Cannabis Has been appointed by the wall street as one of the fastest growing industries on the planet. After sales more than tripled worldwide between 2014 and 2018, wall street has forecast a roughly five fold to 18 fold increase in global annual revenue by the time 2030 rolls around. This type of growth is impossible for wall street and investors to, if not, which is a big reason pot stocks have been all the rage.
Black market marijuana is here to stay
The legalization of recreational marijuana is Canada as well as in select U.S. states hasn’t stomped out black market cannabis as originally expected. In California, the largest weed market in the world by annual sales, illicit marijuana sales are predicted to outpace legal pot sales in 2019 by a significant margin: $8.7billion to $3.1billion. Analysts at Scotia bank estimated in early February that the black market would be responsible for 71% of total cannabis sales in Canada in 2019.
How illicit producers bucking the push toward a legalized marijuana environment? The blame rests with the following five factors:
1. Supply issues in Canada
In our neighbor in the north, supply supply shortage has been a persistent problem since recreational sales began a year ago, with a trio of problem to blame.
First, the regulatory agency Health Canada has been buried by cultivation, processing, and sales applications. It entered the year with more than 800 applications on its desk, and despite implementing aggressive changes to the cultivation licensing process, it’s going to take months, or perhaps more than a year for the agency to work through its backlog. Cannabis growers are forced to wait to either grow or sell marijuana.
Secondly, certain Canadian provinces have been slow to give the green light to physical dispensary licenses. With a few retail stores for consumers to shop at, illicit marijuana has filled the void.
Thirdly, pot growers have been slow to start and complete cultivation projects. All of these factors have allowed illicit weed to producers to thrive.
2. Tax issues in select U.S. states
In the U.S. states, high tax rates have been driving consumers to purchase black market marijuana.
For an example, California is taxing the daylights out of its marijuana buyers. Buyers are paying a 15% excise Tax, as well as a $9.25 wholesale tax per ounce of dries cannabis flour, or $2.75 per ounce of cannabis leaves. If you ad this up, it comes out to an aggregate tax rate of 45% on legal marijuana. This doesn’t include additional costs such as the laboratory testing on weed grown in the golden state, which is also factored into the price consumers pay.
Legal Cannabis can’t compete with illicit producers in price. This is one of the reasons MedMen Enterprises has struggled as of late. MedMen is losing a lot of money, $178.4million in the net operating losses through nine months of fiscal 2019., and it recently terminated its acquisition of Pharmacann to conserve capital. According to the company’s third quarter operating and preliminary fourth quarter review, MedMen’s existing California locations delivered justv5% sequential growth in the third quarter and 10% growth in the fourth quarter.
3. A slow dispensary approval process throughout North America. A mother clear problem that allowed the black market to persist is the slow approval process for dispensary licenses in both Canada and select U.S. states.
In Canada, Quebec based grower HEXO announced during its fourth quarter operational update that the slow pace of dispensary openings has impacted its sell-through rate. Hero’s home province didn’t even see its own dispensaries open seven days a week until may, mainly due to severe supply shortages. There are far too free locations open to provide adequate supply to Quebec’s adult residents. HEXO removed its 2020 sales guidance and reduced expectations for sequential fourth quàrter sales growth from “A doubling” to about 19% at the midpoint.
Local regulators in California have been notoriously slow to approve dispensary store licenses. As of midpoint 2019, California had just one dispemsary open per 61,000 adults 21 and over compared to one dispensary per 5,567 adults 2q and over in Oregon.
4. Jurisdiction problems in the select us states
In Canada, the passage of the cannabis act made Cannabis legal throughout the country. In states like California and Colorado, statewide legalization looks like Swiss cheese rather than a unified decision passed by voters.
In California, Cole to 80% of the 482 municipalities in the state have banned commercial marijuana activity. Even though California’s significantly higher populated cities have left plenty of the state as a sort of a no-go zone for pot. With such a large percentage of municipalities failing to ok licensed dispensaries, it’s opened its door for the black market to grow.
5. Regulatory Enforcement Has Been Spotty
Regulatory Enforcement designed to drive the black market out of business hasn’t been working. Based on dates from the United Cannabis Business Association, 2,835 of the 3,757 listings of marijuana sellers in California on the website weedmaps were unlicensed. Although the state has promise to step up on illicit producers, it’s yet to do so.
Enforcement Has Been a bit tougher in Canada, where CannTrust holdings was taken to the woodshed. CannTrust announced in early July that it had been growing marijuana in five unlicensed grow rooms for a period of six months. This admission led regulatory agency Health Canada to suspend CannTrusts cultivation and sales licenses in mid-september. CannTrust also announced this past week that bit will destroy roughly $58million of plants and inventory.