More specifically, the debate has resulted in a division into two camps of cannabis companies (and cannabis investors). For simplicity, let’s call these two camps the “Canada Camp” and the “California Camp”. This reflects the fact that as a single state, California represents an even larger population base than all of Canada.
Both sides have had strong points they could make in support of their position.
The Canada Camp
- The world’s largest fully legalized national market
- National legalization provides a better foundation for international expansion
- Access to public listings on exchanges provides superior ability to raise capital
- Less-complicated legal/regulatory structure is more conducive to efficiency and scale
The California Camp
- An even larger single market (39.8 million to 37.5 million)
- A more mature cannabis market (medicinal cannabis first legalized in 1996)
- More relaxed regulations on cannabis products
- Part of the gigantic overall U.S. market (roughly 9 times as large as Canada)
Canada has represented the simple way for investors to play the emerging opportunity in legalized cannabis. This has been true ever since (now) Prime Minister Justin Trudeau vowed to legalize cannabis if elected.
The United States, overall, has always represented the greater long-term opportunity because of its size. California, as the most populous state (and a fully legal market) has represented the biggest opportunity within the U.S.
Cannabis investors in both Camps have now been able to compare the merits of California vs. Canada as cannabis opportunities.
Without question, the governments in both of these jurisdictions earn at best passing grades in their efforts(?) to complete the transition from black market cannabis to a fully legalized market.
An estimate from earlier this year predicted that 72% of recreational cannabis revenues in Canada in 2019 would still go to the black market. In California, 60% of all cannabis revenues in 2018 went to the cannabis black market – in that state’s first year of full legalization.
Canada’s provinces have a mixed record in facilitating legalized cannabis. Ontario, in particular, has done an appalling job of licensing cannabis stores – with a commensurate affect on revenues. Only now are consumers beginning to see reasonable retail access.
California’s counties have an even more ‘mixed’ record in opening up cannabis commerce. Most counties have at least partial Prohibition still in place and (as of March 2018), only about 10% allowed unrestricted cannabis commerce.
Canada is about to commence Phase 2 of legalization: allowing a full spectrum of cannabis consumer products, including concentrates, edibles and infused beverages. This will increase the consumer base by roughly 50%.
But critics have pointed to some overly restrictive rules on Phase 2 cannabis products. These rules will hamper the growth of these markets and eat into margins.
In California, legal cannabis revenues actually went down in 2018 (by $500 million), the first year of full legalization. This is because the state completely overhauled its cannabis regulations. In addition to the painful transition for California’s cannabis industry, the new code has bogged down the industry in red tape.
California’s black market has continued to flourish. This has embarrassed the state government to such a degree that it recently launched a massive War-on-Drugs style law enforcement campaign against its cannabis black market.
Both Camps of investors have reasons to be disappointed as to how their preferred jurisdiction has actually performed in facilitating legalized cannabis. These failures have taken a heavy toll on marijuana stock valuations in both the U.S. and Canada.
This begs the question: which jurisdiction would appear to be the better bet moving forward?
Our answer is Canada, with a caveat.
Despite a more-timid regulatory approach federally (and initial reluctance from many provinces), legal cannabis revenues are now on a strong upward trajectory in Canada. Retail sales have been growing at a double-digit pace since April (as of the most recent numbers from July).
Overall, total cannabis revenues in Canada are on track to more than triple over the first year of full legalization. As noted, Phase 2 is expected to add roughly 50% more consumers for legal cannabis products. These new products are due to hit store shelves by mid-December.
This translates into sustained revenue growth through (at least) 2020.
The picture for California is much more uncertain. Arcview Research is predicting legal cannabis revenues growing to $3.1 billion in 2019. But that barely eclipses the $3.0 billion in revenues in 2017.
While all of Canada’s provinces are at least gradually moving forward on legalization, the same cannot be said for California’s counties. Some local governments remain opposed to legalizing cannabis commerce within their boundaries – the product of old prejudices and phobias.
This means that Canadian-based cannabis companies will enjoy a much greater degree of certainty over the short to medium term. Regulatory certainty and revenue-growth certainty.
That said, the regulatory uncertainty in the U.S. translates into the potential for a number of political wildcards. These could greatly improve prospects for U.S.-based companies if (when) they become a reality.
The SAFE banking bill is now in front of the Senate. Prospects for passage are bleak due to Republican opposition – but passage is possible.
Congress is continuing to hold hearings on full legalization of cannabis. However, the chance of anything happening here before the 2020 election is perhaps even slimmer.
The FDA has promised new regulations at the national level to facilitate CBD commerce, at the very least with respect to hemp-derived CBD products. Absent such regulations, this continues to be a gray market in the U.S. – with several companies having recently incurred the wrath of the FDA.
Eventually, all of these regulatory changes will become a reality in the United States (and the vital California market). Until then, it’s “advantage Canada”.