Canopy Growth (NASDAQ: CGC) (TSE: WEED) stock is up some 85% in the last few days. This is on the back of varied stories about possible Federal legalisation of cannabis. There are mutterings of all sorts of things. Apparently Joe Biden has “always” supported some move. Chuck Schumer has been talking about changing the Schedule. That wouldn’t be legalisation but it would enable firms to deduct certain business expenses which they cannot now. Or those mutterings about the Safe Banking Act. This is all an advance in a legal and even civilisational aspect. For, yes, of course weed should be legalised.
However, we here are talking about money. And it’s not obvious, not in the slightest, that legalisation will lead to decent, better, or even any, profits for the current crop of cannabis companies. There are two reasons for this and one big piece of evidence. The evidence is that none of the companies have been able to make money from the current sets of legalisation. As we’ve said before about Canopy Growth: “As to the larger issues we've long been very bearish on the entire sector. The problem with cannabis isn't that people won't buy it. The newly legal markets do exist and material is moving through the system. There are two problems with it though. One is that cannabis - the legal stuff anyway - is now a market designed by bureaucrats. Thus doesn't work because bureaucrats don't know anything about markets. Taxes are too high, licences and permits too difficult to get and so on. California - where Capital Growth has been trying to work - has achieved the unlikely feat of making the legal dope more expensive and worse than the still existing illegal market.”
Canopy Growth Corporation stock price from Google Finance
That’s one part of it, we’ve been getting markets designed by bureaucrats. Bureaucrats don’t know how to design markets. Therefore everyone’s been losing money. And the more the market expands the more everyone’s losing.
The other issue is that there’s just too much competition. All those illegal growers are still out there - and no one had any problem getting hold of cannabis when it was all entirely illegal now, did they? Add in the new growers financed to take advantage of legalisation and we’ve a market in gross oversupply. Which isn’t the way to be making money.
Finally there’s the issue we’ve been talking about for years. Full legalisation would probably mean international trade. At which point N American growers are going to have serious problems. Southern Africa can produce at $3 a kg (yes, that’s kg, or 2,2 lbs). The American business would go the same way tobacco has done - everything’s imported.
Yes, obviously, Canopy and other cannabis stocks are going to jump around based upon beliefs about legalisation. But in the long term we don’t see it as being positive at all. We just don’t think anyone will be making any money out of a legalised cannabis market.
