Is COVID-19 a Silver Lining for Cannabis Investments?

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Although COVID-19 has ravaged large swaths of the economy, by and large that hasn’t been the case with the marijuana industry. Cannabis sales have exploded higher through many North American markets, with Oregon seeing marijuana sales increase by 30% compared to the previous year, helping to create a growing interest in cannabis businesses as an investment.1

In this article we’ll look at the effect of COVID-19 on cannabis investments, along with some of the potential opportunities and challenges facing the cannabis industry once the pandemic has run its course.

COVID-19 is Creating Record Cannabis Sales

Legal sales of marijuana are booming as the struggle against the pandemic continues. The increased demand is likely due to a variety of factors, including existing customers stocking up, cannabis stores offering delivery, and new customers who want to take advantage of a product that used to be illegal:2,3,4

  • During the first quarter of this year, average cannabis store sales increased by as much as 130%, and users ordering online grew by 142%
  • Sales of cannabis for both medical and recreational have steadily increased each month in Pennsylvania, with adult-use sales in the first two months of the year exceeding sales in the previous two years combined
  • California alone generated more than $208 million in tax revenues from cannabis sales last quarter
  • Many government leaders across the country view potential tax revenue from cannabis sales as a way to close some of the budget gaps created by the pandemic, with more states warming up to legal sales of marijuana for recreational use
  • Sales of cannabis for both medical and recreational have steadily increased each month in Pennsylvania, with adult-use sales in the first two months of the year exceeding sales in the previous two years combined
  • Cannabis pharmaceutical companies are in the race to develop treatment therapies for COVID-19

Cannabis is as Essential as Milk and Bread

In addition to legalization and tax revenues, another reason why cannabis sales are increasing is because many places view marijuana dispensaries as an essential business. According to a recent article from The New York Times:5

  • Marijuana makes the list of essential products, along with groceries, prescription drugs, gas, and urgent medical care
  • Marijuana businesses must limit themselves to orders for delivery or curbside pickup
  • Cannabis is another consumer good like beer or wine with women and young Generation Z’s accounting for much of the new sales growth
  • Business is also growing from Baby Boomers, motivating one cannabis operator with 53 locations in 17 states to reserve the first hour of operation each day for customers who are 60 or older
  • Cannabis businesses are careful to adhere to federal government standards to ensure they are deemed essential and can remain open

Long-Term Effect of COVID-19 on the Cannabis Industry

Barron’s notes that while COVID-19 has increased the discretionary demand for cannabis, the industry would probably suffer along with the rest of the overall economy if there is a sustained downturn.6 So far, however, it appears that the cannabis industry is about much more than just discretionary spending.

New jobs and tax revenues

Cannabis operators in the U.S. are showing impressive results despite being excluded from national banking and capital markets, punitive federal tax treatment, and the inability of institutional investors to buy their stock.

Cannabis companies are also helping to create jobs by hiring displaced restaurant workers and drivers, and generating badly needed tax revenues for cash-strapped cities and states.

Technology is minimizing market disturbances

Infrastructure components of the cannabis industry such as greenhouses have become more tech-oriented than ever before. This means that operators in a better position to deal with long-term consequences of the pandemic compared to other sectors of the economy.7

For example, even a small greenhouse owner with the right amount of automation can operate effectively with a socially distanced skeleton crew. Automation is one of the main reasons many investors believe the cannabis industry is one of the most future proof markets going forward.

Impact of COVID-19 on cannabis consumption

The pandemic has caused cannabis consumption patterns to change, with the majority of consumers in North America aged 16 to 65 planning on maintaining or increasing the purchase of cannabis products in the coming months.8

To avoid product shortages and potential supply chain issues, regulators have begun amending rules to ensure that demand can continue to be met. In Pennsylvania for example, patients can obtain online prescriptions for medical marijuana that are valid of 90 days rather than 30 days.

This proactive regulatory approach has also helped investments in the cannabis industry to rebound faster than the overall stock market. Cannabis stocks took a beating the beginning of the year, due in large part to investor concern that cannabis firms would lose revenue due to lock down restrictions. Once marijuana dispensaries were deemed to be essential businesses, prices quickly rebounded due to increased cannabis sales and the innovation of cannabis companies.

How Could a Recession Impact Cannabis Investments?

A recent World Economic Outlook Update from the International Monetary Fund describes the current crisis as like no other, with an uncertain recovery.9 What a prolonged recession might mean for cannabis investments is unclear, in large part because the industry is so new.

Tobacco, alcohol, and the Great Recession of 2008

Prudent investors may wonder if the stream of retail and venture capital, and private equity funds, that have been flowing into the cannabis industry will suddenly dry up. Or alternatively, if cannabis investments will follow similar counter-cyclical behavior that the alcohol and tobacco industries do.10

Looking back at the Great Recession of 2008:

  • Alcohol sales increased by 9% in 2008, the first full year of the Great Recession
  • Between June 2010 and May 2011, alcoholic beverage sales grew by 10% while the unemployment rate nearly doubled to 9.6%

While consumers may cut back on a number of things during a recession, it appears that drinking alcohol was viewed less as a discretionary expense and more like an essential purchase.

Cannabis industry is unique

There are also several unique differences in the cannabis industry that could further impact cannabis investments:

  • Illicit market: until cannabis is legalized at both federal and state levels, an economic downturn that hits the pocketbook of consumers could create a resurgence in illegal market offerings that could cut into the profits of legal sellers
  • Dual sales channels: medical marijuana and recreational adult-use are two distinct sectors that drive the cannabis industry, each with broad long-term growth potential
  • Diverse investment sector: in addition to cultivation, manufacturing, and distribution, there are companies within the cannabis industry that focus on research and development, accessory products and services, and software, which should even out the industry’s performance in any economic cycle

Lawyers, bankers, and politicians are also helping to spur growth of the cannabis industry on several fronts. Doctors are embracing the medical value of cannabis, lawyers are pushing for legalization in one jurisdiction after another, and investment bankers and venture capital firms are simulating the flow of capital into cannabis investments.

Conclusion

The Brookings Institution notes that once the pandemic passes and the economy returns to normal, government officials and stakeholders in the cannabis industry will need to work closely together to identify the biggest successes, failures, and where improvement is necessary.11 By working together, the cannabis industry can continue to flourish, benefiting consumers, governments, and cannabis investments alike.

 

References

1. https://www.nasdaq.com/articles/covid-19s-surprising-impact-on-cannabis-sales-2020-05-28

2. https://www.cnbc.com/2020/03/25/legal-cannabis-industry-sees-record-sales-in-coronavirus-crisis.html

3. https://mgretailer.com/cannabis-news/cannabis-and-coronavirus-sales-surge-as-the-industry-carries-on/

4. https://mgretailer.com/cannabis-news/cannabis-legalization-gains-momentum-as-economic-impact-from-covid-19-grows/

5. https://www.nytimes.com/article/coronavirus-weed-marijuana.html

6. https://www.barrons.com/articles/as-the-covid-19-crisis-deepens-u-s-pot-producers-prosper-51585848587

7. https://www.marketwatch.com/press-release/how-covid-is-affecting-marijuana-stocks-and-the-cannabis-industry-2020-07-24

8. https://prohibitionpartners.com/2020/03/27/insight-the-coronavirus-pandemic-and-cannabis-consumer-behaviour-ii/

9. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020

10. https://www.mgocpa.com/article/how-will-cannabis-perform-in-a-recession

11. https://www.brookings.edu/blog/fixgov/2020/04/19/essential-cannabis-businesses-strategies-for-regulation-in-a-time-of-widespread-crisis/

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