The North American marijuana industry has been practically unstoppable for years, and the estimates on future growth seemingly keep being pushed higher. According to cannabis research firm ArcView, legal North American sales totaled $6.9 billion last year. By 2021, they're expected to reach nearly $22 billion, albeit this takes into account recreational and medical cannabis sales in the U.S., Canada, and Mexico.
However, with an estimated $46.4 billion in black market sales conducted last year, the sky appears to be the limit for the legal pot industry. All it would take is a fairly regular stream of converts from the black market to legal channels to fuel annual growth of around 25% for possibly the next decade.
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Canada's recreational marijuana bill offers promise and peril
Within the North American market, Mexico recently signed into law a bill that legalizes medical cannabis, while residents in eight states in the U.S. have voted to legalize recreational pot just since 2012.
Canada may be looking to take an even more aggressive step with the legalization of recreational marijuana by July 1, 2018. If recent legislation introduced by Prime Minister Justin Trudeau passes through Parliament, Canada would become the first developed country, and only the second country in the world besides Uruguay, to legalize recreational marijuana. Trudeau's bill allows Canadians aged 21 and up to purchase recreational pot, and gives households the right to grow up to four cannabis plants. The Canadian government has estimated that legalizing recreational marijuana would result in $5 billion to $7 billion in added annual sales, so it may be an even greater catalyst for marijuana stocks at the moment than any state-level legalization in the United States.
But an approval of legal pot in Canada isn't a given. There are what you might call a number of issues with Trudeau's legislation. To begin with, there's reasonable concern about how driver impairment will be measured. Though breathalyzer developers have been hard at work on tetrahydrocannabinol (THC) detection devices (THC is the psychoactive component of cannabis), there are no official guidelines on what is defined as "impaired." Without these guidelines, it's impossible to consistently enforce the law.
Another notable issue is the home-grow option in Trudeau's bill. While any recreational legislation would be expected to include a home-grow option, conservatives in Canada argue that it gives minors easy access to marijuana. Conversely, removing the home-grow option could really irritate proponents.
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The strangest marijuana problem you'll ever see
Yet another issue has recently emerged -- and it's perhaps the strangest marijuana concern we've seen to date.
According to a recent Bloomberg report, some members of Canada's parliament may request to delay the launch of recreational marijuana in Canada (assuming passage) because there will likely be a supply shortage. Producers will not be able to grow enough pot to meet what's expected to be a massive surge in consumer demand.
What happens if there's more demand than supply, you ask? There are two primary concerns here. One is that we'd likely see a surge in prices for marijuana. Though businesses would be unlikely to complain as long as consumers buy their product, it would increase the price of legal cannabis to levels that could sway consumers back to the black market.
The secondary issue, which builds off of the first, is that black market operators would probably step in to (illegally) cover the shortage. The entire purpose of Trudeau's bill is to stomp out the black market entirely, and that requires adequate supply, reasonable pricing, and low tax rates to accomplish this. Without these dynamics, Canada's recreational pot bill could come up short of its goals.
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Recently, Health Canada, which is the regulatory body that oversees the health of the country's citizens, announced a number of changes to its medical marijuana program. Some of the most notable changes included allowing more producers to be licensed (there are only 44 right now), as well as giving those licensed producers permission to safely and securely fill up their vaults with cannabis. Initially it looked as if these changes were being made to accommodate roughly 10% monthly growth in the number of medical marijuana patients, but it now appears that these changes may have more to do with preparations for a possible recreational legalization.
Canadian pot stocks could be taken for a wild ride
You're probably wondering what this means for Canadian marijuana stocks. My opinion is that we're liable to see a lot of volatility.
Canada's quartet of investable marijuana stocks haven't been slouches in the expansion department, that's for sure. Canopy Growth Corp. (CGC -0.66%) has been growing primarily by acquisition. It recently completed the purchase of Mettrum Health, expanding its medical cannabis reach within Canada, and it also closed on 472,000 square feet of land, which includes its headquarters.
The other three -- Aphria (NASDAQOTH: APHQF), Aurora Cannabis (ACB -2.96%), and MedReleaf (NASDAQOTH: MEDFF) -- have been trying to do things organically. Aphria is working on a $100 million capital project known as Phase IV that'll boost capacity to 75,000 kilograms of cannabis annually. Aurora Cannabis is working on its 800,000-square-foot Aurora Sky facility, which will increase its grow capacity many times over. And finally, MedReleaf's Bradford, Ontario facility should nearly quadruple its grow capacity.
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The question is whether these producers will be ready to deal with an influx of demand. Aphria, Aurora Cannabis, and MedReleaf probably aren't going to be done developing their projects until sometime next year, which is cutting it close to the hoped-for legalization date of July 1, 2018.
At the same time, conservatives could wind up making life difficult for more progressive lawmakers in Canada's parliament. In other words, there still aren't any guarantees that Canada's recreational bill will pass due to the issues discussed above. And, even if it does pass, implementation could be delayed perhaps a few months to a year in order to get grow capacity up to spec.
Even though Canadian marijuana producers and retailers are arguably the most attractive opportunities in the legal marijuana spectrum because of their near-term profit potential, caution remains warranted at this point. Investors would still be best served sticking to the sidelines and waiting for official word from the Canadian government before they consider taking the plunge.
