Over the last few years, California has seen unstoppable growth in its legal cannabis industry. Sufficient sales data exists to prove this claim. According to ArcView, a marijuana research firm, legal pot sales in North America grew by 34 percent to $6.9 billion in 2016. By 2021, this would have grown by an annual rate of around 26 percent. Within five years, the North American market could be worth $22 billion.
There is likely to be a lot more expansion of the state’s marijuana market. This growth in sales, coupled with a rapidly changing perception of marijuana among consumers, has been the catalyst driving investment in cannabis stocks over the last year. According to surveys by CBS News and Gallup, the number of people wanting marijuana legalized at the national level is at an all-time high.
Today, medical marijuana is legal in 29 states. Another eight states have or are busy legalizing recreational pot too. California is the pot industry’s crown jewel of the recreational market, and experts predict it will swell the state’s coffers by at least $1 billion in additional tax revenues. This is particularly good news for California, which frequently has to deal with a budget deficit.
Voters approved recreational cannabis in November last year, and by the start of 2018, dispensaries will be able to sell it to adults legally. To put this into context, Colorado reported a combined sales growth of both medical and recreational pot at $1.3 billion, which was more than 30 percent growth in 2016. Yet, it still fell shy of $200 million in licensing and tax revenues.
These statistics indicate that California’s cannabis market could be as much as five times the size of Colorado’s, perhaps even more. Although this news should excite marijuana growers in California, there is a major obstacle standing in their way. In fact, those invested in marijuana cultivation may see their profits dwindle alarmingly.
California’s marijuana growers are producing far more than consumers in the state actually need. Eight times too much. According to the Los Angeles Times, cultivators have been skirting this problem by exporting to other states. Thus far, this has worked well for marijuana growers, despite the fact that pot remains illegal under the federal government.
However, if the state enacts its new law prohibiting exportation out of the state, California’s marijuana growers will have few choices left to them from January 1, 2018. One of them will be to slash their production, which is not ideal. Growers are facing a choice of painful downsizing. Another option would be to leave the industry altogether by not applying for state licenses anymore.
The final option available to growers would be to continue exportation and violate state and federal laws by operating in the illegal marijuana market. Those who do not apply for state licenses will face enforcement action. This would not happen immediately, however, as California is still drafting regulations for its cannabis industry.
What would all this mean for California’s weed market? If too many marijuana growers choose to avoid the licensing process or continue exporting their products, they will likely take consumers with them. The number of people who would use the regulated market may diminish significantly. Ultimately, this problem has the potential to hamper the state’s legal industry.
Additionally, prices on the illegal marijuana market would undercut the state’s regulated prices, as growers would no longer pay licensing fees and taxes. This would defeat the entire purpose of pushing companies and consumers into a legal, regulated market. This is a crisis indeed, and it serves as a reminder to investors that the rolling out of a regulated industry may face uncertainty.
Despite the success of marijuana programs in Oregon, Colorado, and Washington, the legal pot industry is still new and finding its way. There are bound to be hiccups that could hinder growth and destroy lofty expectations. These issues are likely to attract unwanted attention from Washington, at a time when the federal government is doing all it can to enforce its marijuana laws, even in states where it is legal.
Although the federal government is unlikely to spend too much energy on medical pot, it is taking active steps to target recreational weed. If states cannot regulate their industries properly, it would make it easier for the federal government to take full advantage of this weakness, especially as Attorney General Jeff Sessions is determined to curtail further expansion of marijuana legalization nationwide.