Pot of Gold: America’s Cannabis Industry Prepares for New Highs

Article by The Economist

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IN THE 1990s Snoop Dogg, a rapper, called cannabis “chronic”. The drug was illicit and cool. In 2016 Mr Dogg is a cannabis investor, and the drug is poised to earn another title: consumer staple. On November 8th four states, including California, voted to approve recreational cannabis use. Four other states eased rules for medical marijuana. About three-fifths of America’s population lives in states that now allow cannabis use in some form.

So pot entrepreneurs face the thrilling prospect of normality. This week industry leaders were meeting in Las Vegas to discuss how the sector might expand. They have in prospect a vast, partially established market. More than 32m Americans already use cannabis. As the business becomes more normalised, it is sure to attract new customers. “It’s not often that you see an industry and you know the inevitability of it,” says Brendan Kennedy of Privateer Holdings, a private-equity firm that specialises in cannabis. Last year legal sales reached $6bn, according to the Arcview Group, an investment and market-research firm. By 2020 Arcview expects legal sales to be more than three times higher.

There remains the dispiriting fact that, on a national level, marijuana is still illegal. Federal agencies have generally respected states’ cannabis rules, but Donald Trump’s enforcers may be more aggressive. Even if they demur, the federal ban makes business difficult. Few banks are willing to lend to cannabis companies that handle the plant directly. Firms cannot operate across state lines, nor may they deduct common expenses from tax filings, which squeezes their profits.

Nevertheless, startups are spreading like weeds. Many of them serve the cannabis industry without touching the plant itself—these firms benefit from the sector’s growth while avoiding its strictest rules. For example Kush Bottles, based in California, sells product packaging that complies with idiosyncratic state requirements. Older firms are eyeing the industry as well. Scotts Miracle-Gro, a publicly traded gardening company, reckons it can serve not just ageing green thumbs but young cannabis growers, too.

Other companies deal with the plant directly, whether growing, processing or distributing it. Many early entrepreneurs have exited, unable to survive tight rules and falling cannabis prices brought about by legalisation. Bigger firms with strong management have, unsurprisingly, fared better. A company called LivWell now has 14 dispensaries across Colorado, which legalised recreational cannabis use in 2014. Its founder used to lead a firm that sold baby products to Walmart.

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