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The Economics of Legal Marijuana Markets

In every North American marijuana market that has legalized, prices have always fallen shortly thereafter.

Investors have been lured towards the marijuana sector with the expectation that annual legal sales could grow to the level of the alcoholic beverage industry (10x growth), along with comparable levels of profitability.

The bulls have shunned any notion that marijuana should be viewed as an agricultural commodity, as that would imply significantly lower margins and lower valuation multiples on a very rich sector.

This is certainly a case where the investment ‘dream’ is far more intoxicating than the cold hard reality of legalization. In every North American marijuana market that has legalized, prices have always fallen shortly thereafter. In our latest infographic we examine one of the main reasons this is the case: excess supply, specifically from the black market and legal home grown.

The three main reasons why supply from the black market and legal home grown will continue to weigh down the marijuana industry are as follows:

  1. Legal producers are burdened by security, testing and packaging costs.
  2. Black market and home grown are tax free.
  3. Very strong returns on invested capital for the black market and home grown are a powerful incentive for increased supply.

The cost to produce legal outdoor home grown marijuana is on average 80% cheaper relative to the cost of marijuana produced by publicly traded licensed producers.

Exploring the ROI of Home Grown Marijuana

Our marijuana grow tool helps investors and ‘gardeners’ understand the return on investment (ROI) of growing DIY marijuana in every legal state and province in North America. Click the ‘GET STARTED’ button to explore the varying ROIs in each jurisdiction, adjust the variables (# of plants, outdoor/indoor, experience level and local cost) to assess economic break-evens.

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About Author

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Thomas George

Thomas has over 17 years of global institutional investment management experience. At TD Asset Management he was Director of Global Resources and lead Portfolio Manager for over $1 billion of global equities (resource and sustainability funds). Thomas is a CFA charterholder and has been featured on Fox Business, CNBC, Bloomberg, CTV, CBC and the National Post.

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