Canada's market share-leading cannabis company, Canopy Growth (NYSE:CGC), has long said it won't enter the U.S. market until there's a legal pathway to do so federally. The passage of the new U.S. Farm Bill in December gives it what it was waiting for. On Jan. 14, the company struck a deal with the state of New York to process hemp, a strain of cannabis that's low in the psychoactive chemical cannabinoid tetrahydrocannabinol (THC), to create hemp-based consumer-goods products.
The negative attitudes toward marijuana have been easing over the past decade, and that's led to approval of legal marijuana in 33 states, including 10 states that have passed laws creating adult-use, recreational marijuana markets.
The growing acceptance of marijuana has been fueled in part by stories and experiences stemming from the potential medical benefits of cannabidiol (CBD), a non-psychoactive cannabinoid found in hemp and other engineered cannabis strains.
In fact, all but four states have laws on the books that allow patients to possess CBD, either through CBD-specific legislation or broader medical marijuana laws.
Nevertheless, marijuana remains illegal federally in the U.S., and that's not only hamstrung companies interested in creating cannabis-based consumer-goods products, but it's also prevented companies operating within specific states from conducting business across state lines.
The potential for a federal crackdown on marijuana isn't the only reason large cannabis companies, including Canopy Growth, have steered away from doing business in America. Marijuana is now legal nationwide in Canada, but Canadian companies listed on Canadian stock exchanges are prohibited from conducting business in countries where that business is illegal at the federal level. Rather than risk delisting, Canopy Growth and its peers decided to play it safe and focus their attention on Canada and other global markets, such as Germany.
The U.S. Farm Bill signed into law in December doesn't change marijuana's legal status in Washington, D.C., but it does change the laws for hemp. The Industrial Hemp Farming Act of 2018 that's included in the Farm Bill legalizes hemp, defining it as an "agricultural commodity," so that hemp and hemp products will no longer be scheduled, controlled substances in the United States. This move paves the way for companies to increase hemp farming and processing, and importantly, it lets them create hemp-derived products, such as beverages and edibles.
A big splash
New York has given Canopy Growth a license to process and produce hemp, and in return, Canopy Growth will invest between $100 million and $150 million to help establish a "hemp industrial park" that can process "tons of hemp extract on an annual basis," according to Canopy Growth.
The revenue impact of Canopy Growth's move into New York will depend on how the FDA will regulate hemp-based products, says GreenWave Advisors' Matt Karnes. Nonetheless, Karnes thinks Canopy Growth could enjoy a big splash, given that "many mainstream product manufacturers seek to include a hemp-based CBD additive" in their products.
GreenWave Advisors estimates that medical and recreational marijuana sales in New York may total $2.7 billion within five years.
But the market potential could be much bigger if products made in the Empire State are able to flow easily throughout America. The Agricultural Marketing Resource Center estimates the total retail value of all hemp products in the U.S. was $820 million in 2017, and New Frontier Data pegs U.S. CBD sales at $367 million in 2017, up 40% from 2016.
Since beer, wine, and spirits giant Constellation Brands (NYSE:STZ) owns 38% of Canopy Growth and has extensive distribution and marketing know-how, this move into New York could be game-changing if barriers fall and CBD products manufactured in the New York are allowed to flow freely throughout the nation.
Canopy Growth says it's evaluating "a number of sites" in New York to build its first extraction and processing facility outside Canada and that it will update investors on its plans "within 100 days."
Canopy Growth will be an anchor business in the to-be-created industrial park, but it's unlikely to be the only tenant. The intent is for the site to serve as a hub for hemp innovation that includes multiple players. For that reason, investors ought to expect additional third parties to announce similar plans in New York during the coming year.
Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.