Slow legalization burdens the Canadian cannabis stock market

Cannabis legalization relies on a few key assumptions. First, cannabis consumers would almost always prefer legal over illegal products. The second was that entrepreneurs, seeing a great business opportunity would rush into the cannabis market and crowd out illegal competitors. Companies who have one or more licenses find themselves uniquely positioned atop a multi-billion dollar industry.

Evaluations show that the cannabis stock market, as well as the entire cannabis industry, are currently facing different challenges. The times of constant upward trends are over, as several large problems have entered the cannabis industry.

According to a report published on January, 23rd by the Canadian Statistics Office, the black market is undermining the legal activities of cannabis companies. From the first to the third quarter of 2019 the companies in the sector achieved a turnover of $570 million. The black market, on the other hand, generated a turnover of $930 million.

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Cannabis stock market shares may suffer from price pressure

Roughly 61.8% of sales were made on the black market, although in Canada it is possible to obtain cannabis legally. However, there is a large price gap, apparently to the detriment of Canopy Growth, Aurora Cannabis & Co. In the last quarter of 2019, one gram of cannabis cost an average of $4.32 (CAD 5.73) on the illegal market, while legal customers had to pay $7.78 (CAD 10.30).

Another large problem is overproduction

Apart from the fact that many customers prefer their cheaper illegal sources of cannabis, the overproduction of cannabis puts pressure on legal company shares. In Canada, as well as in the US, several hundred tons of stored cannabis will go unsold this year.

Market observers on social media, such as Facebook and Twitter, think that there are too many market participants due to insufficient regulatory requirements. They also say that taxes on legal cannabis products are too high, which makes the black market more attractive. Furthermore, there are far too few licensed points of sale.

Legalizations offers important milestones for the global cannabis stock market

According to data from the German Cannabis Association, in 2014, 20.5 million people worldwide lived in countries where cannabis has been legalized. In the following year, the number was already 70.1 million. However, the legalization of cannabis around the world is currently progressing more slowly than initially expected.

Within one year the growth rate was about 242%, but from 2018 to 2019 the number of “legalized world population” increased by only 11.1%.

Large cannabis markets, especially in Europe, which could possibly have a strong influence on cannabis stocks, seem to have developed slower than anticipated. Although European countries have been more open to legalizing cannabis since Canada’s legalization, concerns are also being expressed, both from a political and scientific point of view.

Recently, more positive development of the share prices of cannabis securities has become apparent again. However, the results suggest that the cannabis market continues to show its volatile side.

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(Featured image by geraldfriedrich2 via Pixabay)

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