The Coming Cannabis Crash

The Coming Cannabis Crash

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AP

This may be the year that the cannabis green rush hits the wall. Like other good ideas that blew up into frenzied manias – the Internet bubble of the late 1990s, for example – a lot of money will be lost before the real fortunes are made. Signs of a developing bust are abundant.

In the last year or two, investors have poured tens of billions into startup and early stage companies with great stories to tell and not much else. That bubble has already begun to deflate. The Canadian Marijuana Index, which tracks the aggregate market capitalization of a portfolio of publicly-traded companies, lost half its value in 2018. Today it is still down by about a third from the all-time high, with nothing on the horizon that would provide a fresh jolt.

Vendors that cater to the cannabis industry are starting to complain that their customers are paying slower. Online news site Marijuana Business Daily reported this month that professional services firms like consultants and accountants are feeling the pinch as their clients cut back on spending, hoping to ride out the downturn.    

On the consumer side, recreational cannabis has been such a hit in California, and so few cultivators have been licensed so far, that the demand for legal marijuana is outstripping supply. It’s gotten so bad that, “The world’s largest cannabis industry is on the verge of collapse,” says Sebastopol, California attorney and consultant Lauren Mendelsohn. She reports that legalization has not only failed to crowd out the market for black market marijuana, it has made legal weed so expensive it can’t compete.

In order to grow legal marijuana in California cultivators must jump through hoops for a mob of state agencies, each with its own agenda, regulations, and enforcement authority – Water Resources Control, Conservation, Fish and Game, Food and Agriculture, Forestry and Fire Protection, to name a few. And then there are multiple levels of taxing authorities. And that’s just one of fifty states that each have a unique set of rules and enforcement priorities.

On top of all that, few US banks will even take deposits from cannabis-related companies as long as marijuana remains illegal at the federal level. Even the National Hemp Association, a lobbying group that does not grow or process cannabis products, had its accounts at a Pennsylvania bank shut down just because of the organization’s name, says executive director Erica Stark.

On the black market, a huge glut that’s developed during the past two or so years has driven prices through the floor. To make up for lost revenue and anticipating a clampdown on illegal grows, farmers have been planting ever bigger crops.

Decriminalization and relaxed enforcement have made it easier to get outlaw crops from California’s fertile crescents to eager buyers in major metropolitan markets. As of last fall, you can walk into Los Angeles International Airport with an ounce of marijuana in your carry-on bag and you won’t be stopped by TSA agents or arrested by local police. District attorneys in a number of major cities such as Baltimore have stopped prosecuting pot-related infractions altogether. Resources are being redirected to dealing with the deadly fentanyl scourge.

As a result, quality marijuana that once sold for more than $4,000 a pound at the field in California now wholesales for about $1,200 on the streets of New York, with no end of demand in sight. Industry insiders believe that at least 80% of the marijuana smoked in the US is still grown on outlaw farms.

On the other hand, if you drive into the state of Mississippi, get stopped by the police, and they find three pounds in your car that you can prove you bought legally in Oregon, you could face up to 40 years in prison. That’s what happened to Jamaican musician Patrick Beadle, who was on his way from the West Coast to a gig in Florida when, according to the American Civil Liberties Union, he was racially profiled – driving while black. As of the most recent report, Beadle faces a minimum of three years behind bars.

This disunited state of the nation extends to legitimate hemp shipments. Congress’s Agriculture Improvement Act of 2018 (aka, the 2018 Farm Bill) contains a provision that requires states to allow cross-border transportation of hemp used to make non-psychoactive CBD oils. But in January, citing a technical gap in the law, authorities in Idaho stopped and seized a truckload of Oregon hemp and arrested the driver. Similar cases have been reported in Oklahoma and elsewhere.

Finally, and possibly most profoundly, the economic promise of legal cannabis will be hobbled by growing concern about contaminated and fraudulent products. Leading states like Colorado and California have strict testing requirements, but the testing infrastructure and oversight is only just evolving. There are gaps and outright mismanagement.

There have been multiple reports of significant pesticide contamination, and of lead in vape cartridges that is thought to be leaching from the Chinese-made devices into the product. One lab that tested about a dozen CBD products that were bought in retail shops found that five had no CBD, one tested positive for high levels of ethanol, and one sample of gummy bears tested positive for a deadly strain of E. coli bacteria.

The future may look bright and shiny for the cannabis industry, but getting there will be a long and bumpy ride.

The good news is that once this ball of string is finally unravelled, cannabis is poised to change the course of human history. Early signs include: San Francisco recently expunged the marijuana convictions of more than 7,000 people; some users of addictive pain medications are replacing drugs with cannabis products; beverage companies are positioning themselves to produce cannabis-infused products that could help alcoholics wean themselves from booze; cannabis is now a recognized and sanctioned pharmaceutical treatment for certain types of childhood epilepsy; hemp fiber is already being used in Germany and elsewhere to replace petroleum-based materials used in dashboards and insulation of new cars and in building products; hemp seed, it turns out, is a superior livestock feed, containing more protein and nutrients than corn and other feed crops.

If the cannabis crash is anything like the bursting of the Internet bubble, it may take a couple of years for the markets to absorb the losses before investors return to the sector in force. For that to happen, all of the supply, distribution, regulatory, legal, and pricing issues have to be resolved. And consumers will need a reason to feel confident that the only thing in their weed is weed.

1 COMMENT

  1. Dude what is up with every journalist who writes about cannabis businesses? It’s all focused on these huge companies and how their stock is doing. A lot of us aren’t trying to grab every piece of the damn pie…… But we still exist!!!!! The industry shouldn’t be about companies earning billions of dollars!!!! Focus on how that mentality is causing thousands of us to be obsolete!!!

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