A Big Bounce on Friday Gives Marijuana Stocks a Much Needed Positive Week
News broke on Friday that the US Federal Government would not interfere with state regulation of legal marijuana, driving global marijuana stocks up between 6%-15% for the day and 13% for the week. This news allows Canadian LP’s to reenter the U.S. if they choose, a positive development, but we think the stock gains seen on Friday were an overreaction.
Using Canopy Growth as an example, the stock increased ~$2.00/sh which implies they will add an extra 60,000-80,000 kg of capacity in the U.S. This is 15% of additional growth for the company and would cost $120 million and take 2-3 years at a minimum for permitting and construction. These are some lofty expectations the market is setting based on an incrementally positive data point. The U.S is still hyper-competitive with 4,000 growers operating on the West Coast alone.
WEEKLY PERFORMANCE OF THE TOP 75 GLOBAL MARIJUANA COMPANIES
Alberta Updates Rules on Marijuana Retailing and Branding
Alberta is the only large province to allow private stores to sell marijuana to the public so government rules on marketing and branding will be even more important for Alberta retailers. The government updated their current framework to prohibit the following:
What This Means for Legal Producers
Marketing and branding is being restricted even further by the province which will make it that much more difficult for producers to differentiate themselves from one another. A legal producer is already prohibited from highlighting their own products if they own retail stores, and these new restrictions won’t allow any health claims to be made about marijuana. The retail game has gotten just a little bit more difficult.
President Trump Promises that States can Continue to Police Themselves
News broke on Friday that Senator Cory Gardner of Colorado has been given assurances by President Trump that the government will continue to allow states that have legalized marijuana to police themselves without government interference. This news provides some clarity around the federal government’s stance on marijuana and basically showed that nothing has changed even with the memo released by the attorney general in January.
What This Means for Legal Producers in Canada
This news is incrementally positive for Canadian producers as it may pave the way for them to enter the US market in size if they wish. However stock prices assume much higher selling prices than the companies will actually realize if they want to gain market share in the U.S.
The US market is hyper competitive and is already flooded with supply judging by falling retail prices, which gives Canadian producers two options:
- Price their product at an uncompetitive price of $7.00/gram or more and sell almost nothing
- Price their product around $4-$5/gram in line with US prices and potentially see significant volume growth.
The only way Canadian LP’s will sell meaningful volumes into the US is to price their marijuana competitively which will bring down their overall revenue per gram below what the market is expecting.
Canopy Growth for example could make $4,000 selling 1 kg at the average market price or they could try to price their flower at a $1 premium but would only be able to sell 20% of their inventory so they would only make $1,000 of revenue with premium pricing. The market expects higher volumes AND premium pricing, which is impossible in a non-monopoly market.
Colorado Sales by Price Point 6 Months Ending April 2017
Israel Moves Closer to Allowing Medical Marijuana Exports
After the prime Minister of Israel made an emergency decision in February to discourage marijuana exports due to pressure from President Trump, it is now being reported that legislation is moving forward to eventually allow exports.
An agreement was reached on April 11th between the health, justice and interior ministries to properly police marijuana exports. The government will now proceed to a vote to potentially allow export of finished marijuana products. Raw flower exports will not be allowed.
What This Means for Canada
Israel is competing for the same patients as Canadian legal producers so the legalization of Israeli exports would decrease the rest of the world’s need for Canadian marijuana and make it more likely that Canada will be oversupplied in the future.
Israel already has 50 medical marijuana companies and will have domestic production capacity of at least 200,000 kg in the next year or two compared to domestic medical demand of 40,000 kg. Production costs are $0.40-$0.50 per gram compared to $0.80-$1.00 per gram in Canada.
Malta Decides to Allow Large Scale Marijuana Cultivation and Sales
After earlier announcements that large scale cultivation would not be allowed in Malta, an Australian grower, MGC Pharma, announced it received the go ahead to build a 40,000 sq ft greenhouse and would be allowed to export finished marijuana products as well as raw flower. Allowing raw flower exports is unique in Europe as many government are worried about the diversion of supply to the black market unless marijuana is first converted into finished consumer products.
What This Means for Canada
Malta is now set to become another competitor in the race to supply European patients and retail users. The MGC Pharma facility will likely produce up to 5,000 kg, or 1% of medical demand in Europe.
Adding up all greenhouses announced in Europe so far, 500,000 kg a year of capacity could be operational by 2020. This is 80% of estimated demand in Europe over the same period meaning only 125,000 kg of supply would be needed from the rest of the world including Candada. As a reminder, Grizzle thinks Canada could be oversupplied by 500,000 kg by 2021.
READ THE MARIJUANA EXPORT MIRAGE FOR AN IN-DEPTH REPORT ON THE STATE OF DEMAND FOR MEDICAL MARIJUANA OUTSIDE OF CANADA