The Marijuana Industry's Biggest Enemy Just Might Be Itself

By Markets Fool.com


Image source: Getty Images.

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In just three days, Americans across our great country will head to the polls to decide the fate of a number of key issues facing our country, and our respective states. We'll be voting on who'll become our 45th president of the United States, who should represent us in Congress, and for residents in nine states, whether or not marijuana should be legal.

Will Election Day be a sweeping victory for marijuana?

Having been a taboo issue that politicians and the public avoided for decades, marijuana is now a front-and-center debate issue, with both presidential candidates, Hillary Clinton and Donald Trump, weighing in that they would be in favor of legalizing medical cannabis on a national level.

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A number of national polls also suggest that opinions surrounding cannabis are increasingly favorable. Gallup's recently released 2016 marijuana poll showed that 60% of respondents favor legalizing the drug nationally, which is an all-time high over the nearly five decades Gallup has conducted its survey. Last year's CBS News poll suggests even higher favorability for medical cannabis, with 84% of respondents suggesting that they'd like to see it legalized nationally.

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So what's at stake for the marijuana industry on Election Day? If marijuana were somehow able to run the board on Nov. 8, the number of recreationally legal cannabis states would more than double to nine from four, and residents in more than half of all U.S. states would have access to medical cannabis prescribed by a physician. The pot industry would also gain access to the most lucrative U.S. state, California, where recreational marijuana could yield $1 billion in additional tax revenue per year. For context, Colorado is the current "green standard" state, and it generated only $135 million in tax and licensing revenue from cannabis in 2015.

Could cannabis cannibalize itself?

A lot could go right for the cannabis industry in a matter of days, yet some industry activists and pundits have also suggested much could go terribly wrong.

Should recreational-marijuana initiatives pass in California, Nevada, Maine, Arizona, and/or Massachusetts, some argue that it could wind up putting medical marijuana dispensaries out of business. The thesis here is that if recreational marijuana becomes legal for adults, then the impetus to go see a doctor for a medical marijuana prescription simply isn't there. It could be time- and money-saving to simply visit a recreational-marijuana dispensary and purchase cannabis if a patient has a recognized ailment that can be assisted by marijuana within a particular state.

The other issue here with recreational marijuana having a considerably larger market potential than medical cannabis is that large corporations may swoop in and attempt to corner the market. If large corporations push out smaller players, especially within the medical cannabis space, it could become increasingly difficult, and costly, for pediatric patients to gain access to cannabis-based products prescribed by a physician.


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We may already be seeing this play out in Colorado. As reported by Tradiv in August 2016, wholesale marijuana costs in Colorado had fallen to a range of $1,400 to $1,600 per pound from between $2,400 and $2,600 a pound in October 2015. While consumers often cheer falling costs, the reason for the drop in price is a bit disturbing. A moratorium on new cannabis license issuances, coupled with no limits on the number of plants a facility can grow, has allowed a few larger players to snatch up the remaining licenses and crank out huge production levels, which has resulted in growing supply and falling prices.

Larger businesses often have the deep pockets to withstand a reduction in margins, which means if they can eliminate or discourage smaller businesses, they can essentially whittle the market down to just a few players. This is something most cannabis activists have been concerned about since day one.

The case for, and against, big business in pot

On one hand, having big corporations in the cannabis industry wouldn't necessarily be bad for everyone involved. Since big business often has deep pockets, expansion and hiring would likely come a lot easier. Remember, most banks aren't dealing with cannabis-based businesses because they fear the potential for federal prosecution for money laundering at some point in the future. This wouldn't be an issue if big corporations were running the recreational-marijuana markets in key states, such as California.


Will big businesses squash competition in cannabis? Image source: Getty Images.

Big corporations also provide an avenue for investors to dip their toes into the water. Though there are dozens of "marijuana stocks" you could theoretically invest in, nearly all trade on the over-the-counter exchanges. While reporting standards have improved over the years on the OTC boards, finding up-to-date financial information relative to a reputable exchange like the NYSE or Nasdaq can be a challenge. Not to mention, most publicly traded cannabis companies are losing money. Having big corporations involved in recreational marijuana could provide potentially profitable pathways for investors to take advantage of marijuana's growth.

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The downside of big business is that it could whittle down competition, which could have a long-term negative effect on recreational marijuana prices. Though we're witnessing big businesses flooding the legal market with marijuana in Colorado and driving down prices, once the smaller competition is mostly removed it wouldn't be one bit surprising if prices started to increase. If legal marijuana prices become less competitive relative to the black market, some consumers could choose to revert to the black market for their purchases. Should this happen, it would not only hurt the profitability of marijuana businesses, but it would defeat the message of cannabis activists that legal marijuana can be competitive with the black market.

As of now, everyone's hypothesis is nothing more than that -- a hypothesis. Legalizing recreational marijuana on a state level is unprecedented, and no one is exactly sure what to expect. However, it can't be discounted that the medical cannabis industry could face competition and sales cannibalization from within if the recreational-marijuana industry continues its expansion.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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