Cannabis stocks show resilience to uncertainty
A new Canadian Government report shows that the expected price point of recreational marijuana will provide a hefty margin to licensed producers with a price point between $6.67 and $8.33 per gram. For comparison, Aphria Inc. (TSXV:APH | OTCQB:APHQF) reported an all-in cost of production as $2.08 per gram.
This is good news that may usher another rally for Canadian cannabis stocks. The recreational market in Canada is estimated to be worth $7 to $10 billion.
In anticipation of the legalization of recreational marijuana investors have taken the stocks of Canadian producers of medical marijuana into the stratosphere, defying gravity like a released helium balloon in a Nicolas Spark movie. Canopy Growth Corp. (TSX: CGC), Aurora Cannabis Inc. (TSXV: ACB), Aphria Inc., OrganiGram Holdings Inc. (TSXV: OGI), and Supreme Pharmaceuticals Inc. (CSE: SL).
The report titled “Legalized cannabis: fiscal considerations” provides a forecast of the economic parameters in the cannabis market, including the number of users, aggregate consumption and product prices. It also delves into potential revenues that could arise from legal cannabis sales, based on existing and projected market data, as well as the government’s stated policy objectives.
In Spring 2017, the federal government is to introduce legislation to legalize and regulate the cultivation, distribution, sale and consumption of recreational cannabis in Canada.
To outcompete illicit market, the Trudeau government intends to fix the pre-tax price of recreational cannabis by putting downward pressure on prices of illicit cannabis. In 2015-16, the average price of illicit cannabis ranged between $8.32 and $9.36, with a mid-point estimate of $8.84 per gram. Prices varied considerably across the country. Legalization will likely affect the price point down.
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The pre-tax price of legal cannabis is projected at between $6.67 and $8.33 per gram, with a mid-point estimate of $7.50 per gram. At the onset of legalization, prices may be higher due to the potential for supply shortages and regulatory changes. As the legal market matures, there will be downward pressure on wholesale prices as producers’ production costs decline. However, long-term prices are less predictable as consumer tastes and product offerings, including value-added products, evolve.
The legalization of recreational cannabis will introduce an entirely new sector into the formal economy. Given the government’s intention to regulate and tax this new sector, legalization will create new government revenues and expenses. Legal sales of recreational cannabis may begin as early as January 2018.
In 2018, an estimated 4.6 million individuals aged 15 and over will use cannabis at least once, according to PBO projections. By 2021, this level could rise to 5.2 million.
There are two fundamental characteristics of the cannabis stock markets. Perhaps most unusual is that every investor seems to have heard of it. Sitting in bars or in airplanes I keep overhearing conversation from bar tenders, waiters and school teachers about how they invested into a cannabis stock. This discussion is omnipresent.
Cannabis stocks have shown resilience to uncertainty. In August, when the Trudeau government published the new ACMPR rules the market scratched its head as to what would happen to the MMPR Licensed Producers. There was a hiatus for a few days until investors collectively realized that the ACMPR rules will most likely benefit the current licensed producers.
Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>