By Carol Ryan
Republicans don't dislike the cannabis industry as much as they used to, but that doesn't mean they will lift a finger to help it. A bad and likely outcome for pot companies is that everything stays the same as it is today during the second Trump administration.
Cannabis investors have been despondent since the election delivered a triple blow in the form of Donald Trump's victory, a Republican sweep of Congress and a failed ballot to legalize adult-use marijuana in Florida. The AdvisorShares Pure US Cannabis ETF, which tracks a basket of American pot stocks, is down almost a third since Election Day.
The incoming administration marks the sixth consecutive presidential term under which the cannabis industry will be forced to operate in limbo. America first began dabbling with legal cannabis more than 20 years ago, when California established a medical-use cannabis market in 1996, says Matt Karnes, founder of cannabis research firm GreenWave Advisors.
Cannabis is still prohibited at the federal level, even though it is fully legal in more than 20 states. The federal ban means cannabis can't be transported over state lines, creating inefficiencies for growers such as Green Thumb Industries and Trulieve that operate in multiple states. American cannabis companies aren't allowed to list on U.S. stock exchanges, or even to open a regular checking account at a major bank.
There is a slim chance that something could get done in the lame-duck session. Cannabis lobbyists say the Safer Banking Act, which would give pot companies access to traditional banking services, might pass in the next few weeks. But it is a long shot. Democrats, who have traditionally been friendlier to the cannabis industry, want to focus on other priorities before the end of the congressional term.
Trump isn't antipot. He backed the unsuccessful ballot to legalize recreational cannabis in Florida. He nominated pro-cannabis Matt Gaetz for attorney general giving the industry hope, but the former congressman withdrew his name from consideration Thursday.
Some of the states that voted Trump back into power are already enjoying a windfall from legal sales, so they won't want a crackdown. Nevada and Arizona have collected $1.1 billion and $703 million in cannabis taxes respectively since legalizing adult-use sales, according to data from Gretchen Gailey, founder of cannabis advocacy firm Panoptic Strategies.
But there isn't a real cost to Republicans to simply leave the issue in states' hands and kick the can down the road on federal reform. Unlike abortion or immigration, pot isn't a topic that motivates single-issue voters and it is low on the new administration's list of priorities.
The failed Florida vote also challenges the cannabis industry's belief that, as more states go legal, legislators will have no choice but to listen to the will of the people and scrap prohibition. Low-hanging fruit in the push to establish new markets may be gone: Several states that held cannabis legalization ballots on Election Day failed to get enough support to lift restrictions.
One potential positive for the industry is a Biden-led plan to reclassify cannabis. Marijuana is labeled a Schedule I substance alongside heroin and LSD. Because it falls into this category, cannabis companies aren't allowed to offset regular business expenses such as rent or travel, which can leave their effective tax rate north of 70%.
Rescheduling would boost the profitability of many struggling cannabis growers who don't have enough cash on hand to pay what they owe to the taxman. An initial hearing on the proposal will take place on Dec. 2. So long as Republicans don't scuttle the process, estimates of how long rescheduling cannabis could take range from six months to two years.
Without meaningful reform, pot stocks will remain in the bargain bin. Institutional investors are steering clear of cannabis stocks while there is a federal ban in place. Retail shareholders that have been badly burned by cannabis stocks in the past are finding better opportunities elsewhere. The AdvisorShares US Pure Cannabis ETF has lost more than 80% of its value over the past three years as hopes for reforms have been repeatedly dashed.
Besides their continuing regulatory challenges, the day-to-day reality of the cannabis business is tough at the moment. Sales are slowing in markets such as Arizona, California and Colorado because of weaker consumer demand. The US Cannabis Spot Index, which tracks wholesale prices, hit a record low of $929 per pound in mid-November.
Ironically for an industry that operates in a regulatory haze, cannabis sales have grown so big that investors are asking whether it is now a threat to other sectors, particularly the alcohol trade. Bernstein analyst Nadine Sarwat points out that America's roughly $31 billion in annual legal cannabis sales are now equivalent to half the size of the U.S. liquor market.
Even with this heft, there is a risk that Washington will ignore the cannabis industry's dilemma. The likelihood that shareholders will spend another four years in the wilderness has increased.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
November 22, 2024 05:30 ET (10:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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