Why the World Is Watching Canada's Pot Legalization


(Bloomberg) -- All eyes are on Canada as it prepares to legalize recreational marijuana in October, becoming only the second country to do so after Uruguay. The pending change has touched off an investment boom and pushed up valuations of Canada’s cannabis producers. They’re enjoying a first-mover advantage as medical and recreational pot gain traction from the U.S. to Germany. Canada’s industry will also be the litmus test for whether governments can stamp out illicit sales, transfer billions of dollars in revenue to an emerging industry, generate taxes and create jobs.

1. What is Canada’s plan?

Fulfilling an election promise by Prime Minister Justin Trudeau, legal sales of certain forms of cannabis begin on Oct. 17. Fresh or dried cannabis, cannabis oil, and plants and seeds for cultivation will be allowed initially. Edible products and concentrates will be legalized later. Federal regulations put the minimum purchase age at 18, allow people to grow up to four plants at home and set strict rules on packaging and branding. The law also bans marijuana exports and imports, except for medical or scientific purposes, which require a permit. It’s up to Canada’s provinces to determine rules for retail sales and distribution. Provinces also have the power to lower possession and personal cultivation limits, increase the minimum age and restrict where marijuana may be used in public.

2. How will provinces handle legal sales?

They differ. Alberta is allowing privately run retail stores and the government’s liquor agency will operate online sales. Quebec plans to set up government-run pot shops that will be operated by its alcohol agency. Ontario, which is expected to account for 40 percent of the legalized cannabis market, has delayed plans to open retail stores until 2019 after newly elected Premier Doug Ford decided to switch to a private model, like Alberta’s. For now, legal pot will only be available online in Ontario.

3. How’s the cannabis business doing?

The promise of legalization has spawned a so-called green rush. The industry is now worth more than C$80 billion ($60.6 billion). On the Toronto Stock Exchange, the market value of Canopy Growth Corp. (ticker symbol: WEED) alone is almost C$15 billion, more than major producers of conventional commodities, including U.S. aluminum giant Alcoa Corp. Many companies are scrambling for production licenses and financing. Existing growers of medical marijuana are looking to build bigger and better facilities to acquire sought-after supply agreements. Optimism has waned in recent months, however, amid concerns that market valuations have become too rich. The BI Canada Cannabis Index, which tracks the shares of 74 Canadian cannabis-focused companies, has slumped this year, after surging 172 percent in 2017.

4. Who else is investing?

Major firms outside the cannabis industry, especially from the drinks sector, are getting involved. Constellation Brands Inc., the brewer of Corona beer, is spending $3.8 billion to boost its stake in Canopy Growth. BNN Bloomberg TV reported that the giant U.K. spirits maker, Diageo Plc, is in discussions with at least three major marijuana producers in Canada to make cannabis-infused beverages. Molson Coors Brewing Co. is starting a joint venture with Hydropothecary Corp. to develop cannabis drinks in Canada. Companies such as Canopy Growth, Aurora Cannabis and Cronos Group are also actively securing deals to supply countries like Germany with medical marijuana.

5. What about taxes?

The Canadian government projects an annual market of about C$4 billion for legalized pot. It plans to apply a marijuana excise tax of 10 percent on the product price, or C$1 per gram, whichever is higher. The provinces will also apply their own sales taxes. Alberta will introduce a 10 percent levy on the retail price while Manitoba is making recreational marijuana exempt from provincial sales tax. The federal government has agreed to hand over at least 75 percent of excise tax revenue to provinces for the first two years after legalization.

6. How popular is pot?

About 15 percent of Canadians partake now, legally and otherwise, according to estimates. Even Trudeau says he’s smoked pot, including since becoming a member of Parliament. Canadians consumed more than 20 grams of marijuana per person last year and spent C$5.6 billion on the product, according to estimates from the nation’s statistics agency. While current pot smokers are typically 18 to 34 years old, use among the middle-aged “conservative experimenter” is expected to grow, with legal recreational sales possibly reaching C$4.3 billion in 2019, according to a June report from Deloitte LLP. Not all existing users will initially transition to the legal market as popular forms of consumption, including edibles and pot for vaping, will remain illegal. It’s also important to remember the nation’s total domestic market is relatively small -- Canada is home to about 37 million people, fewer than California.

7. Is there enough legal pot?

While companies are aggressively building cannabis capacity, clues from other jurisdictions show that initial demand will probably outstrip supply. After recreational use was legalized in California, initial bottlenecks crimped inventory. In Colorado, which has also legalized recreational use, prices soared as high as $400 an ounce. It wasn’t long before Colorado had the opposite problem, with ballooning marijuana supplies sending prices tumbling. In Canada, more than 100 enterprises have gotten the green light to grow medical pot, raising industry worries that the domestic market could eventually be oversupplied. Canadian marijuana prices are already falling as supplies rise; the average cost per gram fell 8 percent to C$7.43 in 2017, according to the nation’s statistics agency.

8. Will Canada still prosecute people for weed-related crimes?

Yes. New laws introduce stiff penalties for selling marijuana to minors, illegal distribution or sale and driving while impaired. Giving or selling marijuana to youths under 18 and producing cannabis in excess of the personal cultivation rules carry a maximum penalty of 14 years in jail. New regulations also authorize police to test drivers’ saliva to determine if they are drug-impaired.

The Reference Shelf

  • A QuickTake on marijuana legalization in the U.S.
  • Canada sets the target date for legal recreational pot.
  • Corona beer maker sees its future in marijuana leaf.
  • A Bloomberg Law column on why cannabis companies can’t seem to spark the interest of established investment firms.

©2018 Bloomberg L.P.

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