After five states — Arizona, Mississippi, Montana, New Jersey and South Dakota — passed ballot measures for marijuana use last week, the drug will soon be legal in some form for 70% of the U.S. population. A third of the country won’t even need a medical excuse. But that’s not the surprise.
What’s more notable is that unlike in the past, all of this happened without much of a public uproar. To be fair, there have been bigger concerns on Americans’ minds these days. But this is the moment that cannabis companies and their investors have been waiting for: to be considered a legitimate industry rather than a hot voting issue. From here, the goal is to make weed every bit as normal as junk food, wine and other vices long found in stores across America.
In order for the industry to flourish it needs the federal government’s help, and the prospects of that are suddenly looking better. Two-thirds of U.S. adults are in favor of marijuana legalization — 91% if you include those who support it at a minimum for medicinal purposes, according to Pew Research Center. That’s more than the number of Americans who support abortion rights or who think human activity contributes to climate change.
The partisan gap in attitudes toward pot is also shrinking, with more than half of Republicans saying it should be legalized. In the reliably red state of Mississippi, Initiative 65 — the less-restrictive of two medical marijuana proposals that were on its ballot — was criticized by Governor Tate Reeves as too “liberal” for “non-stoners”:
And still it passed by 74%. If Joe Biden takes office in January and the makeup of Congress continues to reflect a divided nation, marijuana may end up being the one issue almost everyone can agree on.
The increasing support for pot in red states bodes well for a Senate vote on the Secure and Fair Enforcement Banking Act, which would allow financial institutions to legally do business with marijuana companies. It would be one of the most constructive developments for the industry short of legalizing weed at the federal level.
Cannabis companies have reason to be hopeful that a new administration will also usher in other changes such as reclassifying or excluding marijuana from the Controlled Substances Act. De-scheduling the drug would leave states to decide how to handle pot, which may be more palatable to conservatives than attempting to change federal laws, Isaac Boltansky and Merrill Ross, analysts for Compass Point Research & Trading LLC, wrote in an Oct. 26 report. Marijuana is currently considered a Schedule 1 drug, right alongside heroin, in a category reserved for narcotics with the highest potential for abuse and dependence and with no accepted medical use. Examples of Schedule 2 substances are cocaine, fentanyl, methamphetamine and oxycodone — some of them at the root of America’s opioid addiction crisis. For cannabis proponents, that just doesn’t add up.
Removing cannabis from the CSA would provide a meaningful benefit to companies’ income statements:
In fact, some of the biggest challenges in getting licensed weed businesses off the ground are around the regulatory hurdles and costly process of having to work piecemeal in expanding around the U.S. That’s helped the illicit weed market maintain a competitive advantage by undercutting prices. In California, where marijuana can be legally purchased, illegal transactions are still estimated to make up the overwhelming majority of sales.
It’s no wonder that pot stocks — at one point the darlings of the market — have lost their exuberance this year. The so-called cannabis index has dropped 38%. In one example, beleaguered multistate operator MedMen Enterprises Inc. was forced to walk away from Virginia, where a limited but potentially lucrative medical marijuana market is just beginning to open up; its shares have slumped 73% this year.
An unintended effect of squelching the market may be to drive cash-strapped cannabis companies into the arms of food and beverage giants, which are preparing to pounce on pot once laws become more lax. For brewers and tobacco companies, it may be the most promising growth avenue. That said, a bunch of upstarts getting swallowed by behemoths would seem to go against Democratic legislators’ efforts to level competitive playing fields through more aggressive antitrust enforcement.
Everyday consumer products are a key way for cannabis companies to target a wider customer base than pot smokers. Canopy Growth Corp., one of the biggest U.S. medical marijuana producers, valued at $9 billion, wants to start selling drinks containing THC — the psychoactive chemical in cannabis — next year to compete with beer. Even though Canopy is backed by liquor conglomerate Constellation Brands Inc., it’ll be tough going up against Anheuser-Busch InBev AB, which controls 42% of the North American beer market.
Bit by bit, things are moving in a positive direction for the industry, albeit slowly. Meanwhile, cannabis companies have strategically entered states where medical marijuana is allowed so that they're ready to roll once recreational use for adults is made legal. For example, the more immediate winners of last week’s ballot measures include Curaleaf Holdings Inc., a $5.9 billion company that holds the No. 1 market share in New Jersey and No. 2 in Arizona, and Harvest Health & Recreation Inc., which gets 50% of its sales from Arizona, according to a Nov. 4 report by Pablo Zuanic, an analyst for Cantor Fitzgerald & Co. New York and Pennsylvania are expected to be next, with budget shortfalls caused by Covid-19 potentially incentivizing them to move faster on the issue.
At the national level, if Democrats are looking for common ground with Republicans, marijuana of all things seems like a reasonable place to start. The year 2020 truly is bizarre.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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