The marijuana market has been marked as one of the fastest-growing industries in the world by Wall Street. This comes after marijuana sales tripled all over the world between 2014 and 2018. By 2030 Wall Street estimates the global annual revenue to increase from 5% to 18%. The surge in pot stocks has attracted much interest as it is impossible for Wall Street and investors to ignore this type of growth.
Several challenges have cropped up which have caused a drop in the price of pot stocks over the past six months. The main problem is the rise in the black market for marijuana products despite the legalization of recreational marijuana in Canada and some states in the U.S. which was expected to curb the market.
Globally, California is the largest legal weed market; however, it is projected that illicit marijuana sales could outdo legal marijuana sales with a significant gap of 8.7 billion to 3.1 billion. In early February, Scotiabank estimated that black market cannabis sales would contribute 71% of the total sales in 2019.
The marijuana black market may be hard to eradicate for now because of the following five reasons.
- Supply Shortages in Canada
Canada has been faced with a persistent marijuana shortage since the legalization of recreational marijuana in 2018. The deficit is attributed to the long line of cultivation, processing, and sale licenses. In 2019, the regulatory agency Health Canada had more than 800 applications pending approval, which would take the agency several months to work through. The growers and sellers are therefore forced to wait for the permits before they can grow or sell marijuana. Issuing of dispensary licenses is also slow forcing consumers to buy marijuana from the black market.
- High Tax Rates in the U.S.
High taxation rates are forcing consumers to buy marijuana from the black market. In California for example, pot buyers are paying an excise tax of 15%, each ounce of dried cannabis incurs a wholesale tax of $9.25 for buds and $2.75 per ounce of cannabis leaves. When added, the total bill comes to an aggregate tax rate of 45% on legal weed. Factoring in the price of laboratory tests, it becomes clear why legal marijuana cannot compete with black market weed.
- The Dispensary Licensing Process is Slow
The slow approval process of dispensary licenses in Canada, and the U.S. has contributed to the prosperity of the black market. For example, the slow pace of dispensary opening in Quebec, Canada severely affected the sell-through rate of marijuana while in California, one store is supposed to service 61,000 adults, and this is forcing consumers to purchase from the black market sellers.
- Jurisdiction Challenges in some States in the U.S.
A severe problem is arising in the states such as California and Colorado, which gives jurisdiction to local municipalities to approve licenses for local retail stores. In California close to 805 of the cities have banned commercial marijuana and this has opened the door for the black market retailers to flourish.
- Strict Regulations
The rules meant to bankrupt the black markets businesses seem to have failed. An audit carried out by the United Cannabis Business Association was presented to Governor Gavin Newsom, which showed that out of 3,757 listings of marijuana sellers in California, 2,835 of them were unlicensed.
Canada is a bit strict in implementing its regulations; for instance, Health Canada suspended cultivation and sale licenses for CannTrust Holdings and that could have contributed to worsening the supply shortages on the legal market.
Experts think cannabis companies like Sproutly Canada Inc. (CSE: SPR) (OTCQB: SRUTF) (FRA: 38G) and Grapefruit Boulevard Investments Inc. (OTCQB: IGNG) long for the day when each of the bottlenecks above will be resolved so that the black market can be decisively addressed.
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