California’s marijuana industry may be in deep trouble

Among states that have legalised recreational marijuana, none is more vital to the success of the pro-legalization movement, or to the industry, than California.

Two regulations unveiled recently could be controversial: farm-size limits on some growers, and an apparently limitless number of licenses available for sale to large businesses.

The idea of big business working its way into the marijuana industry is bad news. But it’s good news for investors.

From growers to investors, the marijuana industry has most everyone seeing green.

According to cannabis research firm ArcView, legal weed sales are expected to grow in North America by 26% a year through 2021, yielding a nearly $22 billion market. Of course, that could be touching the tip of the iceberg considering expansion opportunities in the U.S. and throughout the rest of the world.

At the heart of this growth in the U.S. has been a major change in the way consumers view pot. National pollster Gallup showed in 1995, the year before California became the first state to legalize medical cannabis for compassionate use, that just 25% of respondents favoured the idea of national legalization. By October 2017, favorability toward national legalization rose to 64%, an all-time high. A separate poll from the independent Quinnipiac University in April 2017 found an overwhelming 94% support for medical cannabis’ legalization.

Long story short, Americans are mostly believers in the green rush, and the result has been a steady increase in state-level legalizations in recent years. Currently, 29 states have OK’d the use of medical cannabis for specific ailments, while voters in eight states have green-lighted the sale of weed for recreational purposes to adults.

New rules change the face of California’s legal weed industry

Among those eight recreational marijuana-legal states, none is more vital to the success of the pro-legalization movement, or to the industry, than California.

Voters in the Golden State easily passed Proposition 64 by a vote of 57% to 43% in November 2016, clearing the way for adult-use sales beginning in 2018. Considering California’s size, the addition of recreational sales is expected to generate $1 billion in tax and licensing revenue for the state, on top of what it already receives from medical cannabis tax revenue. By comparison, Colorado generated less than $200 million in tax revenue last year from legal weed sales (and that’s counting both recreational and medical cannabis sales).

However, new regulations unveiled last week that’ll govern California’s budding industry could end up causing controversy. While some of the regulations were straightforward (e.g., licensing fees and guidelines for testing, growing, and distributing marijuana), two subtle changes in this long-awaited rules release stood out like sore thumbs.

First, prior to the release of legal-weed guidelines in California, it was expected that cannabis farms would have crop-size limitations imposed, ranging from one to four acres. The final product included farm-size limitations only on medium-sized growers’ licenses, which could open the door for small- and large-scale cultivators to set up mammoth-sized grow farms.

Second, and most important, as outlined in the Los Angeles Times, large businesses appear to be allowed to obtain as many licenses as they can afford. Big businesses have deep pockets, and small businesses are likely struggling to find banks willing to lend, meaning a veritable growing oligopoly could be established in California’s recreational weed industry in short order.

Is this good or bad news? It depends on your perspective

For some, the idea of big business working its way into the marijuana industry is bad news. The emergence of larger players would likely push smaller growers out of the picture. Remember, deeper pockets should allow larger grow farms to outproduce and out partner smaller growers. In fact, there’s the real possibility that larger growers could flood the market with supply with the intent of driving prices and margins down on an intermediate-term basis. This could put smaller growers out of business, much in the same way that Wal-Mart has used its size to push around mom-and-pop stores. Without any competition, prices for cannabis would probably rise over the long run.

Then again, it’s not all bad news if you’re an investor, or looking to get in on marijuana’s rapid growth. One of the biggest detriments to investing in the U.S. weed industry (aside from it still being illegal at the federal level) is that it’s been highly fragmented. In other words, there are too many mom-and-pop growers and not enough larger players that merit investment. If just a few larger players were to emerge, it would give investors a clearer channel to possibly make money.

The big question at this point is: Can California’s recreational weed be price-competitive with the black market? Personally, I’m not too sure. The exceptionally high tax rate, compounded with the possibility of larger players dominating the market over the long run, could wind up driving consumers back to the black market. That would be a losing scenario for the state, growers of all sizes, and investors.

Only time will tell.

Courtesy BusinessInsider