Attention, Canadian Marijuana Stocks: You Have Brand-New Competition From Down Under
Growth in the legal marijuana market has been nothing short of unstoppable, and it looks to stay that way in the years ahead.
According to leading cannabis researcher ArcView, the North American legal weed market grew by 34% in 2016 to $6.9 billion, and should reach an estimated $21.6 billion by 2021. This would represent a five-year compound annual growth rate of 26%, and is a big reason why marijuana stock investors have piled into this budding industry.
Expansion will obviously continue to play a role in this impressive growth. For example, Mexico legalized medicinal cannabis in June 2017, while our neighbor to the north, Canada, is reviewing legislation that would green-light the sale of recreational cannabis to adults beginning in July 2018. Such a move is expected to bring in up to $5 billion in annual sales, once fully ramped up. Within the U.S., voters in eight states have chosen to approve the legalization of recreational pot, with more states expected to vote on a cannabis initiative or amendment this coming November.
The public's perception of cannabis is playing a role, too. After 48 years of polling, Gallup found that support for the idea of legalizing recreational weed stood at an all-time high of 64% as of October 2017. Support for medicinal cannabis is even higher, according to an August 2017 survey by the independent Quinnipiac University. In that poll, 94% supported legalizing medicinal weed, compared to only 4% who opposed the idea.
Canada is leading the way
Of all the burgeoning marijuana markets, none has been more impressive than Canada. Having legalized medicinal weed back in 2001, the Canadian medical pot industry, which is overseen by Health Canada, has been operating on all cylinders. A statement from Health Canada in May 2017 noted that the number of registered patients was growing at roughly 10% a month, with a small handful of growers, such as Aphria (NASDAQOTH: APHQF) and MedReleaf (NASDAQOTH: MEDFF), reporting marginal full-year profits solely because of medical sales.
Whereas most folks in the U.S. appreciate the absence of big businesses in the marijuana industry, it's consolidation in Canada that's made things operate so smoothly. The aforementioned Aphria and MedReleaf, along with kingpin Canopy Growth Corp. (NASDAQOTH: TWMJF) and Aurora Cannabis (NASDAQOTH: ACBFF), should wind up controlling in the neighborhood of half of all cannabis market share throughout the country.
Should Canada choose to legalize adult-use weed, it's also set in place a tax system that'll likely be marveled by other countries considering legalization. The tax on recreational marijuana would actually be lower than that of alcohol, and it allows the provinces to receive a 75% share of tax revenue over the first two years, with the remainder heading to the federal government. In other words, legal weed should be price-competitive enough to drive out the black market, while provinces that are on the front line of regulation should have the funding needed for enforcement.
Say hello to your new competition, mate
Canadian growers have even benefited from being able to export dried cannabis to countries that have legalized medicinal marijuana. Aphria, Canopy Growth, and even Aurora Cannabis through its acquired subsidiary Pedanios, have all buoyed their top-line results by shipping dried cannabis to a handful of overseas countries with nascent growing industries.
However, this last source of revenue is about to face some potentially serious competition. Though only three countries are currently allowed to export dried cannabis for medical use (Canada, Uruguay, and the Netherlands), Australia announced its intention to export medical marijuana just over a week ago. The news sent shares of AusCann Group (NASDAQOTH: ACNNF) and Cann Group (NASDAQOTH: CNGGF), two Australia-based growers, soaring.
The reason for Australian growers to be excited about the opportunity to export is simple: Grand View Research estimates that the global medical pot market is worth $55.8 billion. While demand is being mostly met in fast-growing markets like Canada, there remains a largely unmet need in many European countries that have opened their doors to medicinal cannabis imports.
To boot, Australia, which legalized medical marijuana in 2017, hasn't seen much in the way of domestic demand. Though it's likely to see demand increase throughout the country over time, Auscann Group and Cann Group would welcome the opportunity to ship excess production to overseas markets that have recently legalized. While a contingency exists requiring domestic demand be completely met first before Australian growers can export, it shouldn't be an issue for either company.
It's worth pointing out that this proposal to legalize exports still needs to pass federal parliament when it returns to session next month. But the Labor Party, which is the primary opposition, has signaled its plan to support the proposal.
This battle is just getting started
However, even with this added competition, the Canadian industry still stands tall. Canada has the virtue of experience and size. Its growers have developed partnerships in a variety of markets throughout Europe, and perhaps most importantly, its companies have the cash on hand and growing capacity to "bully" (for lack of a better term) Australian growers, if need be. In fact, Aurora Cannabis happens to be a major stakeholder in Cann Group, with Cann somewhat leaning on the technical expertise of Aurora to fuel its own growth through a technical services agreement.
Australian growers are also going to have one heck of a time competing against the sheer capacity potential of a company like Canopy Growth. In addition to the acreage already devoted to its industry-leading output, Canopy has 2.4 million square feet of greenhouse facilities in British Columbia under construction or in development, with the option to add another 1.7 million square feet in the region. Based on sheer volume, Australia will struggle to compete.
But that doesn't mean it won't be worthwhile for AusCann and Cann Group. If Grand View Research's $55.8 billion estimate for global medical pot is anywhere near accurate, then there's ample room for plenty of other players, and countries, to join the fracas. This battle is likely just getting started.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.