Chances are that it would be difficult to find an industry growing faster and more consistently than the legal marijuana industry. In the U.S., according to estimates from Marijuana Business Daily’s newest report, “Marijuana Business Factbook 2017,” legal weed sales are expected to catapult higher by 45% in 2018, likely as a result of California opening its doors to recreational pot sales. By 2021, the U.S. cannabis market is expected to be generating $17 billion in annual sales, a roughly 300% increase from what it was producing in 2016.
It’s not hard to understand why marijuana has become such a hot commodity in the U.S., either. A number of recent surveys have all led to the same conclusion: The American public wants pot legalized. Nearly two-thirds of respondents in Gallup’s October 2017 poll favored the idea of legalizing cannabis nationally, with 94% of respondents in an August 2017 survey from the independent Quinnipiac University favoring the legalization of medical cannabis. Presumably, as these support figures move higher, so will legal cannabis sales — and the pressure put on lawmakers on Capitol Hill to change marijuana’s scheduling.
The federal government digs in its heels on pot
As a reminder, schedule I substances are wholly illegal, considered to have a high potential for abuse, and have no recognized medical benefits. This places marijuana on the same footing as LSD and heroin. But in addition to marijuana’s unfavorable scheduling, there are a number of adverse impacts on businesses operating in the weed industry.
For instance, medical cannabis companies are buried in red tape. With just a single federally approved grow facility in Mississippi, getting access to medical cannabis to run benefit-versus-risk trials is quite the chore. Marijuana stocks and companies also have very limited access to basic banking services, and they’re facing extraordinarily high effective income-tax rates as a result of U.S. tax code 280E. This specific tax code disallows businesses that sell federally illegal substances from taking normal corporate income-tax deductions.
Put plainly, the chance of effecting a scheduling change in Washington is practically nonexistent under the current administration, and Attorney General Jeff Sessions is primarily responsible for this marijuana quagmire.
Jeff Sessions declares war on the marijuana industry
It’s no secret that Jeff Sessions is an ardent opponent of the marijuana movement. He’s been quoted as saying that “good people don’t smoke marijuana,” and gave a speech last year to his fellow attorney generals where, to summarize, he suggested that medical cannabis isn’t a safe, or appropriate, replacement for opioids. But in 2017, Sessions was all bark and no bite. That changed in a big way earlier this month.
On Jan. 4, 2018, Sessions released a one-page memo announcing that the Department of Justice (DOJ) would be rescinding the Cole memo, which was named after former Deputy Attorney General James Cole, who served under President Obama. The Cole memo outlined a loose set of “rules” that states legalizing marijuana had to follow in order to keep the federal government off their backs, so to speak. This included keeping cannabis away from adolescents, maintaining safety on the roadways by dealing harshly with drivers who operated a vehicle under the influence of marijuana, and ensuring that cannabis grown within a state stayed in that state.
The move wasn’t a complete surprise, considering that Sessions’ right-hand man at the DOJ, Deputy Attorney General Rod Rosenstein, had announced over the summer that the DOJ was reviewing the scope of the Cole memo and its validity. The rescinding of this memo by Sessions signals the belief that the Cole memo overstepped its legal bounds.
More importantly, the move by Sessions also opens the door for possible legal action against marijuana businesses operating in states that have legalized it in some capacity. Though the Rohrabacher-Farr Amendment (also known as the Rohrabacher-Blumenauer Amendment) disallows the DOJ from using federal dollars to prosecute medical marijuana businesses, rescinding the Cole memo effectively gives state-level prosecutors the right to bring charges against marijuana businesses, when deemed appropriate.
Sessions’ war on weed may be just getting started
Many folks viewed Sessions’ actions earlier this month as a speed bump for the U.S. cannabis industry, but not a death blow. In other words, the possibility of legal action doesn’t necessarily mean we will see legal action. After all, those attorney generals who share Sessions’ views tend to be from states that haven’t legalized weed in any capacity. However, Sessions appears to be just getting started in his war on weed.
For those who may not recall, in May 2017, Sessions sent a letter to a few of his congressional colleagues requesting that they repeal the Rohrabacher-Farr Amendment. Doing so would give the DOJ the ability to go after medical cannabis businesses. Though his request gained no traction, it set a clear precedent that Sessions would do whatever he could to slow, or halt, the expansion of legal marijuana in the United States.
Things got particularly interesting in September when the House Rules Committee blocked a vote on including the Rohrabacher-Blumenauer Amendment in the federal spending bill that was being discussed at the time. This amendment, which disallows the DOJ from using federal dollars to go after medical weed businesses, has to be included and approved in each and every annual federal spending bill. If it’s left out, Sessions and the DOJ would be free to go after medical cannabis businesses as they please.
If there’s a silver lining here, it’s that the amendment could still be included in the Senate’s federal spending proposal. Nonetheless, Sessions’ insistence that the Amendment be repealed, coupled with a House Rules Committee vote blockage, signals that this key protection of medical cannabis companies is under attack.
Sessions has put his foot down on medical cannabis research, too
Sessions also seems highly unlikely to expand medical marijuana research at the federal level in any capacity.
In August 2016, the Obama administration outlined a series of changes designed to allow researchers easier access to federally grown marijuana. The new system encouraged universities to apply for grow licenses with the federal government in an effort to establish a much-needed benefit-versus-risk profile for cannabis.
But as Forbes recently reported, the U.S. Drug Enforcement Agency requested that researchers grow 443,680 grams of cannabis in 2018, or just over 978 pounds. This actually represents a slight decline from what was grown for medical research in 2017, despite the Obama administration’s pledge to open doors for medical cannabis research. Despite 25 proposals from universities to grow medical marijuana for the federal government, the DOJ passed on them, allowing the University of Mississippi to remain the only approved grow facility in the United States. This is unlikely to change with Sessions heading the DOJ.
Also, we probably can assume that Sessions isn’t going to promote a more favorable tax rate, or easier access to basic banking services, for marijuana stocks, either.
Think Canada for the time being
With Sessions’ war on cannabis likely to be a multi-year drawn-out affair, my suggestion, should you want to invest in the high-growth marijuana market, or if you already own marijuana stocks, is to stick with our neighbors to the north.
Canada legalized medical marijuana all the way back in 2001, and quite a few of the country’s bigger players have already been producing marginal profits solely on account of medical weed sales. Aphria, for instance, has produced two consecutive full-year profits. Despite spending more than $100 million on a four-phase capacity-expansion project, management has made profitability a priority, which isn’t always the case with its peers.
Even more importantly, Canada looks to be on the verge of legalizing recreational marijuana by July 2018. Prime Minister Justin Trudeau introduced legislation in April 2017 to make recreational sales legal by July 1, 2018, and a number of hurdles have already been dealt with. For example, the federal government and provinces have agreed on a two-year tax-sharing deal, and the federal government has proposed a tax rate on legal cannabis that’ll be lower than that of alcohol in Canada. In other words, recreational weed should be highly price competitive with black-market pot in Canada, pushing consumers into legal channels.
If you’re an investor, the smartest thing you can do right now is ignore the potential of the U.S. market, and focus on the more favorable Canadian market.
