Beyond prohibition, it’s an ag business with no barriers to entry.
By Nick Kelly, Canada, a WOLF STREET commenter.
The stocks of cannabis companies have been on a wild ride, with some observers comparing them to the crypto-craze. Canadian based Tilray (TLRY), which went public in July at $17 a share and is trading on the NASDAQ, was in the $20 range until late August, when it started flaring like a supernova. By September 19, it briefly reached $300 a share, up 1,660% from its IPO price two months earlier. The market cap approached 29 billion, making it more valuable than Clorox, though it had only $17 million in revenues in the first half of 2018 and generated a loss of $18 million.
Then it plunged for the rest of the week. Smaller gyrations continued into this week. Today it closed at $131.30, down 56% from its peak, but still up 672% from its IPO price, with a market cap of $7.6 billion.
Tilray is the poster child for an entire sector resembling the last bubble based on a plant, the tulip bulb craze that nearly wrecked the economy of 17th century Holland.
On September 18, the US Drug Enforcement Administration approved importation of Tilray pot for federal testing in a lab as an anti-tremor drug. Florida Congressman Matt Gaetz immediately objected, wondering why not US pot? The answer is simple: It would have been illegal under US federal law.
In Canada, legal progress was slower but it was at the federal level: Tilray is legal at the Canadian federal level. US Feds can look the other way while states break federal law, but they can’t do it themselves.
The stock reacted as if Tilray was going to export pot to the vast US retail market. But it’s just for a lab test. So the euphoria over the US sale – amounting to perhaps a hundred pounds – was crazy. Also crazy is the idea that if Coca-Cola uses pot in beverages (very doubtful), it would be worth billions of dollars to Tilray.
Suppose Coke does use pot in a beverage. Why wouldn’t they just buy pot in the market, purchased in bulk as a commodity? We’ll get to the likely price shortly.
The next vision from Tilray’s CEO, talking to CNBC’s Jim Cramer, is the idea that pharmaceutical companies “need exposure” to this roller coaster so they can offer pot for cures (along with all other Canadian pot licenses, Tilray’s is medical and its logo says it is a pharmaceutical company).
Suppose US Big Pharma is convinced of a need for medical pot. It will surely be able to get federal permission to obtain it from US sources, which also happen to be much cheaper than anything Tilray can offer.
What makes Tilray a “pharmaceutical” company, and why does it deserve an appropriate valuation? What do other multi-billion-dollar pharma companies do that justifies their valuations?
At great expense (as they remind us) over a period of years, they employ scientists with doctorates to create new substances, new molecules, which they test in trials and patent. The patent is the barrier to entry and protects a very high price.
What substance has Tilray invented and what is the barrier to other providers? I would say, none and none.
Tilray should be valued as an agricultural company and at some point, if it wants to sell to the US retail market, it is going to have to come out from behind its “medical” window-dressing and fight, literally, in the field, because the future of the supply and price of pot will be found outdoors in fields and not indoor under lights. That future is unfolding in Oregon.
As of May, 2018, Oregon had a million pounds in inventory, largely carry-over from the 2017 outdoor crop. Prices had plunged 50% in one year but were still over $5 per gram retail. No one knows what price is needed to move the backlog.
The 2018 harvest is well underway by now, and it is too early to estimate its size. But the only thing that could appreciably lower the size of the harvest would be if many of the more than 1,000 licensed growers left the field, which seems unlikely.
Quite good pot (21% THC) can be grown outdoors. Adequate for smoking, it is indistinguishable from pot for any beverage application and an excellent feed-stock for the latest smoking rage, crystal THC.
Here in Nanaimo, British Columbia, where I live and where Tilray has a large facility, other growers are also caught in the downdraft.
I personally know one licensed indoor grower who can’t sell his crop and is leaving the business.
I also know an unlicensed outdoor (illegal) grower who is wondering whether to bother harvesting. He got C$700 a pound last year (for the 2016 crop) but has had no offers this year from any of Nanaimo’s 32 dispensaries.
None of this grief is due to Tilray, which sells only by direct mail order. The dispensaries are supplied by any of the 4,000-plus personal medical grow licenses, which are not supposed to be selling. The Canadian Feds are ignoring this like the US Feds ignore the state violations. But unlike the US, Canadian Feds promise change in Canadian law soon permitting anyone to grow a small number of plants indoors or outdoors.
One thing seems clear: as the prohibition recedes, the price of pot will be a function of the cost of production. No other psychoactive substance needs so little processing. Once the bud is trimmed, it just needs to be dried. Absent a prohibition, pot can’t be priced as though it were rare.
Some years ago, the Rand “think tank” produced a study on the cost of legal pot. It concluded $10 per pound for bud. Triple that to make their estimate current ($30), double it to be conservative ($60), and double to again ($120) to give pot bulls the benefit of the doubt. Add 25% for profit, and we are in the area of $150 per pound.
If true, a dollar a gram at retail would seem feasible. Coincidentally or not, this is the government-controlled price in Uruguay, where a friend just bought some – quality unknown.
Does the future of pot production belong to Big Pharma, Big Ag, or maybe just individuals growing for themselves or to sell to Big Ag? In any event, Tilray will have to be much more profitable to justify recent valuations. By Nick Kelly, a WOLF STREET commenter.
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The black market is not going away.
Governments are already drooling at the supposed massive tax revenues in their future.
And already planning even higher taxes.
They will kill the golden goose as a hatchling.
The taxes on recreational pot in LA county during the initial roll out was around 70%!. That’s scaled back now (to around 35%, slightly higher than medical), so at least it didn’t take them too long to figure out that such a crazy high tax was going to mean less revenue.
At least one thing will come from all this, namely that indoor growing will disappear, and with the horrendous waste of electricity, and CO2 generated, by the growing lights.
Not everyone lives in the American SW with a couple acres of spare land…
No, but wouldn’t all those acres of outdoor eco-friendly production saturate the market?
I think it’s a great point by Justme. Adding to it, indoor growing has also started many a fire.
In Canada it will be legal to grow 4 plants per household. I don’t know the full language of the law but I don’t think that means it’s illegal to grow a second harvest during the winter if you already grew 4 in the summer. Either way there will be personal surplus.
People are gearing up for a legal winter growing season and depending on the strain of plant, this can produce far more than any household can consume and still function. A chronic smoker will only go through about a pound a year at most. The lower than yielding strains will still produce 2 pounds for the same four plant garden.
I know one person who harvested six pounds of very high quality dry bud from her 4 plants last year. Much will be gifted and sold to family, friends and neighbors.
Where most people live it will be very easy to grow 4 plants outdoors, and then there is the hydroponic winter season which will feed the black (friends and family) market with millions of pounds more.
The Canadian government laughably thinks that many people will actually order online for personal use and trust them to guard their privacy while it’s still illegal in the U.S. where they could face a lifetime ban to entry, or could be discovered by a potential employer who would be afraid to hire them. Maybe the local police get access to the information and start checking in to see if you’re driving stoned now and again.
The sum of all this as far as I can see is lower profits and sales than have been forecast for the recreational market and many of these companies stocks are worthless. Although I’ve made some money jumping on for the wild ride, I’m all out now, and it’s doubled again since I sold. No regrets, it’s way too risky at these levels.
Great piece Nick Kelly.
Sigh. The only thing l know how to find is ditch that will make you cough so bad you’ll almost get a hernia but with less buzz than a cigarette. Had to unplug. Maybe I should move to Oregon.
The great collapse in pot has begun, better get some more states to open up the shops, because the boom is fading. lulz////
Does nobody ever learn from past booms and busts?
Of course, say goodbye to the notorious Elon, pot smoking moron.
I guess he can blame the cannabis…
i hope the pot crash doesn’t cause the next recession, but even if it does we can drown our sorrows in a nice indica strain.
Hahaha, the ad I got with this article says:
2018: The year of the marijuana millionaires. If you don’t invest in pot right now, you will regret it for the rest of your life.
I got a “zero gravity massage chair” .
Never understood this crazy run-up in prices of pot-related firms. Anyone with a green thumb can grow pot, and as Wolf notes, there are no particular barriers for entry into this soon-to-be-saturated market.
The marijuana industry has many facets, some of which are actually useful, most of which are about to be legislated into permanence in Canada, the impact of all of which seems to be lost on the author. I will concede that there are volatility characteristics to some of the stock movements lately that are, er, unpredictable… but hey, it’s an emerging industry and folks are still trying to gauge real value versus hype value.
In any event, consumer consumption in Canada will rival that of alcohol, and medicinal consumption will continue to be supported by our Federal Government, which implies that this is not some start up that’s about to flop. I am not a proponent of this industry nor do I agree with the legislation but even I can see that marijuana is here to stay and there’s more to it than just some dried up leaves.
I see it as a once in a lifetime opportunity to short all the Canadian marijuana stocks and reap a fortune. This is like stealing!!
I’ll take the other side of that trade ;)
Like taking candy from a baby…
Be careful. The shorts are piling on. I’m usually too risk averse to go naked short but I have been tempted here.
Mr. Harper ruined everything, with his scandalous mandatory minimums for pot offences. Prior to this, is was a simple cat and mouse game- get caught and get a slap on the wrist. Get caught multiple times or get caught with weight/weapons/violence/affiliation, and get a MUCH harder slap. Decent guerrilla outdoor was selling for $1500/lb, and the moderate amount of enforcement meant that you didn’t get caught, so much as ‘get yourself caught’ ala natural selection ;). Imo, it either needs to be decriminalized and forgotten about, or re-restricted to create a suitable barrier to entry. My 0.02, and wish for the glory days to return..
While growing pot is farming there are factors that lead to higher production costs than you have with other agricultural commodities.
Here in Sonoma County the size of your outdoor grow is limited, zoning requirements limit the available land for legal grows, the County requires fencing to a code standard and human guard must be present 24 hours a day.
It’s also a cash business, which increases the likelihood of armed robbers showing up at your property.
Often they want the dried product as well as cash and these robberies have a tendency to become violent.
There’s also the possibility that the Feds might decide to make you an example, the RICO statutes are still on the books and Asset Forfeiture is still an important source of income.
I am acquainted with someone who owns a large warehouse in Sonoma County, they have had numerous offers from growers and processors to rent the structure at a very high price.
They have refused those offers on the advice of Counsel because while the risk of having your property seized appears to be low at this time, the potential loss is too big to justify the risk.
As a Real Estate Broker I feel the same way, I won’t do Cannabis deals unless and until it becomes legal at the Federal level.
Simply put the cost of defending myself in court makes the small risk of being prosecuting uneconomical even if I should prevail.
And as someone who has done volunteer work in Jails and Prisons for more than a decade I have a good idea what they are like.
There’s not enough money in the world to make staying in those places for a year worthwhile.
I’m *really* glad I never had a taste for the “whacky-‘baccy” and yeah, one major point to remember is the stuff’s still illegal at the Federal level.
How many people know, for instance, that if they have a medical card for it they’re not legally allowed to own a gun?
And yeah, asset forfeiture *is* a major source of income; couple that with the current regime having a resentment toward the supposedly more liberal coastal areas (by which is meant California). So you wanna grow weed on your $mil+ property here in California? You’d better have all your damn i’s dotted and t’s crossed … and even then better cross your fingers too.
An example of how a “sure thing” can call through in this is, or was, a local pot shop called Palliative. I used to laugh at that name …. Well, it looked perfect. Close to a major freeway, not too hard to find, a large national chain gym and a casino as landmarks, not near any residences or schools, obviously. But, one day I was riding by and there was a small paper sign taped to the door, apparently they’d just closed in the middle of the night and not even told their employees.
I’d pretty much fully expect, once it’s legal on the federal level, for it to be like booze or cigs. There are TV shows about moonshiners getting busted, and as for cigs, I’m really surprised there’s not a homegrown tobacco movement; the stuff’s addictive enough, so growing your own cancer sticks must be *really* cracked down on hard.
As usual you make good points. As for growing tobacco, I loosely know someone in northern Wisconsin that grows his own. He had the weed cuttings from lakes nearby delivered to his land as he saved the DNR the expense of landfilling it. He disced it under and made the poor soil into very productive dirt.
If he can grow good tobacco, he could grow hemp.
FWIW, southeastern Wisconsin was a major supplier of hemp until DuPont bought off the CONgress. And no, it was worthless as pot.
Even into the 1970’s wild hemp was still around. One of my acquaintances came back from a short trip around the areas surrounding Madison, Wisconsin with garbage bags of wild hemp.
Obviously THC enhanced hemp will grow even in climates differing from the CA, OR, BC Canada.
Cigarette smuggling (to avoid taxes) is a multi-billion dollar activity. I expect pot will experience the same.
With respect to your Gold posts…
Are you a valuation troll?
Note…NOTE what Wolf says in his article.
Go ahead, go back and reread it….
Obviously you have made money post GFC.
You’re a “decade” genius, no doubt.
Now, with out looking at the stats,
Tell us what the proper portfolio strategy would have been for any and all 5 or 10 year periods in USA, France, Germany, Brazil, Venezuela, etc. over the past century.
I note that you are are student of history, as you use the term “over the course of time”.
Ever been to Brazli, Argentina, VZ, Germany, Confederate States?? Want to go and tell those folks your “over time” tales about stocks and debt paper?
“Owning profitable income producing business is a winning strategy.” Wow!?!
What happens if I buy a business at 1x, 10x, 100x, 1000x book value? Does valuation matter?
Do markets ONLY go UP? Is there ALWAYS a great fool?
And as I posted weeks ago on Wolfs previous gold post.
No one cries about selling their shares of FB, BTC, or yes even GOLD for currency so as to buy other things.
Enough with this straw man.
You know, what I find fascinating, people speculate on making money by buying houses. But I’ve never seen anyone buy lunch with a house!?!?
Go figure. Stupid people. I guess they don’t read Kevin’s posts.
I know…I’m wasting my keystrokes…
well, maybe some other WolfStreet folks will enjoy this….
Plus, in Canada folks can grow their own 4 plants. I grew pot in high school back in ther 70s and in later years used to make wine from grapes. Good wine from California Zin. Growing pot is a lot easier than making wine. I expect many will just buy simple indoor growing chambers suitable for even apartments. I’m pretty sure the same old illegal connections will be utilized by users too.
(I no longer use either). I think it was a phase or something.
I have a niece who was hired by a pot company in Victoria a year or so ago. She does the books and related office duties. It also has some kind of Govt affiliation/approval/link. She is well paid doing an admin job that requires a security clearance, etc. She loves the job and expects to stay with it. There are jobs in this new industry, anyway.
If I’ve got it right the same people on welfare who perpetrate all the automobile insurance scams (fake staged accidents) will all either add or switch to supplying the entire greater Toronto, Canada area with home grown marijuana. They’ll own the market and retail will have to start selling other things just to pay the rent. The basements of Brampton will be famous in the near future. To me shorting these marijuana stocks in Canada looks like a surer thing than shorting the stemcell stocks from yesteryear.
Be Aware of Bayer/Monsanto are discreetly pushing for their cannabis marketshare thru the sell of marijuana seeds and (ugh) poisonous fertilizer — Then, Federal Laws will be in their favor and not for the citizens. https://www.globalresearch.ca/the-war-on-weed-monsanto-bayer-and-the-push-for-corporate-cannabis/5534771
The bet is that one of these cannabis stocks will be a future Philip Morris as marijuana becomes as socially and legally acceptable as tobacco. This is a sunrise industry, and history shows that there will be a few huge corporate winners that will consolidate and dominate the industry and people want in on the ground (or fifth, or twelfth floor).
Miracle grow (your welcome)
The problem is very simple: countries like India, Morocco and Pakistan already produce enormous quantities of high quality cannabis. Western growers can compete with them only as long as there are legal barriers protecting them from foreign competition. Energy and labor costs alone dictate that.
The US get most (about 75%) of their legal opium from India: this is shipped to the US and then refined into morphine and other opioids. Breadseed (opium) poppy is even easier to grow than cannabis, as it’s far less climate sensitive: it’s widely grown in Central Europe where it’s commonly used as part of several cooking spices. It would be very easy to grow commercially in the US, if only the ridiculous restrictions “Drug Warrior” Reagan put in place were lifted.
But could US growers compete with Indian producers? Tasmanian Breadseed poppy growers are competitive, and barely so, only thanks to large incentives at State and Federal level and bilateral trade agreements with several European and East Asian countries which restrict or even ban legal imports of opium from India, Afghanistan and Pakistan.
Perhaps marijuana will become more socially acceptable than being merely the fuel for Cheech & Chong gags and perhaps it’s really a sunrise industry, but in that case my money is on EM’s for once.
Cookbooks are flying off the shelf! 200 mg. For 15 bucks PRICELESS! Kids please stay away from the devils lettuce and stay in school!
Does it matter? Agricultural product prices are inherently unstable due to the low barriers to entry – one year prices are high, the next year low, and so on for ever.
This entire Delta-9 THC event is really interesting
Isn’t it great to have government that imprisoned people for decades for cannabis , saying it would drive you crazy, etc.
Now the greedy assholes say “it’s OK”
“We’ll take over now”
Aren’t our rulers clever ? So caring for their subjects …..
A Blinding Short. Do they have puts on these stocks?
The damn ‘product’ grows just about anywhere, and is essentially worthless.
Why would anyone, other than stoners with money, who are likely high, invest money into these.
I smoked daily for fifty years and quit two years ago. Many like me have quit too, and quit beer too. I want to live longer. The run-up in pot stocks will end once the Canadian retailers (with excise tax and hst) set their price in three weeks. Fall harvest is coming in now and the long lines at the stores will be mostly curiosity shoppers. Prices have dropped on the street to around 2 bucks. Might go lower.
But the companies like Corona, and Molson Coors will be marketing cannabeer in a year, and I think they will do fine. I will buy that, to try anyway.
I still see hemp growing all over south Wisconsin as a weed. These have not been cultivars for eighty years.
My brother-in-law’s property borders a cattle farm. The cattle crap out seed that take. We even have south Texas cactus here.
We do need to rid the laws that forbade commercial hemp production. It will help the soil loss too.
I see all the short sellers pulverizing all the Canadian marijuana stocks around Halloween or the end of October.
In southern Spain Pot could grow outdoor as good as tomato plants do.
I suppose a pound of marijuana couldn’t have to cost no more than tomato in a free market.
I buy a kilo of tomatoes for 2,69€ =2,20 lbs for $3,14 so a pound of marijuana would cost $1,42.
The more cheaper the product were, the bigger the market need to be to get a profit.
Are we ready?
If you have ever purchased shelled hemp seeds in the US (sold mostly in health food stores), you may have noticed that all of it comes from Canada. I suspect that our quirky laws tied to one or more religious groups has something to do with this crazy policy. Stores can import it from Canada, but American farmers are not allowed to grow it. If you google shelled hemp seeds, you will quickly find that it has a lot of healthy properties.
Hemp oil body butter from The Body Shop cured my 1 year old nephew’s eczema. He was covered in eczema head to toe, now he has none. The only other thing that worked was a cortisone lotion. Slathering her kid in cortical steroids was not something my sister wanted keep doing, so she did a shout out to an online mom’s group for suggestions and they recommended this product. It worked. She stopped using it for a time, assuming he outgrew it, and the eczema came back with a vengeance. Started using it again and the eczema went away again, and very quickly. It doesn’t seem to be a fluke.
Hemp products were more or less illegal in Canada (as was growing hemp, since law enforcement couldn’t tell the difference between hemp and marijuana plants) until about 20 years ago. I’m glad that was changed. What a shame if that product were not available, and she had no choice but to continue to use cortical steroids on a toddler.
Disclaimer: I was going to provide a link to the product, but didn’t want anyone to think I was promoting it or have my comment weeded out. I have zero affiliation with the Body Shop, the product cited, hemp growers or the hemp industry.
I only heard of Canopy – a big operation in Ontario, Aurora – big in B.C., Cronos on the east coast and a small player called Delta 9 in Manitoba. Seeing all these others popping up smells of block chain insanity. Only a couple large players will come out on top, much like pharmaceuticals.
Once all the Canadian marijuana stocks start to free-fall there goes all the takeover companies and you just short all the small startups.
Big Pharma prefers single molecule drugs, so pot and its derivatives have no direct appeal. Pot is rapidly evolving away from THC to CBD. There are a couple strains that supply CBD without THC, Charlottes Web, (which is held outside the US) and AC/DC which is a hybrid which can only be grown from clones and is in short supply. CBD from hemp is a nonstarter, hemp is a toxin sponge, and the amount of CBD relative to the amount of plant you need means you are extracting poisons as well. The high levels of THC in pot, cultivated during the prohibition period, make the product equivalent to moonshine or grain alcohol. Dosing is a problem. A number of drugs are being reprocessed into useful medicines, ecstasy is now being used on PTSD patients. This is the golden age, and others things like shrooms and peyote will gain acceptance. The stocks are another issue
Re: THC versus CBD.
It depends what the customer wants.
If you enter ‘THC versus CBD’, a site called LEAF SCIENCE has a really in depth but plain English piece.
I would sum it up as: ‘high versus healing’.
The recreational user, which I predict will be the vast majority of sales will always want the psychoactive THC to feel ‘high’
The CBD which Leaf Science describes as ‘non-psychoactive’ is used as calming, anti-anxiety agent and in topical skin creams etc,
Right and the potential customer base for healing is much larger (and has a somewhat legitimate claim) Obviously CBD has some psychoactive basis, a lift which it gives people who can still function while using the drug. Next year who knows where they might take this line research.
I know quite a few people who took out massive HELOCs to buy marijuana stocks in the last few weeks. People have legit lost their minds here in Canada.
Spent a month is Oregon and the retail price is $100 an ounce, tested with all the taxes paid, but there wasn’t much need to buy it, because everywhere I went, people were offering to give it to me.
What was quality like, when purchasing retail? …if you don’t mind saying …
Greed and ditch are the only thing I know about where I live,so I unplugged by necessity not choice