Article by Cory Renauer, The Motley Fool via Yahoo News
Investors long cannabis stocks have been making some dangerous connections between the marijuana industry and the market for alcoholic beverages following prohibition. You’re about to see that they’re hardly even related.
In case you haven’t been paying attention, sales of government-sanctioned cannabis throughout Canada have been stagnating at a level too low for big producers like Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB) to scratch out a profit. If you’ve been wondering how long until licensed producers can capture more than one-fifth of all marijuana sales, the answer is probably never. Here are three reasons why.
1. It’s cheaper to produce than you think
Countless analysts have confidently predicted how quickly the black market will cease to exist once everyone has access to licensed cannabis. The illicit market for alcohol practically disappeared following the end of prohibition, but that’s because big businesses enjoyed economies of scale.
Trying to make your own alcoholic beverages takes a lot of work and the ingredients aren’t cheap unless you own a farm. As a result, making your own beer, wine, or spirits usually costs a lot more than purchasing an equally good bottle with a tax stamp on it.
Marijuana is an entirely different animal. With just a few hundred dollars worth of equipment, and an ability to follow instructions, almost anyone can grow more top-quality cannabis than they can possibly consume. Just try to imagine what the market for $20 bottles of Johnnie Walker Red would look like if everyone could produce gallons of 25-year Macallan in their closets for pennies.
This is why it’s so hard for the big producers to break even, they’re paying employees, licensing technology, and building greenhouses. During the first three months of 2019, Aurora Cannabis lowered the cash cost to produce each gram of cannabis sold down to CA$1.42 during the first three months of 2019, and the company still lost CA$158 million.
2. Law enforcement isn’t helping
Few governments with a medical or recreational marijuana program outlaw growing your own cannabis and most make it really easy to become a registered caregiver for a limited number of patients. For example, when Michigan adopted a medical marijuana program more than a decade ago, nearly every small-time grower with a clean record became a licensed caregiver.