The Future of the Cannabis Industry
Depending on whom you ask about the future of the cannabis industry, it may seem like it has no future (ahem, Jeff Sessions) or it is the answer to everything that ails our country. The answer is certainly somewhere in between those two extremes.
In short, over the next few years the cannabis industry will:
- Become legalized nationwide for recreational use
- Become an international economic force
- Transform several industries and create tens of thousands of jobs
- Face severe backlash from law-and-order type politicians and community groups
Legalized cannabis—that is, hemp and marijuana—has the power to transform our culture and economy, but it won’t be an easy road. Let’s take a look at what’s happening, what needs to happen, and what will happen in the near future as the cannabis industry becomes a serious force in our country.
Legal and Regulatory Shifts
The future of the cannabis industry as a legal interstate and international industry rests largely on the legal and regulatory shifts that are currently underway. As the prohibitionist laws fall away, the cannabis industry is slowly finding its footing outside of the black and grey markets. Over the next few years, the state-by-state movement for legal medical and recreational marijuana will become a national cry.
The political will amongst voters in the U.S. (and other industrialized countries) is already there. According to Pew Research, 62% of Americans support marijuana legalization. That is twice the number of people compared to 2000. That growing support has translated into 33 states with medical marijuana and 10 states and Washington D.C. with recreational marijuana.
Nationwide, 10 states and Washington, D.C., have legalized marijuana for recreational use, while 33 states allow medical marijuana.
— NBC News (@NBCNews) November 20, 2018
It will soon reach a point where the nation’s politicians can’t ignore the economic benefits of legal marijuana, which is poised to be worth $57 billion worldwide on its own, with billions in related economic activity. Politicians also can’t ignore the social inequalities perpetuated by prohibitionist laws. Quartz reports that, since 1980, 15 million people have been arrested for marijuana offenses, and they’re disproportionately people of color. In New York City, black residents are 8x more likely to be arrested for marijuana possession or sales, despite similar use rates amongst different races. Legalization and de-criminalization will help the social and economic standing of every demographic cross-section.
The cracks are already starting to show, even with a law-and-order, return-to-the-drug-war administration in power. Last year, the 2018 Farm Bill recognized the difference between marijuana and hemp and removed the latter from the Schedule I designation. That opened up interstate commerce for hemp and hemp products and cleared the way for farmers to get crop insurance for hemp and loans. It also paves the way for research into hemp’s many medicinal, industrial, and culinary uses.
Look for the national legalization to be discussed during the 2020 presidential cycle as grassroots activism and the success of legal states and Canada’s market shine a light on how backwards our country’s approach is to marijuana.
Marijuana Will Grow Up
In spite of prohibition, marijuana has always been available and part of the country’s culture, either associated with hippy attitudes or inner-city crime. As the industry comes out of the shadows, it will have to adjust to life under strict regulations. On top of that, it will have to rebrand itself as part of the mainstream to become a multi-billion-dollar industry.
The growing up—and growing pain—is happening already. Dispensaries are now in strip malls. The cannabis industry is posting jobs in the open and online. For the first time, marketing is moving beyond word-of-mouth. Despite many states legalizing marijuana, some cities and counties are banning dispensaries anyways. These successes and challenges will be magnified when weed is legalized nationwide.
When national legalization happens, the industry will have access to loans and banks, and customers can use more than cash to make purchases. Interstate and international commerce will open up. As with hemp, the industry will be accountable to the FDA, instead of the DEA. National legalization will be a boon, but like with Canada’s legalization (see below), the process will be fraught with difficulties as new realities are discovered for enforcement officials and cannabis companies alike.
With Canada’s legalization, many U.S.-based companies are traveling north to develop and mature their product offerings, and to find funding on the Canadian Stock Exchange. They’re also learning how to operate in a nationwide context that has differing laws and supply chain capabilities. That experience should make the transition from prohibition to legalization easier in this country.
With access to more capital and more mature business models (thanks, Canada), the marijuana industry in this country will be able to wage a much-needed public relations campaign to help rebrand marijuana. Young people across the globe consider marijuana safer than alcohol, yet alcohol prohibition lasted only a few years in the 1920s, while marijuana prohibition has lasted more than eight decades. Alcohol prohibition cost billions to enforce and was largely a failure. Similarly, marijuana prohibition costs $13.7 billion annually and is clearly a failure. The industry, along with activists and advocates, need to bring marijuana into the mainstream through scientific studies, smart marketing, and persistent lobbying. Special interests like alcohol, private prison companies, and law enforcement groups are spending millions every year lobbying to block marijuana legalization. Cannabis companies will need to respond in kind.
“Studies have shown that marijuana legalization could save $7.7 billion in averted enforcement costs and add $6 billion in additional tax revenue — a $13.7 billion net savings. Not to mention the reported 782,000 jobs it could create on day one.” https://t.co/tvTxAm16O8
— TheCannalysts (@thecannalysts) July 20, 2018
The marijuana industry in this country will need to mature quickly in the next few years if a sustained push for national legalization is going to succeed, politically and culturally.
Hemp Will Become a Household Name
The passage of the 2018 Farm Bill introduced many people to hemp for the first time. Farmers, on the other hand, who have been slammed by tariffs on staple crops like soy, anxiously awaited for industrial hemp to become legal. The Associated Press recounts how a recent session at the South Carolina AgriBiz & Farm Expo on the benefits and challenges of industrial hemp was standing room only, with over 100 people in the room. Similar scenes are playing out in every state.
That’s because the demand for hemp and hemp-derived products—namely, CBD oil—are making hemp farming a lucrative industry, worth up to $10.6 billion by 2025. CBD, one of the chemicals present in both hemp and marijuana, is expected to be a $22 billion market on its own by 2022. Since hemp doesn’t have as much THC as marijuana, it is the perfect source for this popular ingredient.
Last year, the FDA approved the first CBD medication to treat two rare forms of epilepsy. The Farm Bill makes it much easier for academics and companies to research the medical uses of hemp-derived chemicals. Look for more medicines like this to clear the FDA for a wide-range of afflictions, from anxiety and depression to diabetes and cancer.
But CBD is not the only application of hemp, though. Everything from food, clothing, and plastic can be made using hemp. Hemp can even be used to make biofuels and construction materials. With access to U.S.-grown industrial hemp, products like hempcrete—a bio-composite composite used in building—can replace more costly and ecologically-damaging products.
Without the same social stigma as marijuana, the hemp industry has a much brighter outlook in the short-term. With the right research and entrepreneurial application, hemp will become a household name and change many industries along the way.
Look to Canada for a Glimpse of the Future
In 2018, Canada legalized recreational marijuana use nationwide. In the months since, the industry has had its ups-and-downs. Despite supply shortages and confusing provincial laws, the demand for legal weed and the long-term upside has not diminished. Canadian cannabis companies are raising massive amounts of money to help build out the industry’s infrastructure and product offerings. Canopy Growth Corporation, one of Canada’s largest cannabis companies, received a $3.8 billion equity stake from Constellation Brands, while Massachusetts-based Curaleaf Holdings debuted with a $4.5 billion market cap on the Canadian Stock Exchange.
With nationally legalized cannabis, Canada is unleashing a whole new industry that is reshaping its economy. According to Bloomberg, 3.4% of all job openings in Canada on Indeed.com were related to the cannabis industry. Every sector from agriculture and manufacturing to retail and pharmaceutical is feeling the positive effects of legalization.
Where the green is: Cannabis jobs
— 🇨🇦CanadaPotStocks™️ (@CanadaPotstocks) January 30, 2019
Canada’s approach to cannabis still has some room to grow. The confusing difference between the laws in different provinces effectively still criminalizes many cannabis activities, such as growing at home. And the growing pains have allowed the black market to continue to thrive. In spite of these issues, the economic effects of legalized marijuana are still having a profound effect.
Challenges for the Future
Beyond the obvious political challenges, there are many challenges to navigate in the cannabis industry. To understand these challenges, it may be wise to look at the lessons learned by tech startups.
Why tech startups? As more states become legal, companies have more access to capital. Cannabis companies are taking on massive funding and scaling at astronomic rates to meet the latent demand. In this gold rush-esque moment for the cannabis industry, easy capital and a poor foundation can be just as fatal for a cannabis company as a tech company.
Ryan G. Smith, Co-founder and CEO of Leaflink, argues that cannabis brands need to take three lessons from the tech startup frenzy of the last decade. First, each company needs to find a niche that fills an unmet demand in the territory. Second, each company needs to hire the right mix of salespeople and industry experts to navigate the rapid growth period. Lastly, high demand doesn’t always translate into customer acquisition: creative branding and marketing are needed to grow at the pace expected by investors.
The future of the cannabis industry will be defined by its ability to overcome the challenges presented by its own success and the roadblocks put in place by lawmakers and regulators. Even in legalized states, getting involved with the cannabis industry is complicated. But the payoff can be big if done right.
Look to Verdantis Advisors to help you navigate the challenging investment and regulatory environment today to set you up for success tomorrow.