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The Canadian Cannabis Invasion

Jeff Nielson Jeff Nielson, Stockhouse
1 Comment| May 2, 2019

As the emerging cannabis industry has developed in North America, cannabis investors have now had several years to observe the progress of this industry – on both sides of the Border. It has been a study in contrasts.

Canada (obviously) has the much smaller population base and over the long term will represent a much smaller overall market for cannabis and cannabis-derived products. The United States has the much larger population base, but with a very capricious and uneven regulatory structure, which has been reflected in the development of the U.S. cannabis industry (or lack thereof).

Click to enlargeIn the U.S., the epicenter of the now-discredited War on Drugs, anti-cannabis propaganda has been much more virulent and more prevalent. As a result, anti-cannabis biases remain much more extreme within the United States.

At the federal level, cannabis is still equated with heroin in terms of its legal status, although the federal government has (wisely) chosen to refrain from directly exercising its anti-cannabis witch hunt in U.S. states that have legalized medicinal, and in some cases, recreational consumption.

The official status of cannabis federally in the U.S. still has a strongly chilling effect on the cannabis industry as a whole. Importantly, hemp commerce has now been legalized at the national level and there are many companies in the U.S. (mostly private) working to develop opportunities especially in CBD-rich hemp production.

In this overall legal and commercial context, many observers within the cannabis industry have been making a consistent prediction: that it was only a matter of time until the U.S. cannabis industry (and U.S.-based companies) swept across the Canadian cannabis industry, buying-up every attractive asset in sight.

To be sure, there are plenty of Canadian precedents to support such a prediction. In many other industries this is precisely what has happened, and this cannibalization of Canadian industries has been greatly facilitated by what media talking-heads and semi-educated economists call “free trade”.

However [pause for laughter] this time it’s different.

There is one primary reason why (to date) we have seen no sign of any “U.S. invasion” into the Canadian cannabis industry: raising capital. The frigid federal landscape for cannabis in the U.S. has kept mainstream U.S. financial institutions (and the oceans of capital they wield) on the sidelines. This has also locked out U.S.-based cannabis companies from acquiring listings on its major equity markets.

Click to enlargeThis has made the U.S. cannabis industry (to date) a toothless tiger in terms of being able to leverage capital into growth. While this could change considerably down the road (a U.S. “cannabis finance” bill is beginning to work its way through Congress), there is little prospect of any change here over the short term.

Then we have the Canadian cannabis industry.

While residual anti-cannabis bias remains within the Establishment (in the government and private sector), legally Canada has been almost completely opened up for cannabis commerce. Pending legislation in October to legalize “cannabis edibles” and other cannabis-infused products will complete the official process of cannabis normalization.

With a much more friendly, certain, and homogenous regulatory structure, it has been much easier for Canadian-based companies to get off the ground. A flourishing Canadian cannabis industry has now taken root. Specifically, Canadian cannabis companies have had no difficulty in raising capital to finance growth and development.

Compared to the U.S., Canadian-based companies have had an embarrassment of riches. In some cases, this has resulted in companies trying to do too much, too soon – with a few companies having imploded from excessive dilution and lack of focus.

In broader terms, the Canadian cannabis industry is robust and well-financed. On the other hand, it isn’t clear sailing for cannabis commerce, even in Canada. Federal taxpayer-funded commercials continue to stigmatize cannabis usage. Bias and ignorance within the mainstream media has resulted in a consistently negative slant in cannabis reporting.

Lukewarm support by many (most?) provincial and territorial governments has meant that Canadians continue to have grossly inadequate retail access to legal cannabis, and/or over-taxation has made cannabis products uncompetitive. This has meant that the black market continues to be the primary source from which Canadians obtain their cannabis – despite a pledge by all levels of governments to eliminate black market cannabis commerce.

Despite this impediment (or perhaps because of it?), we now see the Canadian cannabis industry moving South. Canadian industry leader, Canopy Growth Corp (TSX: WEED, NYSE: CGC) has made two very significant announcements in the month of April.

First, there was the announcement of a major acquisition in the U.S., a $3.4 billion deal to acquire U.S. “pot giant” Acreage Holdings. This has been followed more recently by a “New York hemp industrial park update”.

Because of the restrictive legal landscape in the U.S. toward cannabis, Canopy Growth is prohibited from taking an active role in managing its Acreage Holdings assets, at present. However, in terms of its New York hemp operation, it’s now full speed ahead.

More generally, there has been no “Canadian invasion” of the U.S. cannabis industry, yet. But as the largest Canadian cannabis company and a front-runner in pursuing new market opportunities, where WEED goes, other Canadian companies are sure to follow. And fellow cannabis giant, Aurora Cannabis Inc (TSX: ACB, NYSE: ACB) has already been advancing its own strategy for U.S. cannabis expansion.

If there is a “threat” to the Canadian cannabis industry, it’s not coming from the U.S. cannabis industry. Rather, it is the growing trend of foreign multinational corporations (especially beverage giants) to buy their way into the Canadian industry. Indeed, in Canopy Growth’s recent acquisition of Acreage Holdings, the release made a point of noting that WEED’s own major strategic investor – Constellation Brands (maker of Corona beer) – would not be in a position to acquire majority control of the Company.

Click to enlarge

If there is ultimately an “invasion” of the Canadian cannabis industry, it will be a general corporate invasion, not a specific invasion by the still-stunted U.S. cannabis industry. In the meantime, when it comes to cannabis in the United States, the Canadians are coming.

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