These Cannabis Companies Can Profit from the US-China Trade War

US-China trade war

2,500 years ago, beneath the peaks of the Pamir mountains in northwestern China, members of an ancient community said goodbye to a loved one. As part of the funeral rites, these people played music, burned fires, and smoked hallucinogenic cannabisToday, THC-rich cannabis is not only illegal in the Pamir mountains, it’s possibly exacerbating a US-China trade war that continues to wreak havoc on the global markets.

In June, the deputy director of the China National Narcotics Control Commission blamed a rising number of illegal drugs being smuggled into the country on the legalization of marijuana in parts of America and Canada. This, he said, represents a "new threat to China."

It’s not difficult to see how the cannabis sector is getting caught up in the US-China trade war. Most notably, the tariffs that Trump imposed on Chinese goods are causing the price of things like rolling papers, cannabis packages, and vape devices to rise by as much as 25 percent.

Even the cannabis plant itself is susceptible. China currently produces more than half of the world’s hemp, which it largely uses for textiles. New tariffs are likely to affect hemp and hemp-derived products, which over the last few years have been coming to the west from China more and more.

If borne by the companies themselves, this added cost is likely to make the cannabis space prohibitively expensive for a lot of businesses.

US-China Trade War isn’t All Bad for Cannabis, Though

Interestingly, the US-China trade war can also be seen to have some beneficial effects on the cannabis industry. China has historically been a major purchaser of American agriculture, but the tariffs on grain have caused the nation to look elsewhere for wheat, soybeans, and other agricultural goods. Struggling to make money from their old crops, US farmers are increasingly planting their fields with hemp in order to turn a profit.

Currently, farmers make about $150 per acre on soybeans. But they can net around $750 per acre by growing food-grade hemp.

Hemp can be grown by American farms as a result of the Hemp Farm Act of 2018. The act was passed by Congress last year and effectively removed hemp from the list of schedule 1 controlled substances in the US. Now it’s treated the same as any other agricultural commodity, allowing large-scale cultivation on farms across the nation.

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The more that hemp is grown in the west, the more the cannabis industry will turn towards Canadian- and American-based THC and CBD extraction. It’s no wonder, then, that business has been booming for extraction companies in the months since the US-China trade war began ramping up.

These are the Companies Currently Benefiting

One such company is MediPharm Labs Corp. (TSX:LABS) (OTCQX:MEDIF) (FSE: MLZ).

MediPharm was the first licensed Canadian producer to focus exclusively on cannabis oil extraction and is now one of the largest. Since February, its share price has been on a fairly consistent upward trajectory on the TSX, rising from $1.90 on February 1 to $5.30 as of August 1.

According to MediPharm’s corporate update on July 16, the company has increased its average weekly production of cannabinoid component concentrate to 75 million milligrams. Accordingly, it’s also been ramping up its purchase orders, buying 9,000 kilograms of dried cannabis from multiple cultivators at the end of June.

Neptune Wellness Solutions (TSX:NEPT) (NASDAQ:NEPT) has also been posting significant growth since the US-China trade war began. Like MediPharm, it is also scaling up its extraction capabilities from 200 metric tons to 1,500 metric tons, allowing it to produce as much as 200 million capsules yearly.

In addition, Nepture noted that 200,000 kilograms of extraction product have already been booked for 2020 and 2021. This good news led the company to see better gains in July 2019 than any other company in the cannabis industry.

Finally, Valens GroWorks Corp. (TSXV:VGW) (OTCQX:VGWCF) reported record earnings for its second quarter 2019. Its revenues increased to $8.8 million, up nearly three hundred percent from Q1 and its gross profits are up more than 50 percent. Valens is currently the largest third-party extraction company in Canada, with an annual capacity of 425,000 kg of dried cannabis, and it will likely grow larger in the coming months.

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The Future of the CBD Market in North America

Despite much of the cannabis sector seeing a downturn in share prices over the last few months, extraction is the rare subsector that’s actually seeing growth. Much of that centers on CBD extraction in particular.

A recent study from investment bank Cowen & Co. estimates that CBD will become a $16 billion industry by 2025. That’s up from as low as $600 million just last year. Even more optimistically, the Brightfield group believes that the hemp-based CBD market is on track to grow to $23.7 billion through 2023 and that growth is expected to kick off this year.

“The CBD market has been growing rapidly, but we will see unprecedented growth in 2019,” said Brightfield Managing Director, Bethany Gomez, in a press release about the report.

The report itself claims that “CBD is the next healthcare phenomenon. It is so effective for so many conditions, is natural, non-psychoactive, and has no known serious side effects […] It can be grown domestically as a substitute for tobacco and provide a much-needed cash crop for American farmers.”

The US-China trade war shows no signs of stopping, so investors will have to plan accordingly if they don’t want to be blindsided by the effects of the conflict. While the cannabis industry has encountered some hardships due to tariffs, it is also seeing growth. Extraction companies, and companies selling CBD extract products, stand to benefit as the trade war stretches on indefinitely.

What do you think of the companies we've included on our list? Are they companies that you've been keeping an eye on? Did we miss any of your favorites that we don't currently have our radar on? Let us know in the comment section down below or follow us on Twitter to join in the conversation. Happy hunting, investors!

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