In our wrap-up for 2020, we highlighted much of the progress we saw in the cannabis sector in the past year. We believe that 2021 is shaping up to be the most significant year yet for the global cannabis sector. A Democrat sweep in the U.S. likely paves the way for federal legalization (or something similar) while states continue to pursue their own reformist agendas, and countries around the world, namely Israel and Mexico, continue to push forward on reform as well. Our predictions for this year take into account that momentum while hitting pause on a couple areas that took a step back in 2020.
The Aphria-Tilray merger kicked off what many industry observers have long predicted: consolidation is inevitable. There are simply too many Canadian cannabis producers with fraught financials for the size and stage of the market. We believe that there will be two more significant mergers or acquisitions in the Canadian cannabis space before the calendar flips to 2022. Whether among licensed producers, retailers, extractors, or ancillary companies, we see the Canadian market consolidating in 2021 as companies align themselves with other players who have stronger balance sheets and better exposure to the U.S. market.
In early December, LeafLink announced its $40 million series C led by Founders Fund, one of the most influential technology venture capital firms. As regulations evolve and the stigma around cannabis falls, we expect that cannabis will attract more big name investors in 2021. This influx in capital will further help legitimize cannabis companies and hopefully signal to holdout governments that legalization is a worthwhile initiative worthy of supporting.
Cannabis legalization hopes are high following the Democrats’ Senate runoff victory in Georgia. While we do believe that cannabis legalization is inevitable (as evidenced by recent comments by Chuck Schumer), we do not think that federal legalization will happen in 2021. We could see incremental steps towards it — perhaps by giving cannabis companies banking and capital markets access through the SAFE Banking Act — but we see full legalization falling outside of the initial priorities for the incoming Biden-Harris administration.
If we’re (slightly) bearish on federal legalization passing this year, we’re bullish when it comes to state-level legalization. 2020 was a milestone year for cannabis in several U.S. states with five states passing cannabis-related ballot measures, including recreational legalization in New Jersey and Arizona, in November’s election. On January 6, New York governor Andrew Cuomo announced his plans to legalize cannabis in 2021. Given that cannabis legalization can satisfy a dual role as a social justice policy and revenue generator for hard-hit states, we expect to see at least two other states — Pennsylvania, Rhode Island, Connecticut, Virginia, or New Mexico — join New York in rolling out their legalization plans for medical and/or recreational cannabis this year.
Overall, Canadian cannabis retail sales climbed steadily throughout 2020 before dipping slightly in November. While country-wide sales dipped from $270 million in October 2020 to $261 million in November, the month-over-month growth up until that point indicates that the Canadian sector is primed for an upward trend. We see no reason why cannabis sales won’t recapture 2020’s trend and grow consistently throughout 2021. Ontario recently announced that it will also expand the number of retail permits per month, and ongoing vaccination efforts related to the coronavirus pandemic should create opportunities for brick and mortar retailers in the second half of the year. This should only solidify the pace of growth in the coming months and set Canadian recreational cannabis up for another big year.
CBD prices plunged throughout 2020 as supply far outstripped demand and the commoditization of hemp took hold. CBD companies that once hoped that the non-psychoactive nature of their main ingredient would create an easier path to market compared to other cannabis companies have hit a wall. U.S. consumer regulations around the marketing — primarily regarding CBD’s supposed benefits — and distribution haven’t progressed, either.
While even Canadian licensed producers with limited U.S. exposure continue to reap the benefits of cannabis optimism across the U.S., we believe that U.S.-based multistate operators will be the long-term winners in the U.S. As more states look to legalize through 2021, and the federal government potentially provides its plan for cannabis, we believe that by the end of the year the top five MSOs will see their market cap eclipse the top five licensed producers as investors flock to these companies ahead of country-wide legalization.
2020 was a huge year for special purpose acquisition companies, or SPACs. From green technology to cannabis, 82 SPACs went public in the U.S. last year. Towards the end of 2020, Weedmaps announced it will go public via a SPAC. But while SPAC formation stays hot, we’re not sure the follow through will be as anticipated. SPACs try to strike industries while the proverbial iron is hot — hence the focus on electric vehicle technology or U.S. cannabis right now — but their structure has its shortcomings (sponsor shares, de-SPAC approvals, etc.), giving companies plenty of reasons to stay private longer.
By the end of 2021, Canada, many U.S. states, and perhaps even Mexico will have legalized recreational cannabis. With demand soaring and international regulations beginning to evolve, we may start to see the emergence of low-cost cultivation jurisdictions in Latin America. Many Latin American countries have the ideal climate for outdoor cannabis growing, as well as quality land that comes at a lower cost compared to similar plots in North America. These countries also have lower labour costs. Canadian cannabis companies have been hit hard by the costs, and ensuing writedowns, associated with large-scale indoor and greenhouse grows. The long-term result may be the emergence of cultivation hubs in lower cost, strategic locations.
Europe has long been cited as a catalyst for cannabis industry growth. It was even referenced as a key point in the Aphria-Tilray merger in late 2020. And while we were dripping with optimism at this time last year, we’re more cautious about the prospects of widespread European legalization at this point. Despite snail’s pace progress in Germany and a small handful of other nations, these frameworks are highly regulated and do not set the stage for the emergence of similar industries as we’re seeing in North America. We’re confident that Europe will get there, but we don’t see it happening in 2021.
That’s a wrap on our 2021 cannabis predictions. If you have some of your own, feel free to share in the comments, or send them to us on Twitter or LinkedIn. We will check back on these in December 2022 to see how they fared.
This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.
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