Please ensure Javascript is enabled for purposes of website accessibility

Mexico Moves Closer to Legalizing Cannabis, but 1 Issue Still Remains

By Sean Williams - Feb 15, 2020 at 8:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Our southerly neighbor must legalize marijuana by no later than April 30.

This is expected to be another history-making year for the rapidly growing global cannabis industry.

In 2018, we witnessed Canada become the first industrialized country in the modern era to greenlight recreational marijuana. This was followed in 2019 by Illinois becoming the first U.S. state to legalize the consumption and sale of adult-use weed entirely at the legislative level, as well as include an expungement clause for persons previously convicted of pot possession.

But this year holds something truly special in store. In 2020, we'll witness Mexico become the first country to legalize recreational marijuana based entirely on a ruling by its Supreme Court.

The Mexican flag overlaid atop a pile of cannabis leaves.

Image source: Getty Images.

Mexico must legalize adult-use cannabis by the end of April

While this legalization is likely to happen soon, there's still a pretty big issue that needs some ironing out. But before delving into the reason for the holdup, let me provide a little background on how Mexico even landed on the verge of legalization.

It all began in late October 2018, when Mexico's highest court ruled that an absolute ban on the recreational use and possession of marijuana was unconstitutional. This ruling happened to be the fifth such occasion over a period of roughly two years where Mexico's Supreme Court reached a similar verdict. Under Mexican law, when its highest court reaches a similar verdict five times, it becomes the set standard throughout the country. In effect, the Supreme Court legalized adult-use marijuana and tasked lawmakers in Mexico with creating the legal framework for a retail marketplace.

Following this ruling, the Mexican Supreme Court gave lawmakers one year to craft the appropriate legislation and implement it. However, lawmakers didn't really get into the weeds of discussing this framework until October 2019, leaving little time to spare or room for compromise. Ultimately, Mexico's lawmakers asked for a last-minute extension to the Supreme Court's deadline and received it (albeit on a one-time basis). Now, lawmakers are required to come up with the regulatory framework for a legal market environment by no later than the end of April.

Sounds pretty straightforward, right? Well, it's not as cut and dried as it would appear.

A farmer inspecting his outdoor-grown crop.

Image source: Getty Images.

Social equity remains a holdup during the negotiating process

This past week, Marijuana Moment reported that, according to a top senator in Mexico, Congress would vote on a bill to legalize cannabis this month. Although the exact nature of the bill hasn't been released, we were privy to an October 2019 proposal (prior to the Supreme Court's extension) that had relatively broad favorability on a number of points. 

For those who may recall, the October 2019 bill called for:

  • A legal age for consumption and purchase of 18 or older.
  • Consumption to occur in private.
  • Strict packaging regulations designed to deter adolescent usage.
  • Edibles and infused beverages to be off-limits for recreational users.
  • The creation of The Cannabis Institute to oversee the industry.

While not every lawmaker in Mexico necessarily wants to see cannabis legalized, the Supreme Court decision forces their hands. Among these provisions above, there was virtually no public pushback last year.

There's been disagreement in regard to social equity provisions contained in the October bill, and also in the proposal making its rounds now in Mexico's Congress. In particular, some lawmakers have called for low-income individuals, small farmers, indigenous peoples, and those most impacted by the drug war in Mexico to be first in line to receive licenses, rather than big businesses.

Considering the pushback against this provision in October, it's to be expected that lawmakers are, once again, disagreeing over this social equity provision in the new bill circulating in Congress. This makes it unlikely that Mexico will legalize marijuana in February, especially with Marijuana Moment noting that legislative leaders have yet to convene meetings on the new proposal as of yet. However, the clock is ticking, and the Supreme Court has made it clear that there's no extension to be granted this time around.

A cannabis leaf laid atop a one hundred dollar bill, with Ben Franklin's eyes poking out between the leaves.

Image source: Getty Images.

Mexico is unlikely to be a land of riches for marijuana stock investors

Although Mexico is forecast by the 2019 State of the Legal Cannabis Markets report to top $1 billion in annual sales by 2024, making it one of the highest revenue-generating marijuana markets in the world, it's unlikely to become a market of significance for investors. As noted, some lawmakers are attempting to implement a social equity provision to ensure that Mexico's adult-use industry is dominated by small businesses and local farmers. That's no good for investors in publicly traded marijuana stocks.

Making matters worse, if the new proposal were to mirror the October bill and limit access of edibles and infused beverages to medical patients, it would be a pretty significant blow to investors. Derivatives, such as edibles and infused beverages, sport considerably higher margins than dried cannabis flower. Over time, dried flower has demonstrated a propensity to be oversupplied and commoditized in a number of recreationally legal U.S. states. Thus, pot stock investors looking for their piece of the Mexican cannabis market would be banking on quantity, not quality.

Lastly, even if Mexico's lawmakers allow big businesses to get in on the green rush, there just aren't any intriguing options to take advantage of the Mexican cannabis market. Aurora Cannabis (ACB -8.05%) has a presence in the country through its ownership of Farmacias Magistrales, but the company isn't exactly on the best financial footing.

Aurora Cannabis recently announced a sweeping overhaul that called for significant cost cuts, including 500 layoffs, and a focus on foreign markets that would immediately generate revenue for the company. Given Aurora's potentially serious cash situation, it doesn't exactly have a lot to gain by chasing low-margin cannabis sales in Mexico when it becomes legal.

While recreational legalization should be no more than 10.5 weeks away in Mexico, it's not an event of significance for pot stock investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.37 (-8.05%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.