banking) remain partially or completely untenable.
The net result of these two articles is to inform investors and potential investors that sometimes “first in” is not a wise investing move even when an industry seems wide open and profits are apparently there for the taking. As Anthony Wile puts it: “Fools rush in.”