Marijuana – Heading For a High?
As the push for legalisation increases around the world, the legal marijuana industry is experiencing a period of substantial growth for both medical and recreational use. Investors, manufacturers, and researchers agree that the market holds the potential to be one of the most lucrative in the world, but questions still remain as to what form the industry will take. Forecasts predict that the industry could produce up to $200 billion in revenue per annum by 2030, but with a large element of this hinging on the US market’s ability to overcome stern legal barriers, the future is still uncertain. Consequently, there may never again be a more critical juncture for the domestic US industry than the 2020 US elections.
State and Federal Split
For the citizens of New Jersey, Arizona, South Dakota, Montana and Mississippi, the November 3rd ballot presents not only the chance to support their preferred presidential candidate, but also the opportunity to shape marijuana policies in their states. Already, marijuana is legal either recreationally or medically in 33 U.S. states. Combined with the plausible passage of the upcoming referendums, the message to Washington is clear; states and their constituencies want to see marijuana legalization at a central government level.
Federally, the use of marijuana has been outlawed in the US since 1970 under the Controlled Substances Act. Despite an evolving social acceptance of marijuana at state level and a greater understanding of its medical advantages, marijuana remains classified as a Schedule I Drug, reserved only for substances deemed to be prone to abuse and without medical benefits. Strict categorisation as a controlled substance acts as a major growth inhibitor for both legal dispensaries and the domestic industry as a whole.
In the first instance, cannabis firms that turn a profit are being subject to Section 280E of the U.S. tax code which deprives firms selling federally illicit substances of corporate tax breaks, effectively subjecting businesses in the marijuana industry to extremely high corporate tax rates.
Additionally, Schedule I classification impedes firms from vertically integrating their operations in multiple states in an economically efficient manner. Multistate marijuana operators are prevented from carrying their products across state borders under federal law, meaning that processing facilities are required in any state in which a business hopes to establish a retail presence.
However, the biggest impediment on the domestic industry’s growth proliferation lies in the limited banking opportunities available to US based businesses. Technically, marijuana operations in legalised states are committing a federal crime, leaving large federally backed financial institutions fearful of potentially facing money laundering charges as a result of dealing with such businesses. Besides the huge financing difficulties that businesses therefore face, this also leaves many companies bearing the huge risks of operating strictly in cash. The clash between state and federal law has prompted financial institutions to be trapped between satisfying the needs of their local marijuana enterprises and the threat of federal enforcement action, with the marijuana industry frequently coming out second best.
Political Party Positions
When Donald Trump was elected US president in 2016, there was optimism among marijuana industry stakeholders that industry deregulation would be one of the many rollbacks introduced by the seemingly pro-small government president. However, what has occurred over the course of his tenure in the Oval Office thus far has proved nothing but disappointing for industry insiders. Trump has taken a standoffish approach to the subject, supporting states in deciding their own marijuana regulations but side stepping the issue at a federal level. Furthermore, the appointment of Mitch McConnell, an outspoken critic of the marijuana cause, as leader of the Republican senate majority threw cold water on any industry hope for deregulation.
On the opposite side of the table, Democratic presidential candidate Joe Biden and running mate Kamala Harris have confirmed their commitment to decriminalising marijuana at a federal level; a commitment that follows earlier suggestions of democratic intentions to deregulate the industry. Last Autumn, the Democratically controlled House of Representatives passed a bill that would allow banks to serve legitimate marijuana businesses in legalised states. Ultimately, however, the bill suffered a swift death when it appeared before the Republican senate.
The Blue Wave
The re-election of Donald Trump and the maintenance of Senate control by the Republican party will, in all likelihood, dash industry hopes of deregulation. This will continue to enable states to determine their own laws on medical and recreational marijuana legalisation, while the drug remains Schedule I classified at a federal level. If the industry is to achieve its immense domestic growth potential in the US, a Blue Wave must reach across all aspects of the election. While a Biden victory is pivotal, his presidency is effectively worthless to US marijuana businesses without the legislative support of the Senate. A Mitch McConnell led Republican Senate will undoubtedly maintain the status quo, shattering any policy reform hopes for the next presidential term at least.
To be clear, will a blue wave entail legalisation for the marijuana industry at federal level? – In all likelihood, no. Will it signify decriminalisation? – Very possibly. But, will a Democratic sweep of the Senate and the White House result in a much simpler regulatory environment for legitimate marijuana operations? – Absolutely! And therein lies the opportunity for scale and big returns in the domestic industry. When marijuana companies can begin to bank legitimately and pay tax on par with other multi-billion dollar industries, that is when institutional investment will begin to flood into the industry, no longer fearful of the sectors ferocious volatility.
Lows of the High
The opportunities borne out of deregulation don’t come without their downsides, however. Currently, growing marijuana in the US is extremely profitable because of the fact that it is federally illegal, yet tightly regulated. High risk is simply borne in the nature of its production. But, as was recently evident in Canada, deregulation will give rise to widespread production across the board and, ultimately a plunge in retail prices. Furthermore, marijuana will maintain the inherent risks associated with all commodities, regardless of their regulatory status. These risks may even grow in the short run with the emergence of new poorly disciplined producers in the sector with no industry experience.
At the end of the day, it is the US voters that will dictate the future of the world’s largest legal marijuana market. A vote for the Republican party is a vote for the status quo, maintaining the industries position on the backburner for the foreseeable future. Alternatively, a Democrat vote clears the pathway for federal legalization and massive growth potential across the sector. Regardless of the outcome, the forthcoming elections will at least provide institutional investors with a clearer impression of the tumultuous industry’s future.