You’re reading this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news. We no longer send these by email as we did in the past, but we post this and all of the newsletters on our website here.
Friends,
I am based in Texas, which has a very poorly structured cannabis industry. The medical program here has only three licensed providers, and two of them are units of larger multi-state operators. The other is a local company that I have visited and follow. The program has improved dramatically since it was introduced, but it is still poorly run and missing a lot. There are very few patients in the Texas medical cannabis, and adult-use for Texans isn’t likely to happen soon.
With that said, I went to my first cannabis event this week right near my house in Houston. The event was sponsored by a company based in South Carolina that sells seltzer that contains THC and CBD derived from industrial hemp. The Farm Act of 2018 legalized industrial hemp cannabinoids at the federal level, but the FDA has not yet weighed in.
My own focus on the cannabis industry began in 2013, which was right ahead of the Cole Memorandum that allowed Colorado and Washington to introduce what their voters had approved in late 2012: adult-use sales in their states. The state-by-state approach has created a lot of challenges, to be sure, but it also allows the industry to evolve. The rules and regulations differ greatly from state to state.
I currently am not focused on any publicly traded companies that operate in industrial hemp exclusively. I used to follow some of them, but it has been a disaster. Of course, investors in state-regulated cannabis companies have endured a lot of pain too. I have been expressing my optimism for them, and the delay in rescheduling does not change my optimism that I have been expressing here. It is still likely to happen and will end 280E taxation, which is a major positive, but it won’t happen as soon as some were hoping now that the DEA has scheduled a hearing in December.
For a while now, I have viewed hemp-based products negatively. My main concerns have been that there are many stores selling them that are unlicensed and not selling products that are tested or that make sense. I am bothered by the many products that come from synthetic CBD and synthetic THC too. I have never had an issue with cannabinoids derived from hemp.
While I am not a fan of gas-station CBD and now more recently THC products, I think the good thing is that it shows that consumers want these products. The media and regulators must explain to consumers about how unregulated cannabinoids can be dangerous. Of course, having regulations raises the price of the product, which can hurt consumers, but consumers of other types of products will often pay up for safer products with other criteria that they like, such as being organic, vegan or light in added sugars.
I have been libertarian in my thinking for more than 40 years now, and I am against over-regulation, but I understand how a total lack of regulation can lead to problems too. I am very happy to see regulators stepping up to protect their consumers in California and New York within the licensed cannabis programs, and I am happy to see Texas reaching out to stop CBD stores that aren’t regulated.
People who have been focused on the industry saw the excitement over the Farm Bill of 2018 and how poorly it played out for operators and investors in CBD companies. The state-regulated cannabis operators have been in a bear market for over three years now, and there is too much competition within it and a lack of new big opportunities for them. There seems to be a war between them and some industrial hemp operators to reach consumers, and I think that the ability to sell cannabis products, even if derived from industrial hemp, expands the market so much that state-regulated cannabis companies should think about entering those markets. More importantly, they are thinking about it and, to a small extent, doing it. This week, the Ayr Wellness CEO did an interview at Seeking Alpha with Rena Sherbill, and he discussed how his company is looking very closely.
The MSOs all talk about building brands, but the current system of state-by-state production and sales makes it difficult to build a national brand. Selling in dispensaries only is a big challenge. It would be helpful if they could sell their brands in restaurants and non-cannabis stores. Ben Kovler at Green Thumb Industries wrote to the CEO of publicly-traded Boston Beer Company about the two companies potentially merging. I don’t see that merger happening, but it would be good for GTI if it could do so and retain the NASDAQ listing.
I began to give this topic of industrial hemp cannabinoids more thought earlier this year when I saw that a Houston-based company had merged with a craft beer maker. Then, this company cut distribution deals with a large Texas-based wine chain that I know very well and respect a great deal and a Mexican restaurant chain to sell their beverages that contain THC from industrial hemp. I discussed with the CEO the legal status and learned that it is currently legal in the state.
I know that many of our readers are investors in the space, and I have no investment conclusions today. I see a big potential threat developing, but I also see an opportunity for the MSOs to invest in industrial hemp cannabinoid production or to buy established brands. I am investing my time and thought into better understanding the hemp-derived cannabinoids industry. One big company, which happens to be publicly traded, seems to be excited: Anheuser Busch. They are quietly pushing CBD and THC products here in Texas. It’s not now or likely to be a big part of their revenue any time soon, but I like to see these established companies diversify into cannabis.
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Canadian Cannabis Sales Growth Plunges
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Sincerely,
Alan
