How Marijuana is Poised for a North American Takeover

How Marijuana is Poised for a North American Takeover
How Marijuana is Poised for a North American Takeover

The United States is feeling some North American peer pressure to get in on the cannabis boom.
Producers in Canada, where marijuana is legal for medicinal and recreational uses, are already planning for a future where pot is a globally traded commodity, and some are setting themselves up to profit if it is legalized in the U.S.

In Mexico cannabis is legal for medicinal purposes, and the landscape could shift further: The country's new president, whose party controls a majority in the national legislature, sent a proposal to the Mexican Senate late last year to legalize recreational use.

In Washington, support for liberalizing marijuana laws is growing in Congress, many of the 2020 Democratic contenders for the White House back the push, and President Donald Trump is even said to be willing to sign a measure to give states the power to decide for themselves whether to make weed legal.

But despite the budding momentum, bills to legalize marijuana or at least decriminalize it aren't expected to pass before the 2020 presidential election. Amid the changing tides to the north and to the south of the U.S., that political reality threatens to stunt the growth of the domestic market and hamper the potential for companies and states to cash in on a global trade worth hundreds of billions of dollars.

For some in the Canadian industry, congressional inaction isn't necessarily bad news.
“In a selfish way, we’re pretty happy that it hasn’t passed — there's no federal rule in the U.S. right now — because Canadian companies are setting up all over the world,” said Khurram Malik, CEO of Canadian cannabis producer Biome.

Yet legalization on the federal level in America could open lucrative trade corridors to Canada and beyond the North American market.

While the U.S. market for cannabis was $10.4 billion last year and is projected to rise, total global market potential for marijuana is $344 billion, said Giadha Aguirre de Carcer, CEO of New Frontier Data, an analytics firm that focuses on the cannabis industry.

Pot is legal in some form in 33 U.S. states and in Washington, D.C., but marijuana grown legally can't cross state lines as long as federal law continues to consider it a prohibited drug with high abuse potential and no medicinal characteristics. And financial institutions are barred from doing business with marijuana producers and other companies in the industry because cannabis is still considered a prohibited substance on the federal level.
A legalized environment in the U.S. that would allow states to trade bud across state lines also would give operations with ample supply and quality product a chance to increase profits by selling to states with legal programs but limited local production.

Rep. Earl Blumenauer, the Oregon Democrat who has led the push for Congress to rewrite federal drug laws, has trade on his mind.

“I’m bringing some people together to talk this through, about the best way to do it,” he said on his annual call on the eve of April 20, a holiday of sorts for cannabis users. “There are also some treaty implications. … It’s something that needs to be unpacked.”

Blumenauer chairs the House Ways and Means Committee's trade panel, a platform he says he can use to further the marijuana legalization effort.

“We’re kind of busy right now in a variety of areas, but it’s something that I plan on exploring with the role that I have dealing with international trade on Ways and Means,” he added.

The administration of Mexican President Andrés Manuel López Obrador has expressed an interest in legalizing marijuana as a way to help cut down on organized crime and violence in the country.

“Mexico needs to urgently reform the way it deals with the use and consumption of drugs," Mexican Interior Secretary Olga Sánchez Cordero said in a Mexican Senate forum on cannabis regulation last month. "The prohibitionist policy that’s been followed in the past, without a doubt, has increased violence in our country.”

The bill López Obrador’s party submitted last year would legalize the growth, sale and consumption of marijuana for recreational use. It has not yet been debated in Mexico’s Senate or Chamber of Deputies, but that could change when lawmakers return from recess in September.

FOMO and a long way to go

The U.S. could become the missing link in North American legalization efforts, but that hasn't stopped marijuana companies from making major plays to position themselves for a future continental takeover.
Eric Berlin, a leader in Dentons' U.S. cannabis practice, said companies are looking to joint ventures, acquisitions or licensing deals to expand their reach and gain the resources and capital necessary to compete on the global level.

“Folks are absolutely looking globally, and the folks who are knowledgeable about this industry view it as a global play," he said.

The most prominent example is Canadian cannabis giant Canopy Growth's acquisition of U.S.-based Acreage Holdings, a deal that is contingent upon marijuana sales becoming legal on the federal level.

Acreage Holdings CEO Kevin Murphy said last month his company expects sales to be permissible within 12 to 18 months, an opinion that he said was based on some of his company's board members, "who are cued into Washington."

Former Republican House Speaker John Boehner, once an opponent of legalization, now sits on Acreage's board, highlighting the potential for the cannabis industry's economic promise to help shift people's views.

Industry insiders say the U.S. economy stands to miss out as American cannabis businesses looking to go public flock to the Canadian Securities Exchange and gain access to financial services that are nearly impossible to come by stateside. This is done by engaging in reverse takeovers of Canadian shell companies, a move that enables the entity to be listed on one of the country's stock exchanges.

Canadian bankers “have an opportunity before legalization to identify all the best financial opportunities," said Rezwan Khan, vice president of corporate global development at DNA Genetics, a marijuana seed company, and a board member of the Global Alliance for Cannabis Commerce, a new trade group.

“By the time the United States kind of realizes what’s happening and wants to participate, they’re going to have lost all the top companies that really couldn’t wait … and list on NASDAQ because there’s really no telling when [legalization is] going to happen — and the time is now,” Khan said.

Many insiders say the pot policy effort with the greatest chance of passage in the current Congress is H.R. 1595 (116), which would allow banks to serve marijuana businesses without incurring federal penalties. While the bill is expected to get a vote on the House floor this year, its future in the Senate is murky.

Even if interstate and international cannabis commerce were legal, exporting to other states or countries might be too risky a proposition for some businesses, depending on their location. For instance, businesses that grow marijuana hydroponically in places like Colorado could face stiff competition from producers in countries like Mexico or Colombia, where factors like a more favorable climate and lower labor and production costs could provide an advantage.

And such competitive scenarios could spook states that have not legalized medical or recreational cannabis from getting into the business, if there’s a question of whether they could reap the tax benefits of a state-sanctioned marijuana program.

“I think that we’re still doing what we’re supposed to within our confinements,” said Chanda Macias, CEO of Women Grow.

As an example of problems that legalization could create, Macias cited how a state like Oregon, which has a medical marijuana surplus, being able to sell product to states where medicinal use is prohibited, like North Carolina, could potentially preclude local cannabis industries from emerging.

“For me, I say, ‘Let’s stay here where we are, deal with our internal issues,’” she said at the National Cannabis Policy Summit held recently in Washington. “But when the time comes, the U.S. will emerge as the biggest provider of cannabis to the world. But it’s just not time yet.”

Sabrina Rodriguez contributed to this report.
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