Hellenic Dynamics (LON: HELD) shares are down 25% in London this morning on the back of a business update. The base problem is the difficulty in making a profit in the legal cannabis market. That's not quite and wholly what Hellenic says, to be fair, but that is the underlying meaning here. We have our own view of this market and we're not just being cynical when we insist that near no one is going to make a profit. For we've a market designed by bureaucrats - and bureaucrats know nothing about markets.
The specific example here from Hellenic: “EU Good Manufacturing Practices ("EU-GMP") certifications. EU-GMP is the most intensive certification for any medical cannabis cultivator to achieve from a capex, opex and time to issuance perspective, with very little advantages for end sales price of products. As the industry enters 'cannabis 2.0' many medical distributors have built their own EU-GMP facilities within their licensed distribution buildings across Germany as have other potential customers in the other markets that Hellenic Dynamics wishes to sell its products into. For this reason, the Company has decided not to invest considerable funds and time into the construction and certification of an EU-GMP facility in the current phase of its development.”
Or, as we'd put it, the bureaucrats think that the raised costs of EU-GMP are just lovely, while not grasping that there are no raised revenues to go with those raised costs. Hellenic is therefore making a reasonable decision here. But the point we want to make is that all of the market is being designed like this - vast and useful costs being loaded on by bureaucrats.
Hellenic Dynamics share price from London Stock Exchange
Over in California they've had much the same problem. The bureaucrats have designed - and taxed - the legal market so badly that the old black market stuff is still cheaper and of better quality.
Now, we think that the legalisation of cannabis is a great idea. People should be able to smoke if they wish, why leave that business in the hands of illegal thugs? But that doesn't mean we think that legalisation has been done right. Further, we're deeply unsure that anyone at all is going to make a profit.
We can just about imagine that people growing in really low costs places - Swaziland perhaps - will be able to eke out a margin. But this is, in the production sense, just a form of farming. And there really isn't anyone out there who makes a good profit margin from farming. Given that anyone with a field and a spade can go farming, why should there be any profits available?
This is the big question for anyone thinking of investing in cannabis. No one else makes big money growing plants so why would anyone here?