The legal marijuana industry is budding before our eyes, and, rightly, Canada is getting a lot of attention. That's because Canada did something that no other industrialized country in the world has ever done before: It legalized recreational marijuana in mid-October 2018. As the first developed country to green-light adult-use sales, Wall Street expects sales to easily top $5 billion a year by 2022.
Meanwhile, the United States' cannabis market remains a considerably larger opportunity than Canada, save for one not-so-trivial factor: Marijuana remains entirely illegal at the federal level. While there's always the possibility that lawmakers could change their tune on cannabis, this seems highly unlikely as long as Republicans control at least one of the two houses of Congress.
These Canadian marijuana stocks want in on the U.S.'s budding hemp industry
However, marijuana's pain could actually turn out to be the U.S. hemp industry's gain. With the passage of the farm bill in December, industrial hemp production, as well as hemp-derived derivative products (primarily cannabidiol (CBD), the nonpsychoactive cannabinoid best known for its perceived medical benefits), became legal across the country. Although the U.S. Food and Drug Administration has put its foot down on CBD as an additive to food and beverages up to this point, it's nonetheless left a wide swath of the CBD market for topicals, creams, and oils wide open for opportunistic companies.
But what you may not realize is that this hemp opportunity extends beyond our borders. Canadian pot growers view the U.S. marijuana market as the ultimate prize. Yet, this is a prize that cannot be attained at the moment, due to pot's Schedule I classification. Nonetheless, developing a legal presence in the U.S. hemp market allows Canadian marijuana stocks the opportunity to get supply chain infrastructure in place on U.S. soil that could be used to gain a competitive advantage if and when the federal government changes its tune on marijuana.
Additionally, by developing a hemp presence in the United States, Canadian pot stocks have an opportunity to develop partnerships that could come in handy should marijuana be rescheduling or de-scheduled at the federal level.
To date, four Canadian pot stocks have announced their intention of making the legal leap into the U.S. hemp market.
The most prominent Canadian marijuana stock entering the U.S. hemp market is Canopy Growth (CGC -0.30%). The largest marijuana stock in the world by market cap, and Canada's projected No. 2 pot grower by peak annual output, has made two notable moves into the American hemp industry.
First, in November, Canopy announced a cash-and-stock deal to acquire Colorado-based ebbu for what was, at the time, around $330 million. Ebbu conducts research into cannabinoids and has filed more than 40 patents representing over 1,500 inventions. More specifically, ebbu's research and patents can be applied to genetic-breeding programs (including growing hemp) and, in the future, CBD-infused beverages, depending on the Food and Drug Administration's opinion of CBD as an additive to food and beverages.
Canopy Growth also snagged a hemp production and processing license in New York State in mid-January. The company has announced plans to spend $100 million to $150 million to construct a processing facility capable of extracting CBD from U.S.-grown hemp plants.
If and when the U.S. federal government ever does legalize marijuana, Canopy Growth will have a leg up on most of its competitors in terms of existing infrastructure on U.S. soil.
As recently as March, Wall Street and investors were of the opinion that Tilray (TLRY) was laser-focused on becoming one of the largest marijuana producers in Canada, and would export a relatively sizable percentage of its cannabis and derivative products to foreign markets. After all, its June 2018 prospectus cited almost 3.6 million square feet of max growing space between Canadian soil and its Portugal facility.
However, things changed in a big way for Tilray in March when CEO Brendan Kennedy announced that the U.S. and Europe would be the company's new investment targets. This made sense given that Tilray closed on a $317 million cash-and-stock deal to acquire Manitoba Harvest in late February.
Manitoba Harvest is the world's largest hemp food manufacturer, with products in more than 16,000 stores throughout the United States and Canada. This includes recognizable branding such as Hemp Bliss milk, Hemp Hearts, and Hemp Yeah granola bars and protein powder. But by this coming summer, Tilray's newest subsidiary will roll out a line of CBD-infused hemp extracts for the U.S. market.
The beauty of Tilray's acquisition is Manitoba Harvest's advanced distribution network, which will hasten its entrance into U.S. retail doors. If and when marijuana is ever legalized in the U.S., this network could prove crucial to giving Tilray an edge over many of its Canadian competitors.
Village Farms International
Although there's a lot of buzz surrounding Village Farms International's (VFF 1.20%) cannabis-growing joint venture with Emerald Health Therapeutics known as Pure Sunfarms, it's actually the company's hemp operations that could make a lot more noise in the months and years to come.
To begin with, both houses of Texas's legislature have passed HB 1325, a bill designed to legalize the industrial production of hemp containing less than 0.3% tetrahydrocannabinol (THC), the psychoactive cannabinoid that gets users high. All that's needed as of this past Thursday is for Republican Gov. Greg Abbott to sign HB 1325 into law, which is fully expected to happen. Once the bill becomes law, rules will need to be developed governing hemp production in Texas, including the process by which production and processing licenses are obtained.
In expectation of HB 1325's signing, British Columbia-based Village Farms has begun converting 635,000 square feet of its 1.3-million-square-foot Permian Basin facility in West Texas to accommodate the production and processing of hemp. Overall, Village Farms has 5.7 million square feet of vegetable-growing facilities in West Texas that may eventually be fully converted to hemp production.
This is a company that's also entered into two hemp-based joint ventures in the United States that'll lead to an estimated 920 acres of hemp being planted in 2019. Its newest joint venture, Arkansas Valley Green and Gold Hemp, expects to scale to as much as 500 acres in 2020 from 120 acres of hemp planted in 2019. Suffice it to say, U.S. hemp will play a big role in Village Farms' growth strategy.
The fourth and final Canadian pot stock making the move into the U.S. hemp market is Quebec-based HEXO (HEXO).
Last week, HEXO announced the hiring of Michael Monahan as its new CFO -- Monahan has more than 20 years of finance and operations experience -- and the formation of HEXO USA in Delaware. HEXO USA is a jumping-off point for the company to take advantage of the farm bill's passage to process industrial-grown hemp for its rich CBD content. Of course, with this subsidiary being formed just days ago, HEXO has yet to announce any concrete partnerships for production or distribution in the United States.
But in Canada, HEXO has the 579,000-square-foot Belleville, Ontario processing and research and development facility that's primarily devoted to expanding its product portfolio beyond dried flower. The sheer size of Belleville, along with HEXO's numerous partnerships and joint ventures, including with alcohol giant Molson Coors Brewing, suggests that it shouldn't have much of an issue establishing a presence in the U.S. as a hemp processing-services provider.
Long story short, don't be surprised if more Canadian pot producers make the move into the U.S. hemp industry in anticipation of an eventual change in U.S. cannabis policy at the federal level.