Momentum to legalize marijuana throughout North America has taken a big step forward in the past month. Michigan become the tenth state to legalize recreational marijuana use on November 6, Canada's legal recreational use market opened for business on October 17, and now Mexico appears poised to pass pro-pot legislation following key court decisions and the introduction of a marijuana legalization bill last week. Here's why Mexico is on track to be the next country to approve of recreational marijuana and what it would mean to cannabis companies if prohibition south of the border ends.
What's the story?
Over the summer, leftist-party candidate Manuel Lopez Obrador secured Mexico's presidency on a platform that included rethinking the country's approach to fighting its war on drugs.
The election of Obrador and his supporters in both houses of Mexico's Congress sets the stage for a speedy review of pro-marijuana legislation once the new government is in place in December, especially following recent Supreme Court decisions in the country that effectively toss aside Mexico's former policy of prohibition.
In Mexico, five rulings establish jurisprudence, and on October 31, decisions in a fourth and fifth case found that an individual's choice to consume marijuana trumps potential risks associated with it. As a result, the rulings overturned Mexico's ban on recreational use.
In response, Senator Olga Sanchez Cordero introduced a bill in the Senate last week that would create a new system that would allow marijuana to be grown, consumed, and regulated.
The bill introduced by Cordero, who is being tapped by Obrador for the job of interior minister once he takes office, would allow the commercial production, sale, and consumption of marijuana for medicinal and recreational use.
The market opportunity
The marijuana market opportunity in Mexico isn't as big as it is in Canada or the United States, but it's still significant.
If the bill is passed as proposed, registered individuals will be allowed to grow up to 20 plants a year for private use, smoking in public will be OK, and a yet-to-be-created government institution would regulate a commercial marketplace for it.
It's estimated that about 7 million Mexicans have smoked pot at least once in their lifetime, and while estimates of the market size vary, the marijuana market in Mexico could be worth up to $2 billion per year.
Stuck in the middle
In Canada, Deloitte thinks recreational marijuana sales could exceed 4 billion Canadian dollars as early as 2019, and that means between it and Mexico, legal cannabis companies could soon be about to pocket up to $6 billion or more in marijuana revenue.
The real prize, though, is the United States, where the marijuana market remains hamstrung by onerous regulations and the fact that marijuana remains a schedule 1 controlled substance federally, despite 33 states passing laws allowing its use medically, and 10 states passing adult-use laws.
The U.S. market is undeniably the most important market for cannabis companies because of its sheer size and wealth. It's estimated that the U.S. market is valued at about $50 billion annually, including illegal sales.
In states that have passed pro-pot legislation, a significant amount of revenue has moved out of the shadows, providing a lot of tax revenue in the process. For instance, sales in Colorado, which was one of the first states to approve recreational use, were $1.5 billion last year and as a result, the state pocketed over $200 million in tax revenue alone in 2017.
The fragmented U.S. market means the largest cannabis companies are operating in Canada, and those companies, including Aurora Cannabis, are in a perfect position to use their experiences to profit from marijuana's legalization in Mexico and elsewhere.
Mexico hasn't voted on its pro-pot legislation yet, but the leftist party hopes to put something on the president's desk soon. If so, then I suspect it won't be too long before big cannabis companies, including Aurora, try to figure out if they can use their expertise to profit from pot in Mexico.
Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.