The Global Cannabis Industry
By Mark Bernberg - March 15, 2019
The global cannabis market is thought to be worth USD$150 billion today. Barclays, in their European Consumer Staples Report in September 2018, suggests that this figure could increase to USD$272 billion by 2028.
The UN estimates that approximately 3.9% of the global adult population, or 190 million people, are cannabis users (vs. 1 billion smokers). The highest prevalence of cannabis users was found to be from Europe, followed by the US and the Oceania Region. Although small, the Oceania Region is considered significant given its access to the Asia Pacific region.
Cannabis Use Cases
Medicinal – here, cannabis is used to treat illnesses such as pain and inflammation, controlling epileptic seizures and possibly even mental illness and addictions.
Recreational – here, cannabis is smoked or made into a concentrate, which involves refining cannabis into a more potent product, infused products, and edibles. Edibles are the fastest-growing part of the market and incorporate mints, gummies, candy, ice-cream, and cookies. Infused products include alcohol, ointments, and vaporisers.
Industrial – cannabis used for industrial purposes is hemp. Hemp has been used for hundreds of years in paper, textiles, clothing, biodegradable plastics, paint, and insulation
The cannabis industry has been inhibited by regulatory restrictions for most of recent history, but the legal market has emerged rapidly as more governments legalise medical and adult use.
Driven by efficacy, medicinal marijuana is gaining traction both within the medical fraternity and with the general population.The stigma is slowly being challenged and will eventually be removed. Medicinal acceptance of the drug leads to the eventual legalisation for recreational use.
Legalisation versus decriminalisationAlthough there is a clear movement away from the strict prohibition of cannabis, the lines can be blurred between different forms of liberalisation. Throughout this article, you will hear us refer to the legalisation and/or the decriminalisation of cannabis.
The most liberal form of deregulation is legalisation. This method is considered the most effective in tackling the illicit market as it leads to the creation of a commercial, regulated market where competitive forces drive down prices and costs, undercutting the illegal market.
Many, however, consider the creation of a commercial market as dangerous for two reasons. First, it can lead to widespread consumption of cannabis, which for many years has been perceived as the ”devil’s drug”, the gateway to harder substance addiction.
Second, if cannabis is advertised and promoted, it can increase youth prevalence. It is for these reasons that the decriminalisation of cannabis is considered a suitable alternative.
In this, it is still illegal to possess cannabis, however, possession is treated as an administrative offense rather than a criminal offense. People are fined, rather than put in prison. Opponents to decriminalisation point out that it does not tackle the presence of the black market.
The Case for Cannabis LegalisationCanada had the following aims with its legalisation of cannabis:
- Reduce the consumption of cannabis by young people.
- Keep profits from the cannabis market out of the hands of criminals.
- Strengthen law enforcement measures to deter the sale of cannabis outside the legal framework, especially to young people.
- Establish and enforce strict regulations around producing, distributing and selling cannabis.
- Continue to provide access to cannabis for medical purposes.
- Apply taxes to legal cannabis sales.
“Some common threads that underpin the arguments for legalising cannabis are that: cannabis is relatively less harmful than other drugs, including other legal drugs, the costs of enforcement of existing criminalisation are high and that there are perceived medicinal benefits that are not being exploited.”
– The PBO, Canada
The Political Movement
The federal legalisation of recreational-use cannabis in Canada, medicinal-use legalisation in the UK and Germany, and partial legalisation in some US states (though it remains federally illegal) shows just how strong the case is for legalisation is.
Despite the sharp divides in support for cannabis legalisation, a few things are clear: public support for marijuana legalisation continues to increase, the industry is already a multibillion-dollar juggernaut that looks primed for continued expansion, and there are clear potential medical benefits of cannabis.
Indeed, The FDA’s approval of Epidiolex in July 2018 (the first ever cannabis-plant based drug approved by the FDA), and its subsequent rescheduling by the DEA, marked a Milton moment for the recognition of the effectiveness of medicinal marijuana as a treatment method for certain ailments.
A booming Industry
However, as global recognition of the benefits of medicinal cannabis increases, and the end of the ‘prohibition era’ for cannabis beckons, there is a burgeoning need for high-quality products with known components, cultivated at large scale for consistent, reliable supply to health users.
It would be safe to say that the Cannabis industry will soon become the most lucrative and thriving industrial sector in the world. Cannabis cultivation has traditionally been a fragmented cottage industry with minimal quality standards.
The current status quo of the Cannabis market is simply that Canadian producers, as a result of the federal legislation and export policies, are driving the global markets and fueling the hyperbolic growth currently being played out in the industry.
And it is only going to get bigger, but with a difference. Growth will not continue to come from a cottage style industry, but rather form the entry of massive global players.
We have seen this recently with Constellation Brands’ massive investment in Canopy Growth, Molson Coors partnership with Hexo, and of course Altria’s (who own the Marlboro Brand) investment of USD$1.8 billion into The Cronos Group.
Let’s consider some of the regions and their largest countries.
And as for the trends moving forward?
It’s a question everyone is looking to answer, but no one can really answer it. The industry is simply moving too fast to know exactly what lies ahead. However, there are trends, and if one follows the breadcrumbs, one can certainly get a glimpse of what the future holds.
It’s a commodity
There is going to be so much weed. Everyone is racing to produce. Colorado (which legalised cannabis in 2014 has seen a dramatic decrease in the price of cannabis per kilogram. Once producers scale up, there is going to be a massive oversupply of cannabis and this will put downward pressure on the prices.
Producers that are not differentiated will suffer in the medium term and the small “low cost” growers will struggle to gain a foothold.
It’s not even grown
Synthesised cannabis – CBD grown in labs and not in greenhouses – could well be the way of the future. Recently Cronos Group announced an investment in GinkoBio, a company that is pioneering the production of synthesised CBD. This could have a significant impact on the industry, as it would put more pressure on Licensed Producers that have spent an inordinate amount of Capex to establish cultivation centres.
The money’s in retail
For the past couple of years, investors have made massive gains investing in the licensed producers (Aphria, Canopy Growth, and Aurora to name drop a few). However, now that recreational legalisation has taken place and the retail market is in full swing, it is the retailers that will ultimately capture the lion’s share of the margin.
It’s going to be about brands
And speaking of retail, brands are going to be where the money is made. Consumers will demand high-quality brands, with research showing that consumers display great loyalty to their retail outlet and their brand of choice. After all, do you buy beer or do you buy Corona?
The biggest Cannabis Company in the world isn’t around yet
And finally, the biggest difference in 5 years time may well be the market’s leaders. It is our belief that the largest cannabis company in the world doesn’t even exist yet. For now, Canopy Growth leads the pack with a valuation of CAD$10.5 billion (at time of writing), however, with Big Pharma, Alcohol and Tobacco actively tracking the industry, it is not inconceivable that Canopy could eventually be dwarfed by the likes of Coca-Cola, Diageo or Novartis.
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