Access to the US cannabis market is important for Canadian farmers as their home turf becomes more competitive
After a wild party earlier in the year when Democrats took control of the US Senate, shares of Canopy Growth, Canada’s most valuable listed cannabis company, have fallen by nearly two-thirds since mid-February. Another Top Name, Cronos Grouphandjob
More than half done.
The country’s pot producers are itching to expand south of the border, where data provider Headset expects the legal cannabis market to be more than five times larger than their home turf by the end of 2022.
On Thursday, Canadian producer Tilray said its plan to boost revenue to $4 billion by the end of the 2024 fiscal year is heavily dependent on being able to sell to American smokers. The company registered a sales growth of 43% for the three months during August as compared to the same period of 2020. While that sounds impressive, it was less than analysts expected, pointing to a slowdown in Canada.
For now, Canadians cannot buy any US marijuana firm that “touches the plant.” But they can sign alliances that will kick in when federal laws change. Tilray recently purchased an option on bonds that could be converted into 21% equity in the US cultivar MedMen.
Canopy has similar placeholder agreements with two US producers. These are potentially risky deals: No one knows what size American companies will be in until the drug is fully legalized.
Meanwhile, business is getting tougher in Canada, where a glut of licenses has led to overproduction. According to a recent report by brokerage Stifel, indoor farming is now spread over 18.7 million square feet, which is enough to meet 200% of the country’s demand. More than 500 marijuana companies are now slathering it for market share, making it harder for Canada’s huge loss-making cannabis companies to turn profitable.
Even if the US federal ban is lifted sooner than currently expected, it won’t be good news for the likes of Canopy and Tilray. Canadian cannabis stocks trade at a large premium, mainly because they are allowed to be listed on US stock exchanges. Their US rivals are forced to tap the less liquid Canadian market instead of a federal ban.
According to Andrew Carter, an analyst at Stifel, valuation levels are likely to rise if the cannabis reform allows U.S. pot firms to bring their stocks home. This could make it more expensive for Canadians to buy US property.
Canadian producers are eager to talk about the opportunities that await them in the US. Unfortunately for investors, they may be stuck on the sidelines for a long time.