Attitudes are changing on cannabis, and as more states legalize marijuana, whether for medical or recreational purposes, it's clear that it's not a matter of if marijuana will be legalized in the U.S., only when. And while COVID-19 may stall the progress that individual states have been making on legalizing pot, the pandemic could help push forward the prospect of legalizing pot federally. Here's why legalization could take place sooner than expected:
A new industry would accelerate the economy's recovery
According to data as of May 14, as many as 36.5 million people in the U.S. have applied for unemployment benefits over the past two months. The COVID-19 pandemic has hit many industries hard and while many employees will go back to work, some jobs will be lost forever. And the longer it takes for people to find jobs again, the longer it will take for the economy to get back to where it was before the pandemic hit. That's where legalizing marijuana could give the economy a shot in the arm to get it going again.
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Legalizing pot would create many new jobs for Americans and could help turn things around for the country. In a recent interview with CNBC, Cresco Labs (CRLBF -1.00%) CEO Charlie Bachtell said, "cannabis has to be part of that discussion" when talking about bringing jobs back. And there's good reason for including cannabis in those discussions: The growth potential would be massive.
According to New Frontier Data's estimates from September 2019, the legal pot market in the U.S. could grow to be worth $29.7 billion by 2025. That's nearly three times the $10.3 billion the market was worth in 2018. That growth factors in legal sales from the existing markets that have already legalized pot and it doesn't take into account the possibility of federal legalization. If government officials were to legalize marijuana nationwide, it would increase those estimates significantly. Currently, only 11 states have legalized marijuana for recreational use and there are more than 30 that permit cannabis for medical purposes.
A push for marijuana reform amid the pandemic
A big challenge for the cannabis industry is that many companies have to operate on a cash basis because pot is federally illegal and big banks avoid the industry like the plague out of fear of repercussions from the government. That created a need for legislation such as the Secure and Fair Enforcement (SAFE) Banking Act which would make it easier for banks to do business with the cannabis industry without worrying about running afoul with regulators. However, there hasn't been much traction on the bill since the House passed it last year.
But in a recent coronavirus relief bill, the Health and Economic Recovery Omnibus Emergency Solutions Act, Democrats included the SAFE Banking Act. There's growing support to help the cannabis industry, which regulators have left out of relief programs thus far. In April, Democrats introduced a new bill, the Emergency Cannabis Small Business Health and Safety Act, which would seek to include cannabis companies on future bills and allow them access to relief programs related to COVID-19.
Marijuana is getting on the agenda, at least with Democrats. And as there's more pressure to help turn things around for the economy, Republicans may start to get on board as well.
What does this mean for cannabis investors?
Legalizing marijuana wouldn't just help the economy create jobs, it would instantly create many opportunities for marijuana stocks as well. Chicago-based Cresco Labs is a vertically integrated cannabis company with a presence in nine states across the U.S. On May 7, the company announced it had completed its expansion of a cultivation and manufacturing facility in Pennsylvania that would triple its growing capacity.
Unfortunately, the company is limited to selling whatever products it produces in Pennsylvania to the Pennsylvania market as it's not legal for marijuana to cross state lines. Federal legalization of marijuana would change that, and that could help a company like Cresco Labs, which has a strong presence with retail locations in Ohio, New York, Massachusetts, and Illinois, to manage its supply chain better. That could go a long way in improving the company's cost structure and making profitability more viable over the long term. In 2019, the company reported a net loss of $65.3 million on sales of $128.5 million.
For Cresco Labs and other cannabis companies, legalization would open up many more doors and opportunities. And while COVID-19 will likely make 2020 a difficult year for cannabis companies to survive, it could also help lead to federal legalization of marijuana. If it happens, the trade-off would be well worth it for the industry.
