Eyes of the global marijuana industry are on Canada as it legalizes recreational use

  • In less than a month, Canada will become only the second country in the world and the first G-7 nation to bring marijuana prohibition to an end.
  • Canada will legalize cannabis for recreational use.
  • The move comes at a time when major corporations such as Constellation Brands are deepening investments in the space, cannabis stocks are seeing major volatility, and talk of a bubble is brewing.
A woman waves a flag with a marijuana leef on it next to a group gathered to celebrate National Marijuana Day on Parliament Hill in Ottawa, Canada.
Chris Roussakis| AFP | Getty Images
A woman waves a flag with a marijuana leef on it next to a group gathered to celebrate National Marijuana Day on Parliament Hill in Ottawa, Canada.

In less than a month, Canada will become only the second country in the world and the first G-7 nation to bring marijuana prohibition to an end, legalizing cannabis for recreational use.

The move comes at a time when major corporations such as Constellation Brands are deepening investments in the space, cannabis stocks are seeing major volatility, and talk of a bubble is brewing.

Canadian legalization, jump-started by Prime Minister Justin Trudeau's government some three years ago, also has broad implications not only across the country but for its neighbor the U.S., where the drug remains illegal at the federal level. The Oct.17 deadline brings with it a slew of unknowns, including how large the market for cannabis in Canada will be and whether there will be enough product on store shelves. Estimates have run the gamut from $4 billion to $10 billion in the first few years of implementation.

Some analysts think the move may pressure the United States to accelerate legalization in some capacity, as states continue to take matters into their own hands by legalizing locally.

"We are sitting back now and watching the Canadians take market share with regards to international export opportunity," says Matt Karnes, founder of industry analyst firm GreenWave Advisors. He cited deals such as Constellation Brands' recent increased $4 billion stake in Canopy Growth Corp. and reports of Coca-Cola's interest in CBD, which has pain relief properties but doesn't get users high. "And multinational companies that are stepping in, or potentially want to step in, are all eyeing Canada, whereas I believe the United States clearly has the most robust and compelling opportunity for cannabis."

Right now 30 states and Washington, D.C., have legalized for medicinal use, and nine states and D.C. have legalized for recreational use, with GreenWave projecting a market of nearly $13 billion in the U.S. in 2019. Midterm ballot initiatives to watch include recreational measures in Michigan and North Dakota, Karnes says, and legislative measures expected this year in New Jersey and early next year in New York.

Chuck Rifici says his company, Auxly, is preparing for the second wave of legalization in Canada in 2019 when edibles hit the market.
Kate Rogers | CNBC
Chuck Rifici says his company, Auxly, is preparing for the second wave of legalization in Canada in 2019 when edibles hit the market.

Longtime cannabis executive Chuck Rifici now runs Auxly Cannabis Group, a diversified cannabis company, based in Toronto. Auxly has invested in 14 different operations that run the gamut from growth to research to retail, effectively building a consumer packaged goods company that controls supply. One of his concerns in regard to legalization in Canada is product, as provinces are implementing the rollout, and it is unclear how much cannabis will be needed to meet demand.

"Certain provinces and different jurisdictions across the country will have different levels of preparedness for retail," Rifici said. "I think we will see empty store shelves, because we've seen that in every other place in the world that has legalization — a lack of product in the first year. Producers across the country are ramping up production, but I think it will be awhile to catch up."

In year one, Rifici and others project a smaller recreational market as the type of product available will be more limited — strictly flower, seeds and oils. Edibles, popular in markets such as California, Washington state and Colorado, won't be for sale until 2019.

While there is a lot of focus on the recreational market, some — including Anthony Durkacz, director of FSD Pharma in Cobourg, Ontario — believe the medicinal market is where the most money stands to be made. The company, which Auxly invested in, is renovating a former 70-acre Kraft facility to build what will become the world's largest hydroponic cannabis farm in the world. They're a licensed producer currently growing product, which they plan to sell in the medicinal market once they obtain a seller's license in the near future. With so much product flowing to the recreational market, insiders say a potential medicinal shortage is possible.

While buzz of a bubble is circulating, with Canadian producer Tilray seeing its market cap cut in half a few days ago, soaring to $20 billion but ending the week near $10 billion, Durkacz maintains cannabis investments are sound.

"We are in a bubble — but we were in an internet bubble in 1998 that continued for another few years — if you did not make an investment in 1998, you missed a lions' share of what could be earned in terms of return on investment," he said.

And while Canadians are optimistic about the opportunity recreational legalization presents in their own country, many are waiting to see if and when a ripple effect happens in the United States and beyond.

"Hopefully we can show America and the rest of the world that legalization is the right thing to do," Durkacz said. "I think it's important to put the money back into the people's hands. The government will generate a lot of taxes and revenue and add a tremendous amount of jobs, especially in small-town America. It's important the rest of the world gets to see this and hopefully follows Canada's lead."

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