Marijuana investors — often a fickle and volatile crowd — seem crestfallen after the federal government finally unveiled plans to create a legal market for recreational cannabis next year.
Shares in industry heavyweight Canopy Growth (WEED.TO), slipped four per cent, Aphria (APH.TO) dropped eight per cent, Aurora Cannabis (ACB.V) fell seven per cent and Organigram (OGI.V) slumped nine per cent.
“Today was a good beginning,” Aphria CEO told us on Business Day PM. “They did deliver on their promise. However, there’s a lot more clarity that’s required.”
For one thing, he says, the industry needs certainty on how much new supply Ottawa wants to create.
Big cannabis stocks also fell on Wednesday after the Globe and Mail reported that “the federal government is getting ready to drastically speed up its licensing process” for producers. “As Ottawa works toward squeezing out illegal producers of marijuana, federal officials are worried that a shortage of cannabis would hurt their plans in the initial stages of legalization.”
Aphria’s Neufeld worries that “we’ve read recently about a 100 … 150 more smaller or cultivators brought in.” He acknowledged that the illegal market, which politicians want to displace, is huge. “That’s all good. But they didn’t bring forward any specifics on who else can grow.”
Overall, there were few surprises in the Liberal package, which calls for 18 as the minimum legal age or higher at provinces’ discretion; tight restrictions on packaging; and tough penalties for those who sell to young Canadians or drive while stoned.
The measures, which mirror recommendations by last year’s task force on legalization, are “in line with expectations,” Eight Capital analyst Daniel Pearlstein said in a report. He’s sticking with a forecast that recreational sales will begin next spring.
But Chris Damas, editor of the BCMI Report, says the sombre tone of the announcement disappointed investors. Marijuana shares, he said in an email, “have had a spirited rally in anticipation of a rosy future which really isn’t being painted by the Liberal ministers today. Instead, it is a bleak law enforcement message.“
Damas is set to join us on Market Call on May 12. He’ll take questions on cannabis stocks as well as well as fertilizer and agriculture-related equities.
Indeed, the government may be losing some of its appetite for creating a large-scale pot market amid public concerns over the health and social effects.
“A Nanos poll published last August pegged support for the policy at an overwhelming 70 per cent,” the Toronto Star reported this week.
“But a RPG Research Group survey done just as the government was signalling the imminent introduction of its marijuana bill last month found that the pro-legalization cohort had shrunk to 51 per cent.”
Investors should expect the rollout of the product to be cautious, with governments adhering to conservative counsels on the issue, according to McGill University finance lecturer Ken Lester.
“A certain section of the population is nervous about this,” Lester told us on Commodities this month. “They’re worried about children, they’re worried about companies that are too aggressive in selling it [with] big marketing campaigns.”
He thinks that politicians will be well served to “do this as carefully and cautiously as possible.”
And provinces can delay the process. “They know the heavy lifting when it comes to controlling the sale and distribution of recreational marijuana is going to fall on their shoulders,” former Tory MP Brent Rathgeber cautioned last month.
“Leaving medicinal use aside, there is no Charter-protected right to smoke weed,” he argues. “A province could authorize only one agent to sell marijuana, locate it on top of a mountain and limit its hours to 4 a.m. to 4:15 a.m. every second Christmas Day.”
Mind you, Ottawa did make one major concession on selling pot. It says that “in those provinces that have not put in place a regulated retail framework, individuals would be able to purchase cannabis online from a federally licensed producer with secure home delivery through the mail or by courier.”
That’s the model that producers use right now to sell medical cannabis. Canopy Growth CEO Bruce Linton told us it would be a painless transition for the industry.
But the threat of a glut hangs over the sector.
Mark Kleiman, a professor of public policy at New York University, told us last year that “I have precisely one word of advice for people considering investing in cannabis: Don’t.”
“There’s going to an enormous amount of money made fleecing investors with stock promotions, very little actually made selling weed to customers.”
He warned that a price plunge is inevitable because the stuff is easy to produce. “The natural course of the cannabis market would have it look like the tea market. A tea-bag is like a joint; it’s a little bit of plant matter in a wrapping.”
Kleiman also argues that the industry will find itself relying on heavy users - people vulnerable to ill effects - for the vast bulk of their revenue.
The Office of Parliamentary Budget Officer agrees. In a report last year on the tax implications of legalized pot, it said “users who consume cannabis at least once a week, including daily, represent 41 per cent of all past-year users, but 98 per cent of total cannabis consumption.”
Anyone who thinks smoking today’s strong strains of weed weekly, let alone daily, won’t impair brain function hasn’t actually tried doing it.