Heightened competition in the market for legal recreational weed is pushing prices down and firing up border wars across state lines. Competition is so steep in Washington state that cannabis revenue growth has slowed as Oregon ramps up its adult pot sales.
What’s more, in Colorado and Oregon there’s more interest from out-of-state investors entering the recreational pot business.
Then there’s California, where voters will decide later this year whether to legalize recreational pot.
Yet, for all the interest, the marijuana business remains fraught with risks and capital challenges.
“Cannabis is still illegal on the federal level, so it makes investing very risky,” said Jessica Rabe, a research analyst with ConvergEx, a New York-based brokerage that released its outlook for the industry last week. Federal laws make it difficult for marijuana businesses to open bank accounts, and as a result many have gobs of cash sitting around, making them targets for robberies.
“The recreational marijuana business shows a vibrant and growing industry as more states legalize the drug,” ConvergEx said. However, it said several states with legalized recreational use have put barriers to out-of-state investors, and “the U.S. Department of Justice frowns upon outside money flowing into the marijuana industry as well.”
Overall, state-regulated marijuana sales reached $5.7 billion in 2015, up nearly 24 percent from the prior year, boosted by growth tripling in the recreational market, according to “The State of Legal Marijuana Markets” report from ArcView Group, an Oakland, California-based investment network for cannabis start-ups. It forecasts legal cannabis sales are on track to reach $22.8 billion by 2020, with adult use representing more than half the total market.
Nearly half of the states and the District of Columbia have passed legislation or ballot measures to legalize the possession and distribution of marijuana for medical purposes, and four states — Washington, Oregon, Alaska and Oregon — have legalized adult recreational use. At least nine states have medical cannabis or adult legalization measures in the works, including the closely watched ballot initiative effort in California to legalize recreational use statewide for people 21 and older.
Meantime, a U.S. Senate drug caucus hearing set for Tuesday underscores some of the uncertainties at the federal level still facing the marijuana industry.
Sen. Chuck Grassley, R-Iowa, chairman of the Judiciary Committee and the Caucus on International Narcotics Control, and Sen. Dianne Feinstein, D-Calif., co-chair of the drug caucus, are convening the hearing entitled “Is the Department of Justice Adequately Protecting the Public from the Impact of State Recreational Marijuana Legalization?” Both lawmakers have long been opposed to legalizing recreational use.
The Senate hearing follows the release of a marijuana report last month by the Government Accountability Office that Grassley and Feinstein had requested. The GAO report called out the Department of Justice for not providing more clarity on its marijuana enforcement policies and recommends “DOJ document a plan specifying its process for monitoring the effects of state marijuana legalization.”
“They are really barking up the wrong tree if their opinion is that the Justice Department should be going after people who are following state law in states that have decided to go this route,” said ArcView CEO Troy Dayton. “The public is behind us, and at the end of the day public officials ultimately answer to the public.”
California’s recreational use initiative imposes a 15 percent tax on retail sales of marijuana and includes cultivation fees. Recreational legalization backers have raised more than $2 million in campaign funds, including about $1 million from Silicon Valley billionaire Sean Parker. Also, Lt. Gov. Gavin Newsom, a candidate for governor in 2018, has endorsed the measure.
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