In our look at Canada’s ‘Next Three Years’, we mentioned that the United States isn’t a good analogy for comparing approaches to cannabis policy.
Despite Oregon and Washington and Colorado having numerous years into recreational sales, the regulatory distinctions coupled with cultural differences between our nations offer only tangential reference points. Flower versus extract, edibles versus beverages: consumer behaviour is one thing that it informs us, but as to how operations are organized, to the scale of them, of core capital formation and corporate structure – it’s a different world.
The Sanders/Biden Task Force dropped its’ recommendations last week, and even the notion of decriminalization got some MSO share prices moving. Leaving aside this isn’t Democratic Party policy (that’s a different thing under a different process); that it’s unclear on how federal banking laws will be amended; that it notionally cleaves medical and recreational streams (sound familiar?); and that there’s no implementation methods discussed…… it sounds to me like nothing more than good ‘ol fashioned election cycle pandering. I am extremely hopeful but that shouldn’t be mistaken for optimism.
What about the mechanics of ‘legalization’ in the United States, as we can pull from Canada’s experience being able to inform about some of the commercial challenges of unwieldy regulatory action, and of persons/politics hostile to any perspective other than a default ‘Reefer Madness’ mindset.
For those unfamiliar, there is a hard distinction between ‘intra-state’ and ‘inter-state’ commerce. ‘Intra’ refers to business conducted within a State’s borders. This governs what and how transactions can be performed under the law, and assigns relevant regulators to supervise markets in action. ‘Inter’ refers to transactions that cross state lines, which supplants State laws, and brings federal trade statutes into effect. inter-State commerce – just like the topic of inter-provincial trade in Canada – becomes an eye glazing decent into a byzantine morass of self-interest and lobbying the moment any initiative considers touching it.
Alcohol has been a poster child of the Small People of Confederation (Premiers), with no less than the Supreme Court of Canada ruling that yes – provinces can treat citizens like children when it comes to taxing the hell out of them. Cheaper booze 10km from home? Don’t you dare go buy a single bottle more than permitted if it’s not in your province: fines and summary offences await the first punter to try. Why? Because the State’s money is going to the province next door.
This holds in cannabis as well, where provincial State Monopolies guard their tithes with all the desperation that one can muster. It’s almost like they don’t offer any value, and act like a price distorting dead-weight burden on the private market. Which, they are. The Saskatchewan example lays bare the bullshit behind the use of State Monopolies to enforce tax collection: it can be done more efficiently with the same social outcomes without warehousing.
Could the States down south end up behaving similarly? Certainly not with State Monopolies, but will States decry tax leakage when the State next door offers easier permitting and lower overall cost – inducing consumers to hit the highway? How will the federal government tolerate and react to inter-state tension?
There is history we can look to: natural gas. The United States went through several gyrations in the early 1990’s as they de-regulated inter-state commerce in energy transactions and transport.
For some 20 years previous, there had been numerous pushes to de-regulate natural gas in the USA. See, states had set up PUC’s (Public Utility Commissions) which set retail prices for gas, along with its’ respective rates of taxation, and governed it’s ability to enter – and exit – state borders. this resulted in a morass of economic distortions – where someone in a neighbouring state would be paying multiples for gas than they were, even if it was operationally on the same system. As the old adage goes: “change is only possible when the pain from the status quo is greater than the pain of change itself”. And the condition of gas markets in the late 1980’s was agony.
Existing gas companies were fat, dumb, and lazy. And they were printing money just fine, thank you very much. There was no impetus to do anything by them, and they actively fought (successfully it can be said) for some 20 years. Consumers were suspicious (fair enough), and it took a new President to bring in FERC Order 636 – which flipped the switch.
By bringing in competition, prices collapsed, inefficient utilities had to improve, and consumers in many cases now had an actual choice in who they were purchasing from. It’s become pretty muddled since (a litigious society does what it does), but overall, the benefits to just about everyone far outweighed the millions of inefficient pieces that the market was in previously. And it washed away a host of hangers-on and non-value adding nothings that lived off the fat of the steak. All in all, it was a ‘win’ for efficiency and transparency (full disclosure: I’m a fan of both).
Cannabis sales and use is a proven business model, and all we need is the government to get out of the way, right? Well, Canada has 13 Fiefdoms, all with their own unique approaches and quirks. From Manitoba’s ‘ban’ on home growing, Quebec’s fear and loathing of private business, to British Columbia’s cowardice in punting permitting to the municipal level (lots of fundamentalist Christians vote in blocks out here), Canada is an unevenly woven tapestry of commerce around many items, cannabis included. The effective ‘fusing’ of medical and recreational streams here (excise tax applies the same) has left patients behind in many respects, and seeing the US emphasize the differences between the streams as it relates to inter-state commerce does not bring confidence.
What would the US retail cannabis look like in action?
3 clear operating conditions are possible:
- Status Quo
I see #1 above as being the state of being for quite some time. Sure, more states will get picked off as legislatures – desperate for new revenue – come onboard. The market expands, companies put up stores and hire staff. Life goes on.
Regarding #2, this would see cannabis hard-lined federally, and bring up inter-state commerce in medical weed. Canada moved to fuse the streams, because the difference between them (to a government) is in name only. Hey, don’t get me wrong: I believe medical use is valid and distinct from recreational use. The problem is that from a regulatory/economic standpoint, they look exactly the same. Florida’s doctors have monetized medical access, with renewal fees of some $200/yr (and a $100 annual trip to the doctor) to get and keep a card. So, will Alabama respect a Floridian’s medical card? How about an Arizonan? Nope.
Aside from being an utterly heartbreaking story, it surfaces one of the two major forces that will confound cannabis legality in the US for years to come: the American Social Conservative.
Much of the ‘left’ or ‘progressives’ have been derisive of the Christian Right (and vice versa), but the reality is that both perspectives are not going to agree on much, they are both here to stay, and that they both wield considerable political influence. Typically regionally. And there are states and counties that are deep red, and will remain so.
The second major force ‘against’ cannabis is the reigning heavyweight title champ of recreational intoxicants: booze.
Alcohol knows what it’s doing, its’ trade is in the billions, and it won’t see market share erosion happen without a fight. As the adage goes: “The enemy of my enemy is my friend”. And I have no problem imagining the booze lobby aligning with social conservatives to try and slow cannabis market expansion.
That brings us to #3, ‘legalization’ – which I can’t see happening for at least a decade. Probably more. A country won’t wind up a 40 year ‘War on Drugs’ by shrugging its’ shoulders and saying ‘Sorry about that, we were wrong all along. You kids go right ahead, we’ll leave you alone‘. The infrastructure of police and interdiction squads has baked in cost and physical apparatus that when in existence – exists to be deployed. Legalization would negate decades of budgetary and policy decisions, thousands of careers spent on criminalization of personal drug use, and the apparatus of criminal and civil law enacted to deal with it all.
Despite the clean parsing of decrim/legal status’ I’ve tried above, the reality is that it’ll probably come down to the state and county level on regulation and enforcement, belying and muddying my quaint definitions further. And I see US policy likely remaining the hodge-podge it is right now, for many years to come. Decriminalization would mirror this to some extent, even if alleviating some of the issues around incarceration.
I hope I’m wrong. But I don’t see federal legalization anytime soon in the US. For investors, that implies a state specific approach to seeking exposure to invest in. Anything less than full federal legalization will be an extension of what the industry now faces.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative.