With an upcoming announcement in a little over a week, a landmark change is going to occur in what has become the hottest investment trend of the last several years.
The week of April 10th, the national Canadian government is going to announce its proposal to comprehensively overhaul recreational marijuana laws and regulations.
Analysts widely expect the new market to eclipse beer, wine, and liquor in sales within a matter of years.
While the move is unprecedented, it is hardly a sea change. Instead, it is a milestone in a progressive series of changes over the years.
Medical marijuana has been established across Canada for years, and a new industry isn’t about to spring up.
Instead, an existing market, with established players, is about to see a massive race to capture market share and sales.
While there are plenty of opportunities for investors in the U.S. as medical marijuana becomes the norm and legal recreational use spreads, the advantages for companies North of the border should not be ignored.
The differences between Canadian and U.S. regulation couldn’t be more stark.
The systems of government are fairly similar. Both countries use a federal system, with a degree of autonomy for provinces carved out where national government doesn’t intrude or overrule.
When it comes to marijuana laws and regulations, the approaches are polar opposites, with U.S. legalization limited to the local and state levels, while Canada is building a framework from the top down.
The differences are dramatic as a result. The U.S. marijuana industry is completely fragmented. Companies cannot expand, or transport and sell, any products over state lines.
So while a company that has built a profitable, efficient system can do well in, say, Colorado, there is no way it can tap into the larger and more lucrative California market.
Without a federal-level change, nothing will change.
The top-down Canadian approach is far different and well established. Back in 2001, the courts mandated exemptions for medical marijuana in drug laws.
This system stayed stagnant until 2013, with patients either growing their own, designating a person to produce for them, or buying directly from Health Canada, the only authorized mass producer.
Between 2014 and 2016, that changed again. Commercial interests were allowed into the market, and now 36 licensed producers are active.
And it is on top of this existing system that the new recreational rules will inevitably be dropped.
There won’t be a scramble to build businesses from the ground up. They already exist. Nor will there be any real threat of legal limbo for companies.
Instead, it will be defined by a massive expansion of market to capture, with restricted sales similar to alcohol.
This established system and the predictability of it going forward has allowed something to happen in Canada that hasn’t in the U.S.
Marijuana producers have access to banks. Simply having an account and a merchant account to process credit and debit transactions provides a decisive advantage.
U.S. banks won’t even get close to state-level marijuana operations due to federal law. Simply providing any services exposes them to sanctions, penalties, and potential jail time for employees.
U.S. producers have had to truck around mountains of cash to complete even the most mundane business-to-business transactions, with all the expenses of an armored truck and guards attached.
Colorado’s cannabis industry alone saw $996 million in sales in 2015, and $1.1 billion in sales last year. Every single dollar had to be secured and shipped around.
These aren’t high-margin businesses either. Retail prices are dropping, and there are already robust security measures in place for the production facilities and shipments. The extra security and transportation for the greenbacks eat into relatively tight cash flows and profits further.
Lending is still a bit difficult, but Canadian banks are creating lines of credit for businesses. An NPR article last year talked to one owner who can tap at least a million dollars to cover expenses.
With the announcement in a little over a week, we should see some language in it that removes the remaining concerns of bankers. That opens up a whole new world. Larger loans and bond issuance are on the horizon.
Both the stable regulations and access to normal banking services create an unprecedented opportunity for businesses and their investors alike — true scalability.
U.S. producers cannot cross state borders in any way. They are capped. Though Colorado has established producers, they cannot ship anything to the much larger market in California.
One in five Americans lives in a state where some form of marijuana use is allowed. No company will ever come close to that kind of market exposure.
The Canadian model allows companies to thrive not only across the nation, but across the world. International sales have already begun, with licensed shipments already sent to the Czech Republic, Germany, Brazil, and Australia.
The announcement coming in the week of April 10th will mark a massive expansion of that established and cohesive market, and a chance for the best companies to secure a future of dominance in the sector.
Arcview Market Research projects a compound annual growth rate of 25% through 2021 for the North American marijuana industry. The lion’s share of that will be captured by Canadian growers due to their decisive advantages.
Established Canadian businesses moving on a much larger market are already rewarding early investors. And we’re just at the start of the trend.