Impending US cannabis legislation could spell trouble for Canadian stocks
The next two years might be make or break for the Canadian cannabis industry. The Secure and Fair Enforcement (SAFE) Banking Act just recently passed a committee vote, and it is winding its way through the US Congress. We’ll likely see a house vote in a few weeks. Should it pass, the bill could go a long way to bolstering the competitiveness of the US cannabis industry.
Specifically, the SAFE Banking Act would allow marijuana-related businesses in the US to legally access critical banking services, such as checking accounts, loans and credit card payments. Another piece of legislation that would also be a net positive is the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, which would exempt states who have legalized cannabis from federal enforcement.
At the moment, cannabis businesses in the US are forced to conduct all transactions in cash, which has resulted in critical logistical challenges, from paying taxes, payroll, products and services to taking out large loans. Some smaller financial institutions are willing to work with cannabis companies in states where it’s legal, but larger banks by and large have refused to touch them. If these bills pass—and they are widely expected to in the next year or so (the SAFE Banking Act already has over 138 co-sponsors)—US cannabis will no longer have to face these hurdles.
Currently, the industry consensus is that the major barrier still holding back US brands is regulatory in nature. In fact, one of its largest cannabis producers Acreage Holdings (CNSX:ACRG.U) tapped former House Speaker John Boehner to join its board last spring and to help lobby Congress for legal changes. Once certain legal changes are made to cannabis legislation in the US, leading Canadian cannabis companies such as Tilray Inc. (NASDAQ:TLRY) and Canopy Growth Corp. (TSE:WEED) should look forward to heavy competition from major US producers such as Curaleaf Holdings Inc. (CNSX:CURA) and leading retailers that include Medmen Enterprises Inc. (CNSX:MMEN).
Depending on how the bill is finally worded, however, industry officials have voiced skepticism as to whether the major US banks will actually be able to lend to the marijuana industry. Money still can’t pass through states where marijuana is still illegal, which may present complications that many banks just might not want to deal with. Wells Fargo (NYSE:WFC) has already publicly stated that it would not bank with cannabis until full federal legalization. Meanwhile, the US market remains fragmented, which means state-side competitors face more logistical problems than their Canadian counterparts
Nevertheless, the passing of these new bills could mean the window of opportunity for Canadian brands to strengthen their leading position may soon be closing. Things are not being helped by stumbles in the domestic market rollout. Canadian producers are still struggling with supply chain issues, severe supply shortages and the slow rollout of cannabis stores, and the black market is still thriving as a result. In addition, many cannabis products such as edibles and vapes are still not available.
Such a weak rollout, coupled with the large drop in demand from Canada’s medical cannabis industry, has prompted cannabis research agency Brightfield Group to cut back on its forecast for the size of Canada’s cannabis industry from $8-billion to $5-billion by 2021. In comparison, Brightfield estimates that the US legal cannabis market will be worth $50-billion by 2026. Canadian cannabis majors will need to act fast before US cannabis legislation catches up.
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