From an investment standpoint, there may be no sector of the legal cannabis industry more intriguing than cultivation and retail. Why? In short, because it’s the one space where the changes created by legalized use tend to create the biggest difference.
Cultivation and retail have been taking place in America and Canada for a very long time. Estimates on just how large the black market for recreational use marijuana is can range as high as $35 billion to $50 billion. However, until 2012, that market was entirely illicit. With legalization, though, there’s every reason to believe that virtually all of that business will transition to the legal marketplace.
So, cultivation and retail is one sector in a very unique place. The demand already exists, there’s no question about that. It’s simply a matter of where and how fast the legal businesses will be allowed to expand to fill that demand.
Dramatic Industry Growth to be Dwarfed by What’s to Come
In 2014, legal cannabis sales in the United States reached $2.7 billion, nearly double the $1.43 billion mark reached in 2013, and more than triple the $800 million sold in 2012. That number, though, is expected to grow even more as 2015 is currently on pace to hit $3.5 billion, good for a CAGR of 65%. Estimates even have sales increasing to some $10 billion by 2018.
Of course, all of this has to be considered in relation to that total figure of $35-50 billion looming over everything. As fast as the current legal market is growing, it’s still just beginning to fill that massive vacuum left by nearly a century of ineffective legal doctrine that forced the industry into the shadows.
A world where dispensaries and grow operations can operate with all the advantages of a fully legal industry is one where the current sales figures are paltry at best. Where most budding industries are forced to speculate about the degree to which their product may or may not catch on, emerging growth cannabis companies in cultivation and retail already know they have a winner.
More Progress in Legalization will Further Legitimize this Major Market
The expansion of legalized marijuana cultivation is expanding rapidly. There are 23 states where medicinal use is legal, in addition to the four others that have legalized recreational use. Canada, additionally, has legal medicinal use nationwide, and stipulations that allow for growers to export their product…provided it’s being exported to a jurisdiction where its sale would be legal.
The result is that marijuana cultivators are able to bring basic principles of the agricultural business into play in a way that they rarely – if ever – have been able to do in the past. The number of legal grows in the United States are growing rapidly, as are their yields, and that should only accelerate as growers are able to expand, consolidate, and begin formulating the sort of new best practices that come with legitimacy.
Marijuana Taxation Means Market Expansion
Despite such substantial growth already, we’ve only scratched the surface of what’s possible. Legalization means a number of rapid changes on the cultivation side that should have far-reaching consequences in the short and long term.
Namely, cannabis is moving from an illicit substance, illegally grown and imported by smugglers, to an agricultural commodity, grown efficiently on large scale while being regulated and taxed by the government. That shift brings with it a variety of changes that should dramatically improve markets for growers and consumers alike.
For starters, the size of grows should expand tremendously. The ability to create economies of scale by expanding operations is nothing new to agriculture, but it is an area where growers had, before now, been severely limited. As marijuana growers start to expand and consolidate, the cost per pound for their yields should fall precipitously, bringing lower prices
Another important development is commoditization. Anyone familiar with commodity markets will realize that they can play a huge part in normalizing prices across regions, protecting consumers from exposure to seasonal price swings, and providing a downward pressure on pricing. On the whole, an efficient market that clearly identifies and prices different strains should play an essential role in normalizing the product reaching dispensaries and smoothing out pricing across the industry, allowing for better planning by businesses and lower prices for consumers.
Finally, the application of agricultural technologies should mean much higher yields for cultivators in legal states. When they were operating in the shadows, growers weren’t in a position to bring to bear the top tier of cultivation techniques on their crop. Now? The cultivation of cannabis is likely to start moving forward in leaps and bounds. Not only can growers anticipate dramatically increased yields simply by applying the best existing agricultural technology, but the development of new techniques and technologies specific to cannabis are likely on the horizon as it transitions into a legal crop.
Cannabis Industry Challenges Provide Opportunity for Investors
Altogether, the future appears bright for this sector. There’s existing demand and huge opportunities to rapidly improve both the quality and quantity of supply. Among the public companies currently active in this sector are:
Canopy Growth Corp. (CGC:CA)
Market Cap: C$276.91 million
Canopy Growth Corp. is the result of a merger between Tweed Marijuana, Inc. and Bedrocan Cannabis Corp. in August 2015 to create the largest licensed cultivating and selling entity of cannabis in Canada. Canopy Growth Corp. currently operates Tweed, Tweed Farms, and Bedrocan Canada.
Tweed is committed to low-cost, high-yield production of quality cannabis for medical patients in Canada. Tweed Farms is a production arm of Tweed, and operates a 350,000 sq. ft. greenhouse in the Niagara region of Canada. All of its cannabis is sold via Tweed. Tweed Farms currently has plans to develop a 20-acre location for on-site harvesting and processing.
Bedrocan is a producer of medical cannabis with over 13 years of growing experience in global markets. Bedrocan produces its cannabis under stringent quality standards that are acceptable in seven countries and focuses on growing product from five strains with consistent cannabinoid contents.
Kaya Holdings, Inc. (KAYS)
Market Cap: $7.55 million
Kaya Holdings owns and operates various brands that produce, distribute, and sell cannabis products including raw flower, concentrates, and infused products. Kaya was labeled the first fully reporting U.S. public company to own and operate a vertically integrated seed-to-sale marijuana enterprise.
Kaya Holdings opened its first Kaya Shack medical dispensary in Portland, Oregon in July 2014, and its first cultivation operation was opened in the first quarter of 2015. Kaya currently operates two dispensaries for medical and retail sales in Oregon with a third location scheduled to open in late 2015.
Kaya acquired assets of OC Harley Gardens and established its Kaya Farms Grow operation in August 2015 in a 6,000 sq. ft. facility in central Portland.
Kaya intends to seek additional licensing opportunities in various states and territories throughout the United States which have legalized medical and/or recreational use. Kaya seeks to replicate its Kaya Shack design to support revenue-enhancing opportunities and enhance brand awareness.
Medbox, Inc. (MDBX)
Market Cap: $2.52 million
Medbox is a consulting services company in the cannabis industry that is shifting its operations to focus on the cultivation and retail of hemp and cannabis products.
In July 2015, Medbox acquired a 320-acre farm in Pueblo, Colorado for the cultivation of hemp. This property will also be used for the extraction and refinement of hemp oil for use in hemp oil infused products. Medbox plans to plant approximately 10,000 plants on this farm across an initial 10 acres in December 2015, leading to 35,000 plants on more acreage in 2016.
Medbox currently engages in the retail sale of cannsbis through one dispensary in Portland, Oregon. In April 2015, Medbox signed an agreement with an operator that will manage the dispensary and pay Medbox fixed payments under an agreement. Medbox will then make the license available for the operations of this facility in exchange for a lump sum and a share of operating profits over the course of the agreement.
Medbox was also granted a conditional use permit in San Diego, CA, effectively receiving a license for the operation of a medical marijuana dispensary. Medbox expects to open this facility in April 2016. Meanwhile, Medbox expects a delivery services tied to the conditional use permit will begin operations in December 2015.
Organigram Holdings, Inc. (OGI:CA) (OGRMF)
Market Cap: C$38.17 million
OrganiGram is a licensed producer and seller of cannabis under Health Canada’s Marihuana for Medical Purposes Regulations (MMPR). Under these regulations, OrganiGram is currently the only licensed producer and seller of cannabis in the New Brunswick province in Canada.
OrganiGram was founded in 2013 with the goal of providing reliable access to high quality cannabis to consumers in Canada. Since then, OrganiGram has expanded its product offerings and has become a well-established seller of organic cannabis.
OrganiGram recently reported the completion of a capital raise for over C$5.7 million in order to accelerate its facility expansions and to capture additional market share.
Terra Tech Corp. (TRTC)
Market Cap: $30.25 million
Terra Tech is an experienced producer of agricultural products that has established operations in the cannabis industry. Terra Tech operates in several markets through its subsidiaries.
Terra Tech engages in the design, manufacturing, and sale of hydroponic equipment for indoor agriculture through its subsidiary, GrowOp Technology Ltd. Terra Tech also is a wholesale seller of hydroponically grown produce through its subsidiary Edible Garden Corp.
In addition to the above operations, Terra Tech has two subsidiaries engaged in the cannabis markets. Terra Tech’s IVXX subsidiary produces and sells a line of cannabis flowers, cigarettes, and concentrates. IVXX’s branded products, which are produced in Terra Tech’s supercritical CO2 extraction lab in Oregon, are currently available in over 100 dispensaries in California. Terra Tech is also planning to operate medical marijuana cultivation, production, and dispensary facilities in Nevada through its MediFarm subsidiaries.
The “Cash” Problem…
Of course, like any industry facing a major pivot, the cannabis market does still face some headwinds. Namely, the fact that cannabis remains classified as a Schedule 1 drug presents some real problems.
Some of these are on the smaller, more direct scale. Growers and dispensaries can’t use traditional commercial banking, forcing them to operate almost entirely on a cash-only basis. While most small businesses can count on banks for loans to help them make rent or meet payroll when things are stretched, anyone in the cannabis business have to operate just with capital on hand. Not to mention, dealing with large quantities of cash necessitates extra expenditures on security measures that exceed what most stores would need.
The huge inefficiencies created by operating without access to commercial banking is only part of the problem, though. With the expansion of the legal industry has come a rapidly expanding need for growth capital. Meeting that need is more difficult for those portions of the industry that are directly handling the drug and subsequently dealing with the limitations of not being able to access traditional banks.
…or the “Cash” Opportunity?
Of course, what makes the investment potential in this particular sector so intriguing is that these headwinds, considerable as they are, are increasingly appearing to be temporary. With four states legalizing recreational use, another dozen or voting on measures by November of next year, and polls revealing that a majority of Americans now support nation-wide legalization, this particular barrier to development appears to be one that’s on its way out.
When you consider just how rapidly sales in the legal market are expanding despite the limitations placed on it by an uneven and rapidly changing regulatory environment, the opportunity presented by the retail and cultivation sector that would exist once the federal government gets out of the way and these companies are given room to run is exciting to say the least.
You can read more from our special program The Future of Cannabis here. To find out why Equities.com and Viridian Capital Advisors launched this program, be sure to read What is The Future of Cannabis? This program was made possible by the support of our sponsors. Click here for a full list of our sponsors.
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