Well, another year for the cannabis industry is in the record books. Here are what we believe were the six most noteworthy developments over the past year:
1. The Rise of the Billion Dollar States
According to ArcView and BDS Analytics, as reported by The Motley Fool, five individual states are expected to record more than $1 billion in sales each in 2019. They are:
- California: $3.1 billion
- Colorado: $1.6 billion
- Washington: $1.1 billion
- Florida: $1 billion
- Michigan: $1 billion
Consider that Colorado, the second largest legal state market, has a population of 5.7 million. California’s cannabis market is barely twice the size, yet its population of 39.6 million is seven times larger. At some point, California alone will be a $10+ billion cannabis market.
As the late Senator Everett Dirksen said, “ A billion dollars here, a billion dollars there, and pretty soon it starts to add up to real money.”
Dirksen was talking about Congress, in order to draw attention to what seemed to him to be a casual indifference among his fellow lawmakers toward federal spending. But the parallel to the cannabis market still holds. Yes, the industry is still fragmented by state, but a billion dollars is still a pretty big deal, and cause for celebration.
2. Go East, Young Man
To paraphrase the mid-nineteenth century advice of newspaper editor Horace Greeley, cannabis legalization, which started as a Western states phenomenon, is heading east. Michigan, the tenth most populous state in the nation, opened its recreational market on December 1, 2019, and Illinois, ranked sixth, opened on January 1, 2020.
The West Coast leads the nation in setting cultural and economic trends – Hollywood, Silicon Valley – so its influence on the social and legal acceptance of cannabis is no surprise (I’m talking to you, New Jersey and New York).
May this trend continue. Just imagine legal recreational cannabis’s potential positive impact on the Midwest and Northeastern states in a challenging economic environment for traditional industries. With the exception of a handful of major markets such as New York, for the most part the Northeast has lagged the rest of the nation in population growth and job creation. In fact, according to recent report by the US Census Bureau, 10 states lost population in 2019, of which five were in the Northeast, led by New York, with a decline of 76,790.
Recreational cannabis legalization has been under discussion in the Empire State for some time. Based on the numbers, it looks like it can’t arrive a moment too soon.
3. Washington, DC is Not Actively Trying to Strangle the Cannabis Market
One of biggest question marks hanging over the industry in late 2016, heading into the Trump Administration inauguration, was the extent to which then-Attorney Jeff Sessions and a Republican-led Senate might try to reverse the state-by-state trend towards cannabis legalization. Recall that Sessions, once the nation’s leading law enforcement official, said that “cannabis is only slightly less harmful than heroin.”
While lack of progress in Congress on the rescheduling of marijuana and reform of banking laws is disappointing, consider that cannabis is now legal in some form in 39 states, without any sign of active resistance from lawmakers in the nation’s capital.
Polls consistently show that a majority of all voters, and an overwhelming percentage of young people, support cannabis legalization. While we didn’t get any of the hoped-for breakthroughs in 2019 some industry participants were counting on, we didn’t face any new setbacks, either.
A tie is still better than a loss. And we are now one year closer to eventual federal legalization.
And Jeff Sessions is no longer Attorney General. While his replacement, William Barr, appears to be a traditional conservative, he does not seem to have the same type of fixation on cannabis as his predecessor.
And one of these days, we may have an Attorney General not afraid to admit the truth about cannabis, that prohibition has proved to be a massive (and expensive) failure.
4. Take Me Out to the Ballgame
Major League Baseball recently announced a change that could have major positive implications for the cannabis industry. The sport unveiled a significant shift in its drug testing policy: the elimination of marijuana as a banned substance.
As ESPN reported, “Marijuana will be removed from the list of drugs of abuse and will be treated the same as alcohol as part of changes announced … to the joint drug agreement between MLB and the players’ association. In addition, suspensions for marijuana use will be dropped from the minor league drug program.”
Let’s hope this opens the door to similar changes in the NBA, NFL and Olympics.
Sports officials quite reasonably want to keep performance enhancing drugs out of competitors’ bodies, in large part to ensure a fair and level playing field. In the past, that legitimate concern has been inappropriately applied to policing cannabis use (but not alcohol) off the field.
It’s nice to see priorities set appropriately for a change. Now if only my hometown Seattle Mariners could ever figure out how to put together a winning ballclub.
5. Stock Market Blues
There’s no getting around stating the obvious: virtually every major publicly-traded Canadian licensed producer and US multi-state operator saw their valuations sink precipitously. It’s no longer easy to make money investing in cannabis stocks.
The challenge, as we’ve noted previously, is in large part attributable to the patchwork quilt of regulations that make it challenging for cannabis companies to build scalable business models. This is not to say that the root cause of every unprofitable business is always directly correlated to unfavorable regulations. In new markets, early stage companies often emphasize revenue growth over profitability, which can fail to materialize as planned. and cannabis has been no exception.
However, the good news is that as the industry grows, it will continue to find its political voice. It seems reasonable to assume that over time the regulation of cannabis, like other industries, will strike a balance between reasonable oversight and rules which accommodate business success.
Recent steps in this direction, such as Colorado’s decision to open its market to outside capital, certainly represent a positive development. In general, government officials don’t typically seek to strangle legitimate businesses by limiting their access to funding. But cannabis isn’t a typical business (yet).
But we’re getting there.
6. The Vape Crisis
According to the CDC, 54 deaths and over 2,500 hospitalizations nationwide appear to be attributable to vaping. While the results are still preliminary, early findings suggest that the underlying cause is the addition of vitamin E acetate, a substance used in the black market.
Obviously, 54 deaths is 54 deaths too many, but to put the size of the vaping crisis in context, over 400,000 Americans die annually from tobacco-related causes and there are approximately 88,000 annual deaths from alcohol.
The good news is that, as compared to deaths from alcohol and tobacco, ending the vaping crisis, as compared to other public health challenges, is relatively easy. The vaping crisis isn’t ultimately about vaping per se, it’s about the negative externalities of a black market. Illicit drug dealers for years have been putting additives into their products to boost profits, without concern as to whether they might end up killing some of their customers (see: fentanyl). The solution is to move all cannabis production to the legal market, where with appropriate product safety testing.
When it comes to cannabis, every argument eventually (and inevitably) leads to the overwhelming sensibleness of legalization as compared to all the other alternatives. Good policy matters. Legalization and effective regulation will lead to improved safety outcomes for consumers. Prohibition means more deaths. Hard to understand why for some people this is a difficult decision.
It’s been a busy year for the cannabis industry. Let’s hope 2020 is another year of progress.
Happy New Year!
Ed Harris is the CEO and co-founder of Pacific Growth Capital, which operates the Spark® Deal Room. Originally from New York, Ed now lives in Seattle with his family, where he enjoys the scenic beauty and slower pace of life that the Pacific Northwest offers. He does, however, forbid his children to root for any professional football team other than the NY Giants, and misses the pizza.