The U.S. cannabis industry is in a time of rapid transition–business models are changing, investors are questioning projections, legalization is advancing, new talent is entering the industry and technology is rapidly evolving.
It’s an exciting time to be in cannabis. Here’s what we think growers can look forward to in 2020.
While each state market is idiosyncratic, there are some general trends. We acknowledge that our outlook is weighted toward the California market, which is not only where we are based, but is also far and away the largest state recreational cannabis market in the county.
States, counties and cities will continue to open their doors to commercial cannabis operations in 2020. Arizona, Connecticut, Montana, New Jersey, New Mexico, New York and Vermont are all considering legalizing adult-use cannabis. Some of these states may open up to commercial cannabis in 2020. Additionally, there’s a movement toward establishing medical marijuana markets in many states, some of which have historically been averse, including Alabama, Idaho, Kentucky, Mississippi and Virginia.
The massive California market will continue to grow as Sacramento ramps up pressure on local jurisdictions to permit cannabis businesses and voters see that the benefits of cannabis tax revenue in neighboring jurisdictions are not accompanied by increased crime. While currently only 12 counties in California allow outdoor cultivation, the remaining 46 may consider lifting bans on growing cannabis commercially following increased pressure from constituents. Many counties and cities will re-examine moratoriums on dispensaries, which has the potential expand access to millions of Californians.
2020 will mark a tipping point for legal cannabis in the United States—the country infamous for exporting the war on cannabis worldwide. At the federal level, cannabis decriminalization may be the only issue with significant bipartisan agreement in Congress, in principle at least.
The Enforcement Phase
Along with expanded legalization, 2020 will see an increase in enforcement as state and local agencies move past refining regulations and issuing permits. Ensuring compliance with the law is the next step.
Governments – motivated by the promise of hefty tax revenue from legal operators – will seek to signal that the era of unregulated cannabis in certain jurisdictions is ending. Cannabis operators who have resisted transitioning to the regulated market will experience a dramatic uptick in enforcement actions. This will be most apparent in California, where the 3,000 estimated illegal cannabis businesses collectively dwarf the legal market, according to a Los Angeles Times article. Enforcement, it should be noted, does not have a great history of success against lucrative illicit markets.
Businesses already participating in the legal market will also feel the pressure of increased enforcement. State and local enforcement teams will be conducting additional audits and inspections to determine compliance with hundreds of new regulations and policies. Some actions will be complaint driven, some will be opportunistic while others will be triggered by license renewal.
A Squeezed California Market
Overregulation and overtaxation will continue to squeeze California’s legal industry, making it challenging for existing companies to stay afloat or for new companies to enter the legal marketplace. Sacramento will debate new tax structures and regulatory reforms—and some significant reforms may even take place during Quarter 3 or Quarter 4, but by then it will likely be too late for many operators that have run out of private capital and cannot access bank loans. Those licensees will then but bought up as distressed assets for pennies on the dollar relative to 2019 valuations.
Conversely, despite some high profile enforcement actions, supply chains in the unlicensed (illegal) market will continue to adapt and become more sophisticated. Some hardware companies supplying California’s black market seem to have pulled back after the vape crises, but Asian imports are already quickly filling those niches. California’s legal market will continue to gradually lose ground to the illicit market for the foreseeable future.
Strong NIMBY Sentiments
Not in my backyard (NIMBY) sentiments will continue to plague growers and dispensaries. As the industry expands, so too will the entrenched opposition. Decades of anti-drug propaganda and fearmongering will take years to overcome. Local battles by neighborhood groups against cannabis businesses have only just begun as these groups continue to organize and challenge both permittees and permitting agencies (e.g., counties and cities).
Big Cannabis and Craft Cannabis
Economies of scale will be more important than ever in 2020. More acreage will be planted by large and sophisticated growers, which will not only drive down prices but also squeeze out smaller producers who are already struggling to remain profitable under onerous regulations and high tax burdens.
Small cultivators that find ways to differentiate their brand will find success by commanding premium prices. Sustainable products and “cause brands” with a social purpose will thrive as customers become savvier, develop brand followings and demand green and ethical products. Cannabis tourism may also provide an avenue for small growers to host visitors at their farms and expand visibility.
While each state and local market has its own unique mix of opportunities and challenges, 2020 will not be easy for most cannabis operators. Even relatively stable and disciplined companies will be challenged as they position themselves for some version of federal–and soon thereafter international–legalization.