The marijuana industry is growing like a weed. Sure, that’s a corny way of putting things, but it also very accurately describes the fast pace and consistent path to growth for the cannabis industry at the moment.
In North America, according to research firm ArcView, legal marijuana sales soared 33% last year to $9.7 billion. With the expectation that compound annual sales growth will continue at an average of 28% through 2021, ArcView is calling for close to $25 billion in North American sales by 2021.
A big reason for this rapid surge in sales is the expected legalization of recreational marijuana in Canada by this coming summer. Canada would become the first developed country in the world, and second overall behind Uruguay, to have allowed the sale of cannabis to adults aged 18 and up. In the process, Canada is expected to add $5 billion or more in annual sales to an industry that’s already benefiting from medicinal cannabis sales and exports to medically legal countries.
The U.S. pot industry is stuck in neutral
What’s interesting about the marijuana industry is that, while Canada is leading the charge, it’s the U.S. that could be the world’s most lucrative market for weed — if it were legal, that is. Despite an overwhelming number of respondents in U.S. surveys in favor of legalizing cannabis nationally, the federal government has remained steadfast in maintaining a Schedule I classification for pot. This places marijuana on par with drugs like LSD and heroin, implies a high propensity for abuse, and fails to recognize any medical benefits of the drug.
This Schedule I classification has additional drawbacks, too. It’s made running clinical research into cannabis’ risks and benefits nearly impossible, as researchers are drowning in red tape and a relatively small availability of federally grown cannabis. Meanwhile, marijuana-based businesses have virtually no access to basic banking services, including a checking account, and could be forced to pay an effective tax rate of up to 90%, if profitable, thanks to a more than three-decade-old tax code known as 280E.
Attorney General Jeff Sessions is very much at the heart of marijuana’s lack of progress at the federal level. As no fan of pot, Sessions has repeatedly attempted to thwart expansion at the state level. In May 2017, he sent letters to a few congressional colleagues requesting that the Rohrabacher-Farr Amendment be repealed. This amendment, passed with each and every federal spending proposal, is what disallows the Justice Department from using federal dollars to prosecute medical marijuana businesses. Sessions’ request has repeatedly fallen on deaf ears in Washington.
He was, however, successful in having the Cole memo rescinded on Jan. 4, 2018. Created by former Deputy Attorney General James Cole during the Obama administration, the Cole memo laid out a series of guidelines that legalized states would follow to keep the federal government satisfied and off their backs. Examples include keeping pot away from adolescents, and ensuring that marijuana grown within a state stayed there. Rescinding this memo, which Sessions intimated overstepped its bounds from the get-go, opened the door for state prosecutors to use their discretion in leveling cannabis charges against businesses and/or individuals.
This gray area of what is and isn’t legal has been a regular source of investor consternation for months. Thankfully, it might have a solution.
President Trump changed his mind on cannabis, yet again
Last week, after consulting with Sen. Cory Gardner (R-Colo.), President Trump came to an agreement to end any potential federal crackdown on legal cannabis industries in states that have legalized in some capacity. In effect, Trump backed the idea of supporting the rights of states to choose what should happen with cannabis within their own borders. As you might imagine, marijuana stocks received a nice little boost after this morsel of news.
However, there’s only so much faith that can be placed in Trump’s promise to turn cannabis issues over to states considering how often his position on the subject has changed.
In 2016, during his campaign, Donald Trump suggested that he was “100 percent” behind the idea of legalizing access to medical marijuana, and kept an open mind to the idea of recreational weed, albeit with the need for additional clinical research on its risks and benefits. But in 2017, and even within the past few months, Trump’s stance on cannabis had taken a decidedly negative turn.
To begin with, knowing full well that Sessions was an ardent opponent of cannabis, Trump recommended him for the position of attorney general. And while Trump has clashed behind the scenes with Sessions, their disagreements have never centered on cannabis.
Even more recently, it came to a head when Israel decided to shelve plans to export medical cannabis to the United States to placate President Trump. Israel is one of just a very small number of countries with a vision for cannabis exports, and it had planned on the U.S. being its primary source of revenue in this regard. If Trump had been “100 percent” supportive of medical cannabis, it seems confusing that he’d nix such an idea.
Yet, once again, Trump is backing the idea of states’ rights when it comes to cannabis laws. Of course, this change in stance comes after Sen. Gardner had repeatedly blocked the Senate confirmations of Justice Department nominees in order to coerce federal cannabis reforms and protect Colorado’s burgeoning pot industry, which generated $1.49 billion in sales in 2017. It appears to be more of a barter agreement than a true show of support for the domestic marijuana industry.
Regardless of Trump’s stance on pot, avoid the domestic weed industry
The fact of the matter is that regardless of what Trump decides to do with cannabis — side with states’ rights or allow Sessions to wage war on cannabis — investing in the industry, at least domestically, will prove far too risky.
Even if Trump protects already legalized states from federal prosecution, it won’t change a thing with regard to the excessively high tax rates these businesses face, or the fact that researchers are bogged down in red tape. The fact remains that Congress is in no rush to act on cannabis reforms with Trump as president and Sessions as the country’s attorney general, signaling that any chance of meaningful change for the industry could be, at minimum, three to four years out, and would depend on the 2018 and 2020 election results.
For the time being, investors are safest on the sidelines.