The cannabis industry is big business in the US and Canada, but its progress towards legalisation has been held up by the Covid-19 pandemic. (Photo by Kena Betancur/AFP via Getty Images)

When it comes to the booming cannabis industry, an investment darling of North America, Covid-19 has been good news for demand, mixed news for investment and bad news for regulation.

For many around the world, the pandemic has brought about prolonged periods of fear, anxiety and boredom. Is it any wonder, then, that more and more people have turned to fun and stress-relieving substances such as marijuana?

“The North American industry has grown enormously during the pandemic,” says Geoff Miller, director of Cannafi Group, a Guernsey-based cannabis finance business. “Everyone has been stuck at home and recreational cannabis has been available, while knowledge of medical cannabis has increased too. So demand has shot up very significantly.”

Cannabis sales exploded in many parts of North America in 2020, with the likes of Oregon seeing a 30% increase compared with the previous year. Meanwhile, in Canada, half of cannabis users increased consumption during the first wave of Covid-19, according to the country’s Centre for Addiction and Mental Health.

Because cannabis can be easily ordered online, it has ridden the Covid ecommerce wave. Geoff Miller, Cannafi Group

In short, the pandemic has not thwarted the green leaf’s boom – the industry is still expected to triple in size in the next five years. To put this in perspective, worldwide spending on cannabis is on track to top $29bn in 2020, and more than double that by 2024, according to Statista. This makes it one of the globe’s fastest-growing sectors, with the US and Canada leading the charge due to their size and high levels of legalisation (relatively speaking).

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Covid has seen parts of cannabis industry boom

At first, it seemed that the cannabis sector was going to join the ranks of those industries being decimated by Covid-19.

When the pandemic first hit North America, marijuana dispensaries shut down like most other walk-in retail businesses. With investors fearing that companies would lose revenue due to lockdown restrictions, cannabis stocks took a big hit.

However, a proactive regulatory approach saved the day. The industry was quickly deemed an essential business in the US and Canada, causing investments in cannabis to rebound faster than the overall stock market – something that was further buoyed as sales spiked and companies innovated.

The pandemic has indeed accelerated many trends in the business, from ecommerce to digital payments. Meanwhile, production and farming has also evolved, such as greenhouses becoming more tech-oriented than ever before.

“Because cannabis can be easily ordered online, it has ridden the Covid ecommerce wave,” says Miller. “Then, in terms of investment, it has also been a booming time [thanks to] the vast amount that retail investors have been pumping into many different sectors – because they have got nothing else to do – and the fact that we have still got ultra-low interest rates so asset prices have been squeezed higher and driven up general investment activity.”

All these factors explain why most cannabis companies have been hawkishly investing in the growth of their businesses and securing high-profile partnerships, according to a blog from Nasdaq.

Not all areas of the cannabis industry have benefited

Before Covid-19 hit the world, foreign direct investment (FDI) in the cannabis sector was growing tremendously and exponentially, a trend that was non-existent just eight years ago.

In short, 2019 was a record year for both venture capital in the global cannabis market, as well as mergers & acquisitions (M&A). Greenfield FDI boomed too, with 50 projects valued at $1.8bn in the first nine months of the year, outstripping 2018’s grand total of 28 projects for $614m.

The vast majority of M&A involved companies in North America, where most of the industry is located (followed by western Europe). This is why most greenfield FDI projects into the world – be it for farms or research centres – have come from US or Canadian companies, while the main destinations for this investment (in 2019) were the US, Canada, Colombia, China and parts of Europe, according to data from fDi Markets. In particular, Latin America was fast becoming a hub for legal cannabis production due to its climate, disposable land and tolerant policies.

Covid-19 has wound down the party. “It is much more difficult to do international transactions when you can’t travel, and you certainly don’t want to be developing new operations when you can’t actually go and visit the site,” says Miller.

This is especially true with regards to greenfield FDI, in which new operations are created from scratch, abroad. However, M&A has also been hit – as per the graph below.

“During the first three months of 2020, the impacts of Covid-19 were already starting to show, with PitchBook data showing both the number of deals and overall deal size decreasing amid economic uncertainty,” wrote Adam Pope from Riv Capital, a venture capital company in the cannabis industry. “[Before Covid], the median deal size we were [being] pitched was typically about $4m. We have seen that halved since then, with the median ask coming in at about $2m.”        

Covid has slowed cannabis legislation

The US is home to the world’s largest cannabis industry. In fact, the legal market boasts 243,700 full-time-equivalent jobs in the US, a figure that is set to increase by 250% between 2018 and 2028 – meaning it is the country’s largest source for new jobs. Nonetheless, cannabis remains an illegal substance under US federal law.

Although the industry has grown during Covid, and more states have legalised, the federal environment hasn’t moved on half as much as it would have if there had been no pandemic. Geoff Miller

Now that nearly 70% of the US population support legalisation, according to a survey conducted since the outbreak of Covid-19, it is only a matter of time before the law shifts. ‘When?’ is the million-dollar question.

“It is ridiculous that you have got companies with tens of billions of dollars flowing through them that still can’t access the federal banking system,” laments Miller.

Over the past decade, the industry has performed remarkably well despite its exclusion from the US’s national banks and capital markets, harsh federal tax treatment, and the inability of institutional investors to buy stock in cannabis companies. This blockage has held up global investment across the market too.

More than 111 million people – more than one-third of the US – now live in a state with legal recreational cannabis, while medical marijuana is broadly legal in 35 states, plus the District of Columbia.

“Although the industry has grown during Covid, and more states have legalised, the federal environment hasn’t moved on half as much as it would have if there had been no pandemic,” argues Miller. “Joe Biden’s priority right now is not the cannabis market, but on spending trillions on infrastructure and Covid relief. So I don’t think he will get to it until 2023.”

More specifically, the market is waiting for the Safe Banking Act (passed by the US House of Representatives in 2019) to be signed off by the Senate and president. While Covid relief has put it on the backburner, the pandemic has also highlighted the sector’s profitability and purpose. Hence the industry being deemed as ‘essential’.

This vote of confidence became most apparent after the Safe Banking Act was included in the Heroes 2.0 Covid recovery package – a move that was criticised by some Republicans, who are generally more opposed to legalisation than Democrats. However, the platform is becoming increasingly bipartisan, not least as the financial advantages become evident.

In California alone, the largest cannabis market in the US, $2.5bn was spent on the herb in 2018. In other words, the industry can support state economies and generate opportunities for increased tax revenue, particularly at a time when local budgets have been hit by Covid and national recovery debt is mounting. Arizona has already taken the initiative, legalising cannabis in late 2020 and issuing a 16% tax on cannabis sales that will go toward community services, such as colleges and police.

The patchwork of state regulation will continue to flesh out in the coming year, with federal law to possibly follow soon. Although Covid has delayed legal and political resources to the cannabis industry, it has absolutely rehashed the importance of the market to the US economy and population.