The next decade should really be something special for the global cannabis industry, which tripled sales over the past four years to $10.9 billion. Various Wall Street forecasts have opined that worldwide weed sales could grow between fivefold and 18-fold by the time 2030 rolls around.
At the heart of this growth trend is the United States. Again, while estimates vary, each and every analyst on Wall Street believes that the U.S. will generate more in annual marijuana sales than any other country. In fact, most estimates peg the U.S. at between a third and a half of global cannabis revenue in roughly a decade's time.
Marijuana is federally illicit in the U.S., but that hasn't stopped state-level legalizations
And yet, marijuana firmly remains an illicit substance at the federal level. Despite an all-time record 66% of Americans favoring national legalization as of Gallup's Oct. 2019 survey, lawmakers have little incentive to push forward cannabis reforms.
Why? Well, one reason is that it would cost the federal government an estimated $5 billion in lost revenue over the next decade. That's because U.S. marijuana businesses are subject to U.S. tax code 280E, which disallows companies that deal with Schedule I substances from taking normal corporate income tax deductions, save for cost of goods sold. This allows the federal government to hit pot companies with exorbitant tax rates that would be lost if marijuana were suddenly legalized at the federal level.
It's also fair to say that Republicans still have a more adverse view of cannabis than Democrats or Independents, and the GOP currently has a majority in the all-important upper house of Congress. Translation: We're not going to see cannabis legalized anytime soon in the United States.
However, this hasn't stopped individual states from giving the green light to recreational or medical marijuana. Since 1996, 33 states have passed medical marijuana laws, with 11 of these states also allowing the consumption and/or sale of adult-use marijuana.
Surprise! Michigan is launching recreational cannabis sales months earlier than expected
Right now, only a small number of these 11 recreationally legal states aren't selling cannabis, and the Wolverine State, Michigan, is one example. However, in a surprising move, that's about to change in a matter of eight days.
As reported by Marijuana Business Daily, Michigan is expediting a timeline that was expected to see sales commence by sometime in the spring of 2020 (likely March) to Dec. 1, 2019. The reason for pushing the timeline forward appears to be growing sales for Michigan's black market, as evidenced by the drop in registered medical marijuana patients from 297,515 in late 2018 to 276,253 as of Nov. 1, 2019.
Michigan's Marijuana Regulatory Agency (MRA) only began taking applications for recreational sales licenses on Nov. 1 but had already preapproved 46 of those applications as of Nov. 13. "We want to make sure we ramp down the illicit market... It's better to have product available through the regulated market than people going through the illicit market," said MRA spokesman David Harns.
Some of these preapproved applications may be existing licensed medical retailers that have already been vetted by the MRA, which would certainly explain the sped-up preapproval process. But it's pretty clear that the regulatory agency would like to get the infrastructure in place to reduce black-market sales, and rapidly approving legal adult-use weed retailers is a possible means to this end.
As a reminder, Michigan, whose residents voted to legalize recreational pot sales in Nov. 2018, is expected to be one of 13 states on track to sell more than $1 billion in cannabis by 2024. The State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics has the Wolverine State pegged for $1.48 billion in sales in 2024, which would rank it fifth, behind only New York, Florida, Colorado, and California.
Before you get too excited...
While it's a pleasantly surprising move on Michigan's part to kick-off recreational weed sales months before expectations, it's also important for consumers and investors to realize that there are going to be some serious speed bumps to contend with as things ramp up.
To begin with, Michigan is going to contend with the same issues that have plagued California and Colorado -- namely, municipalities have been given the right to decide whether or not to ban the sale of recreational pot in their cities. In Michigan, 1,393 cities, townships, and villages out of the state's 1,773 have denied recreational market sales.
This is similar to what's happened in California, where nearly 80% of the municipalities in the Golden State have declined physical dispensaries a presence. When the avenues to purchase legal recreational weed are diminished, the illicit market will rise.
There's also a strong likelihood of a dried cannabis flower shortage in Michigan with the early launch of recreational pot. Growers had been planning on a spring 2020 launch, so there's concern about how the early launch might impact flower availability for existing medical weed patients.
The end result is that major Michigan players, such as Curaleaf Holdings (CURLF -2.65%), shouldn't be too enthused about this upcoming launch. Curaleaf's pending acquisition of privately held multistate operator Grassroots is what will give it access to the Michigan market. Although Curaleaf should find long-term success in the Wolverine State, cities like Detroit failing to greenlight recreational cannabis sales (thus far) will make it extremely difficult for in-state operators to generate meaningful sales in the early going.
Michigan can be a cannabis success story, but it's a market that has a long maturation process to work through.