Global Cannabis Index Down 5% This Week While Canada Treads Water
Global marijuana stocks were down this week due to a lack of positive catalysts and some concerns that there may be too much supply coming out of Canada for the market to absorb. Cronos group, a Canadian producer that listed on the NASDAQ stock market February 27 has now almost completed a round trip and is up only 3% since the date of listing.
Marijuana stocks in Canada have been treading water since February and will likely continue to do so without a positive catalyst out of the government moving legalization closer to a reality.
There has also been a month long lull in international export or production deal announcements, which could be a short-term catalyst for the market if they resume.
The more we hear about new greenhouses being built outside of Canada, the risks increase that excess Canadian supply won’t be able to find a home abroad, and will stay in the country, depressing retail prices.
WEEKLY PERFORMANCE OF THE TOP 75 MARIJUANA COMPANIES
California Planning to Cut Taxes so Legal Marijuana Can Compete With the Black Market
A group of California lawmakers proposed to cut certain marijuana taxes for a three-year period after growers complained that taxes were so high, they aren’t able to compete with the large, efficient black market in the state.
California growers pay a 15% excise tax, a $148 per pound cultivation tax, plus sales and local taxes that can take the total tax rate up to 45%. Lawmakers plan to cut the excise tax to 11% from 15% and remove the cultivation fee, which could cut taxes by about 20%. This still leaves legal marijuana at a 20-25% premium equating to about $2 more per gram.
Implications for Canada – Canada also has a well-established black market that will fight for market share with the emerging legal producers. Canada is proposing a $1/gram excise tax, which is a terrible idea because as prices fall the tax rate goes up making legal supply even more uncompetitive with the black market. Slap a 10%-15% sales tax on top and Canada will likely have a tax rate of 25%-30%. Watch California closely to see if a 25% tax rate is low enough to take market share from the black market.
Canadian Producer CannTrust Signs JV Deal to Export to Denmark
CannTrust will own 25% of Stenocare, a Danish company that has already received its license to grow, produce, import and sell marijuana in Denmark. Stenocare is in the process of building a greenhouse domestically to supply Denmark and eventually Europe.
Implications for Canada – More and more deals are being signed to build additional capacity outside of Canada. These deals will contribute revenue growth for the legal producers, which is good, however the more supply the rest of the world produces the less it needs from Canada. Canada could be oversupplied as much as 1,000,000 kg by 2021 which will crush retail and wholesale prices domestically unless the excess can be exported.
Israeli Legal Producer Globus Pharma to Build 20,000 kg of Capacity in Israel
Globus is a licensed producer in Israel and has teamed up with Yamko, a company that specialized in building large-scale agriculture infrastructure. The 20,000 kg greenhouse will be constructed in 6 months and Globus has already signed deals to export 8,000 kg to Germany and Canada even though the government has not sanctioned marijuana exports yet.
Implications for Canada – Legal demand in Israel shouldn’t exceed 15,000 kg in the next 3 years so the country is emerging as a potential export powerhouse. The government is still dragging their feet on whether to allow marijuana exports, but a decision will be made in the next 6 months. Established corporations are jumping into the marijuana growing game in Israel as if exports are already legal, increasing the risk that demand for Canadian supply in Europe and elsewhere may be partially met by other countries.
CBD Creams are Gaining Market Share in the Beauty Industry
Even though hemp based creams have been around for years, the wave of marijuana legalization is making CBD products cool again. More professional branding along with celebrity endorsement are helping increase demand for assorted CBD-infused products. This quote from Elle Magazine sums it up best:
Implications for Canada – Cannabis-infused products have very attractive margins at $50-$100/gram for the active ingredient (CBD), compared to $30/gram for the active ingredient (CBD or THC) in raw marijuana flower. The beauty industry could be a significant source of demand for legal marijuana raw material. However CBD is no different than other anti-inflammatory ingredients like ginger, according to dermatologists, increasing the risk that the spike in demand is only a fad.
READ THE MARIJUANA EXPORT MIRAGE FOR AN IN DEPTH REPORT ON THE STATE OF DEMAND FOR MEDICAL MARIJUANA OUTSIDE OF CANADA