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5 reasons the marijuana black market won't go away

Cannabis has been anointed by Wall Street as one of the fastest-growing industries on the planet. After sales more than tripled worldwide between 2014 and 2018, Wall Street has forecast a roughly fivefold to 18-fold increase in global annual revenue by the time 2030 rolls around. This type of growth is impossible for Wall Street and investors to ignore, which is a big reason pot stocks have been all the rage.

But if you've been paying close attention to the industry, you're likely well aware that marijuana stocks have been nothing short of a buzzkill over the past six months and change. Many have seen their share price cut in half, or possibly worse, as a host of challenges have cropped up.

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Black market marijuana is here to stay

Worse yet, the legalization of recreational marijuana in Canada, as well as in select U.S. states, hasn't stomped out black market cannabis, as initially expected. In California, the largest legal weed market in the world by annual sales, illicit marijuana sales are projected to outpace legal pot sales in 2019 by a significant margin: $8.7 billion to $3.1 billion. Meanwhile, analysts at Scotiabank estimated in early February that the black market would be responsible for 71% of total cannabis sales in Canada in 2019.

How are illicit producers bucking the push toward a legalized marijuana environment, you ask? The blame rests with the following five factors.

1. Supply issues in Canada

In our neighbor to the north, supply shortages have been a persistent problem since recreational weed sales began one year ago, with a trio of problems to blame.

First, regulatory agency Health Canada has been buried by cultivation, processing, and sales license applications. It entered the year with more than 800 applications on its desk, and despite implementing aggressive changes to the cultivation licensing process, it's going to take months, or perhaps more than a year, for the agency to work through its backlog. In the interim, cannabis growers are forced to wait to either grow or sell marijuana.

Secondly -- and I'll have more to say on this in a subsequent point -- certain Canadian provinces have been slow to give the green light to physical dispensary licenses. With few retail stores for consumers to shop at, illicit marijuana has filled the void.

And thirdly, pot growers have been slow to start and complete cultivation projects. All of these factors have allowed illicit weed producers to thrive.

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2. Tax issues in select U.S. states

In the United States, high tax rates have been effectively driving consumers to purchase black market marijuana.

California, for example, is taxing the daylights out of its pot buyers. In addition to passing along a state tax and local tax, buyers are paying a 15% excise tax, as well as a wholesale tax of $9.25 per ounce of dried cannabis flower, or $2.75 per ounce of cannabis leaves. Add this up, and it could work out to an aggregate tax rate of 45% on legal pot. And, mind you, this doesn't include additional costs such as the laboratory testing on weed grown in the Golden State, which is also being factored into the price that consumers pay.

Suffice it to say that legal cannabis simply can't complete with illicit producers on price. This is one of the reasons I firmly believe MedMen Enterprises (OTC:MMNFF) has struggled of late. To be fair, MedMen is losing a lot of money -- $178.4 million in net operating losses through nine months of fiscal 2019 -- and it recently terminated its acquisition of PharmaCann to seemingly conserve capital, so it has more than just one problem. But according to the company's third-quarter operating results and preliminary fourth-quarter review, MedMen's existing California locations delivered just 5% sequential growth in the third quarter and 10% sequential growth in the fourth quarter. That's not very impressive given how nascent the recreational industry is in the Golden State, and it speaks to the influence the black market has for the time being.

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3. A slow dispensary approval process throughout North America

Another clear problem that's allowed the black market to persist is the slow approval process for dispensary licenses in both Canada and select U.S. states.

In Canada, Quebec-based grower HEXO (NYSE:HEXO) announced during its fourth-quarter operational update that the slow pace of dispensary store openings has adversely impacted its sell-through rate. Despite recreational weed sales commencing last October, HEXO's home province of Quebec didn't even see its own dispensaries open seven days a week until May, primarily due to severe supply shortages. Furthermore, there are far too few locations open to provide adequate supply to Quebec's adult residents. Perhaps, then, it's no surprise that HEXO removed its 2020 sales guidance and reduced expectations for sequential fourth-quarter sales growth from "a doubling" to about 19%, at the midpoint. 

In the U.S., local regulators in California have been notoriously slow to approve dispensary store licenses. As of the midpoint of 2019, California had just one dispensary open per 61,000 adults aged 21 and over, which compares to one open dispensary per 5,567 adults aged 21 and over in neighbor state Oregon.

If the legal retail points aren't there, it becomes easy for consumers to turn to black market retailers.

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4. Jurisdiction problems in select U.S. states

Fourthly, the fact that legalized states have allowed municipalities to decide whether cannabis retail stores can open or not has also been a serious problem.

In Canada, the passage of the Cannabis Act made marijuana legal throughout the country, so this particular issue isn't of concern to our neighbor to the north. But in states like California and Colorado, statewide legalization looks more like Swiss cheese rather than a unified decision passed by voters.

In California, close to 80% of the 482 municipalities in the state have banned commercial marijuana activity. Although the Golden State's significantly higher population cities have given marijuana retail stores a green light, it's still left plenty of the state as sort of a no-go zone for pot. With such a large percentage of municipalities failing to OK licensed dispensaries, it's opened the door for the black market to flourish.

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5. Regulatory enforcement has been spotty

Last, but not least, regulatory enforcement designed to drive the black market out of business hasn't exactly been working. Based on data from the United Cannabis Business Association, via an audit that was recently turned into California Gov. Gavin Newsom (D-Calif.), 2,835 of the 3,757 listings of marijuana sellers in California on website WeedMaps were unlicensed. Although the state has promised to step up enforcement on illicit producers, it's yet to do so.

Enforcement has been a bit tougher in Canada, where CannTrust Holdings (NYSE:CTST) was recently taken to the woodshed. CannTrust announced in early July that it had been growing marijuana in five unlicensed grow rooms for a period of six months. This admission led regulatory agency Health Canada to suspend CannTrust's cultivation and sales licenses in mid-September. CannTrust also announced this past week that it would destroy roughly $58 million worth of plants and inventory from its illicit grow rooms in an effort to regain its licenses. With Health Canada making an example out of CannTrust, it's at least a step in the right direction toward tougher enforcement in our neighbor to the north.

Long story short, the black market isn't going anywhere anytime soon.

3 Reasons Aurora Cannabis Could Soar Before the End of 2019

Sure, Aurora Cannabis (NYSE:ACB) shares are down around 25% so far this year. And, yes, the stock is more than 60% off its highs set in the first quarter. But the growth prospects for the global cannabis industry still appear to be very good. Aurora remains a top candidate to prosper in this global market over the long run.

Being a marijuana sommelier is now a thing

CAMBRIDGE — At a candlelight dinner party on a Harvard Square patio one recent evening, each table setting included a plate, knife, fork — and a clear glass pipe and jars of marijuana.

After the two dozen well-dressed guests, who ranged from their early 20s to late 50s, seated themselves, John Maden stood and introduced himself as a cannabis “sommelier.” Over the next three hours, he directed the guests to smoke certain types of marijuana — with piney, citrusy, or earthy undertones — that he had picked to complement the five gourmet-chef-prepared courses.

UConn Launches Hemp Testing Lab in Response to Industry Need

In response to a rapidly expanding commercial hemp industry driven by interest in products with CBD oil, the University of Connecticut recently opened a laboratory where the plant can be tested for a variety of compounds.

As part of the Center for Environmental Sciences and Engineering’s Hemp Initiative, the UConn facility will support the efforts of growers, manufacturers, and researchers, and educate students interested in entering the field.

CBD is positively changing people’s perspectives on marijuana

A new survey found that older adults have made the most impressive changes towards marijuana, gravitating towards CBD as a natural way of treating different ailments.

While CBD may not have the same effect as THC, it’s certainly having a huge impact on the way people think about cannabis.

The study, which surveyed 2,000 Americans, was conducted by OnePoll on behalf of CBD brand HempFusion. A whopping 82% of participants said that their opinions on marijuana had evolved in recent years, while 46% said that CBD products, such as CBD oil, were primarily responsible for changing their perspectives on the drug.

The takeaway? America’s changing attitudes prove that many people are outgrowing the anti-drug propaganda that they learned in their youth and embracing medical and recreational marijuana.

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As a refresher, both CBD and THC are both derived from cannabis plants. But while THC is psychoactive (mind-altering), CBD is not, which is why many companies prefer to use it as their active ingredient in everything from beauty products to beverages.

“Once people realize two things, they’re much more open to trying CBD,” says Ashley Grace, chief marketing officer at HempFusion. “One – your own body makes cannabinoids as part of what’s called your Endocannabinoid System (ECS). Two – the US Department of Health patented the plant-based cannabinoids found in hemp as ‘antioxidants and neuroprotectants.’ Given this, clearly there might be some value in plant-based cannabinoids as a dietary supplement. And since they don’t get you high – why not give them a try?”

The survey, by way of New York Post, represents the opinions of a broad spectrum of different age groups, reflecting how varied CBD’s target audience is. Younger Americans, who’ve grown up with looser perspectives regarding marijuana laws (and the marijuana plant, in general), are mostly supportive of legal cannabis and are willing to try out new products. Older adults are the ones who have made the most impressive changes, gravitating towards the benefits of CBD as a natural way of treating different ailments.

Russia advocates strict Drug Control Policy

Russia and few countries like Canada are at loggerheads over the issue of cannabis and hold conflicting views on drug related legislation. As per the United Nations Office on Drugs and Crime’s (UNODC’s) World Drug Report 2019, Russia along with the US and China was one of the three countries that together accounted for 43% of injected drug use globally.