Cannabis Shares: Black Market, Overproduction and Slow Legalization Trouble the Marijuana Market
Evaluations by Kryptoszene.de show that cannabis shares and the entire industry face various challenges. The times of stability are over. These days the marijuana market faces three major problems.
The infographic below and found on Kryptoszene.de shows that sales on the black market are significantly higher than legal ones: in the first three quarters of 2019, the sales on the Canadian black market reached $930 million, while the revenue on the legal market peaked at $570 million – one possible reason: very diverged prices. In the last quarter of last year, the price per gram of cannabis on the black market reached $5.73, while the legal market was asking for an average of $10.30. It also shows that the price difference increases over time.
The second problem for cannabis companies is overproduction. In Oregon, USA alone, there are 450,000 kilograms of cannabis in storage. In Canada, around 315,000 kilograms were left unsold last year.
Closely intertwined with the second problem is the fact that legalization in many regions of the world is proceeding much more slowly than many have assumed based on previous developments. In 2014, 20.5 million people around the world lived in an area where cannabis was legalized. The following year it was already 242% more – 70.1 million. However, from 2018 to 2019, the “legalized world population” increased by only 11.1%.
Problem #1: The Black-Market Competition
According to the publication by Statistics Canada on January 23, the black market creates significant issues for the legally operating cannabis companies: their revenue for the 1st through 3rd quarter of 2019 reaches $570 million. In contrast, the black market had a turnover of $930 million.
Cannabis shares may suffer from price pressure
Thus, 61.8% percent of cannabis is sold on the black market, although in Canada, there is an opportunity to get marijuana legally. However, there is a large price gap, which plays to the disadvantage of Canopy Growth, Aurora Cannabis & Co.: in the last quarter of 2019, one gram of cannabis on the black market cost 5.73 CAD – to purchase it legally, customers had to pay 10.30 CAD.
Problem #2: The Overproduction
In addition to the fact that many customers prefer to buy cannabis illegally, overproduction affects cannabis shares as well as companies. Canada, as well as the United States, stores several hundred tons of cannabis, as previously reported by Kryptoszene.de.
The reasons for overproduction are hard to single out at this point. However, market observers make different assumptions on social media such as Facebook and Twitter: insufficient regulatory requirements created too many participants on the market; and, in addition to that, high taxes that come with the legal cannabis production make the black market that much more attractive. In addition to that, there are too few places with a license to sell.
Cannabis legalization – important milestones for marijuana shares.
Problem #3: The Legalization of Cannabis Around the World Is Progressing More Slowly Than Expected
According to German Hemp Association, in 2014, 20.5 million people lived in an area where cannabis is legal. Next year, that number reached 70.1 million people. The number grew by 242% in just one year. The crux: the days of rapid relative growth seem to be over. From 2018 to 2019, the number of “legalized world population” only increased by 11.1%.
Europe and Germany in particular – large markets, which could potentially heavily influence cannabis stocks – seem to be moving slower than many think. The CDU parliamentary group has been more open to legalization since October 2019; however, concerns are also being raised, both from a political and a scientific point of view. Addiction researcher Thomasius told “Tagesschau” that legalization in some US states was a negative example: “What we always feared is now happening in the US for the first time. Legalization leads to addiction, psychosis, and suicide under the influence of cannabis”.
A more positive development in the share prices for cannabis securities is showing. However, the results suggest that the cannabis market remains volatile.
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