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Wednesday, November 9, 2022

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Cannabis Legalization Approved in Two States, But Still Likely to Remain Low Priority in Congress

Summary: Cannabis was on the ballot in five US states yesterday as part of the 2022 midterm elections. Of those five, Maryland and Missouri each approved ballot measures to legalize the sale of cannabis for recreational use - the 20th and 21st states to do so. While expanding state cannabis markets is a net positive for American multi-state operators (MSOs), early results indicate Republicans will take a small majority in the House of Representatives and the balance of power in the Senate may only change by one seat, at most.

The current Congress has done little to meaningfully advance legislation focused on cannabis reform, and with very little change to the current partisan layout, cannabis should remain a relatively low priority in both chambers. While this is bad news for the cannabis industry, it was not an unexpected outcome. Therefore, the effect these elections will have on already beaten-down shares of cannabis cultivators and retailers is likely to be only marginal. 

Related ETFs: AdvisorShares Pure US Cannabis ETF (MSOS), ETFMG Alternative Harvest ETF (MJ)

One of the industries with the most riding on yesterday’s midterm US congressional elections was commercial cannabis. As MJBizDaily notes, voters in Arkansas, Maryland, Missouri and North Dakota voted on whether to establish new recreational marijuana markets that together could generate nearly $1.7 billion in new sales in their first year. By year four, those four markets together could total more than $2.8 billion in adult-use sales. While that was the best-case scenario, results appear to be mixed.

Passage of a constitutional amendment to permit sales of cannabis for recreational use in Maryland faced little doubt leading up to the campaign and appears to have garnered nearly two-thirds of votes in the affirmative. Purchase and possession of 1.5 ounces of cannabis is now legal for those above the age of 21, and adults can grow up to two cannabis plants for personal use. Maryland will also make changes in criminal law and create automatic expungements of past marijuana possession convictions.

Per MJBizDaily, sales are likely to start in 2024 or 2025 and could total $550 million-$600 million in the first year, and as much as $1 billion in the fourth. The state is one of 37 that has a medical cannabis program, touting more than 100 operational dispensaries. Medicinal cannabis revenue in Maryland last year totaled about $600 million.

Missouri also voted to legalize recreational marijuana for adults 21 and older and expunge records of past arrests and convictions for nonviolent marijuana offenses, except for selling to minors or driving under the influence. First-year sales of an adult-use marijuana market in Missouri could reach up to $550 million, according to MJBizDaily estimates, with fourth-year sales projected to be $800 million-$900 million. Missouri already has 191 licensed and operational marijuana dispensaries, as the sale of cannabis for medicinal uses has been legal in the state since 2018.

Considering the results out of Maryland and Missouri, 21 states have now approved marijuana’s recreational use. However, TIME Magazine notes that 55% of North Dakota voters, 53% of South Dakota voters, and 56% of Arkansas voters chose to oppose legalization efforts, meaning ballot measures in those states have failed.

While increasing the number of state cannabis markets is a net positive in expanding potential revenues for US multi-state operators (MSOs), a federal prohibition on cannabis remains a significant hurdle to legitimizing the industry and deregulating access to interstate commerce and sufficient financial infrastructure.

MRP has noted for several years that, short of the total elimination of federal prohibition, laws that will allow licensed cannabis enterprises do business with federally chartered banks is what the industry needs more than anything. Most banks in the US are federally-chartered and therefore have to do their business according to federal laws and regulations – particularly those regarding narcotics. Some state-chartered banks are more open to doing business with cannabis companies, but lack of access to financial infrastructure in the banking system has created a very cash-intensive industry, opening businesses up to a wave of robberies targeting dispensaries and other places that cannabis businesses might be stashing money they can’t get into a bank. Those vulnerabilities raise the cost of doing business by forcing firms to hire extra security, pay for greater insurance, etc.

The Secure and Fair Enforcement Banking Act (SAFE), which would allow banks to legally handle the proceeds from a state-legal cannabis business by prohibiting certain federal banking regulators from taking adverse actions against banks and credit unions that provide services to “cannabis-related legitimate businesses”, has passed the House of Representatives multiple times, only to be stonewalled by the Senate.

With early results indicating the House of Representatives will be taken over by the more cannabis-skeptical Republican party, and the Senate likely to remain gridlocked in a 50-50 split (or potentially 51-49 leaning either way), congressional sentiment is unlikely to meaningfully change in a positive way. MRP has highlighted a growing shift among Republicans and their approach to cannabis throughout the past couple of years – particularly the SAFE Banking Act passing the House with 106 Republicans (exactly half of the 212 Republicans in the chamber at the time) voting in favor in 2021 – but a contentious political environment in the lead up to the next spate of elections in 2024 will likely keep cannabis reform as a pretty low priority in both chambers of Congress.

Shares of cannabis firms have been wiped out throughout the past two years as hopes for a Democrat-controlled White House and legislature to push forward on ending federal prohibition of cannabis have dwindled. All in all, the 2022 midterms will result in a marginal gain for the cannabis industry, but no major upside surprises came about. The best prospect for cannabis firms operating in the US remains potential executive action from President Biden, who has been slow to pull the trigger on this issue, but did roll out pardons for all prisoners convicted on prior federal charges, or convicted in the District of Columbia, of simple marijuana possession, a measure that impacted more than 6,500 individuals with prior convictions. The President has also instructed Secretary of Health and Human Services Xavier Becerra and Attorney General Merrick Garland to begin reviewing marijuana’s classification as a Schedule I narcotic, which deems it has “no currently accepted medical use”. 

Investors can gain exposure to the cannabis industry via the AdvisorShares Pure US Cannabis ETF (MSOS), a fund focused specifically on exposure to US cannabis stocks, as well as the ETFMG Alternative Harvest ETF (MJ), a similar fund containing more broad exposure to cannabis firms based in Canada.


Supplemental material for today's market insight...


Cannabis earnings show legal U.S. weed sales flattening out as prices decline

Curaleaf executives, during the company’s earnings call Monday, said they were cutting hours in stores and cutting spending elsewhere. Curaleaf reported a net loss of $54.7 million, or 7 cents a share, compared with a loss of $56.9 million, or 8 cents a share, in the same quarter last year. Sales came in at $340 million, compared with $317 million in the prior-year quarter. Sales grew just 1% from the previous quarter.

Read the full article from MarketWatch +


Idaho Poll Finds That 68% Support Medical Cannabis Legalization

An Idaho Statesman poll by SurveyUSA released on November 5 found 68% of Idahoans believe medical cannabis should be legalized in the state. The poll found medical cannabis legalization was supported by 84% of Democrats, 60% of Republicans, and 74% of independents.

A bill introduced in the state Legislature last year to decriminalize cannabis never made it to the floor for a vote.

Read the full article from Ganjapreneur +

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