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Cannabis industry investors have faced a number of regulatory catalysts over the past three years that have changed stock valuations.
Notable moments include Canada’s federal adult-use enforcement, the election of President Joe Biden, and the Georgia Senate runoff in January. In addition, the legalization movement from state to state is driving significant growth in the total addressable market, especially in jurisdictions where state and multi-state operators are well positioned to enter these new markets as they are introduced.
Aside from California, no other state has caused more excitement about the launch of its adult market than New York. With cannabis, brands are said to be created in California, but they are most likely to be established in New York, especially as the industry shifts out of the illicit market and into the mainstream.
But while the Empire State “going rec” is a seismic moment for the industry, there are still many questions about how this market will evolve.
In evaluating how the New York cannabis market is performing and what investors should focus on, we consider four goals that policy makers should pursue to support social and economic success.
Four focal points
In a room with five New Yorkers discussing politics, one needs to hear seven opinions, and cannabis politics is no exception.
Most agree that it is time to correct the misapplication of our criminal justice system. It is also time to recognize that New York City is home to the largest illegal and currently untaxed market in the world and that it is not harnessing the tax revenue and job creation needed to revitalize rural and urban communities.
The passage of the New York Marijuana Regulation and Taxation Act is the first step on this path. It is now up to the state to enact regulations to put meat on the bones of this monumental law. While there are myriad policy considerations, regulators need to take some critical measures to ensure the successful introduction of adult cannabis.
1. Fast track grow licensing
If the state is to create a sustainable program that will eliminate the illicit market through price competition, it must accelerate cultivation beyond the existing ten registered organizations operating in New York today. The publicly traded companies that make up the core of this group and are well positioned in New York include: Curaleaf, Columbia Care, Green Thumb, Cresco Labs, Vireo, Acreage, and Ascend Wellness.
These companies currently operate approximately 350,000 square feet of cultivation capacity for a population of 19 million. This is small and creates by far the largest supply-demand deficit in the country. One study estimates that New York City uses 77 tons of cannabis annually – more than any other city in the world.
By comparison, Massachusetts has a growing capacity of about 3 million square feet with a population of 7 million and some of the highest wholesale prices of about $ 4,000 per pound.
Various cannabis strains will be available for sale on Monday March 23, 2020 at the Harborside Pharmacy in Oakland, California, United States.
David Paul Morris | Bloomberg | Getty Images
Ultimately, the New York supply deficit will only strengthen the existing juggernaut of an illegal market as the product will be unaffordable for many consumers. It should be noted that unlike future adult operators, the ten registered organizations are allowed to be vertically integrated and should have a significant advantage due to the inherent profitability of this operating model. Gross margins of over 60% can be achieved with the option of mitigating the punitive effects of the current federal tax system.
Prioritizing cultivation capacity will also support social justice initiatives. Social justice retail businesses will fail if they are limited in supply and have no access to competitively priced products.
It takes at least 18 to 24 months for a grower to produce salable flowers from the date of approval. So if the state doesn’t act quickly, the market will be undersupplied for the next five to seven years. The New York Cannabis Control Board must be appointed immediately and act quickly to issue cultivation licenses, or the real winners in New York will be the illegal market and neighboring states.
2. Flexible delivery business models
It’s no secret that delivery has been the cornerstone of the New York cannabis market for decades. From California to Massachusetts, operators have developed technology-enabled delivery solutions for adult cannabis markets, just like any other packaged consumer product. In a cannabis market today dominated by low-tech supplies, creating a liberal supply framework will create competition for the illicit market and generate the tax revenue many lawmakers are hoping for.
3. Social justice – access to capital and resources
According to the criteria of the Marihuana Regulation and Taxation Act, social justice operators are unlikely to have the skills and training necessary to operate in a highly regulated market. While a paper license is nice, every operator needs access to the capital and operational expertise needed to take advantage of this opportunity and compete with well-funded operators.
The state should sponsor incubator programs and partner with business schools and royalty-free or royalty-free professional service providers (such as lawyers and accountants) to strengthen an impressive network of successful minority operators who can serve as the cornerstones of a positive cycle, tangible, intergenerational prosperity to the communities devastated by the war on drugs.
Social equity operators rarely have access to the capital that white operators have through venture capital firms and family offices. To offset this unequal playing field, New York must ensure that social justice operators have access to non-predatory capital by providing soft loans or supporting private investments with a reasonable cost of capital.
4. Binding of cannabis tax revenues
New York Governor Andrew Cuomo speaks to the media at a press conference in Manhattan on May 5, 2021 in New York City.
Spencer Platt | AFP | Getty Images
New York Governor Andrew Cuomo estimates the state will generate $ 350 million in tax revenue annually once the adult market reaches its size in five years. But New York needs that money today.
Fortunately, there is a tried and true method of preferring tax revenue by issuing bonds. New York was due to issue a $ 1 billion cannabis-backed bond with a term of 10 years in early 2022. The proceeds would provide an immediate source of capital to fund social justice initiatives and community rebuilding. Also, today’s $ 1 billion raise will ease political pressure to overwhelm cannabis in its infancy, thereby lowering the prices of cannabis products. The supply and demand mismatch, if not resolved quickly, will lead to the most expensive cannabis market in the country. However, if the state can pledge some of the future tax revenues, it can introduce lower tax rates and create a regulated market that will fight the illegal market and ultimately replace it. Lower prices will enable bigger sales, which will lead to more tax revenue.
The potential for the adult cannabis market in New York is unprecedented and exciting. The state has an enormous chance of generating income, creating tens of thousands of jobs and correcting decades of misuse of our criminal justice system – but only if the state does it right.
New York policymakers should learn from the successes and failures of previous states while providing innovative solutions to the various policy problems that plague our communities and the cannabis industry. For investors, if New York is even remotely successful in this implementation, the investment case for the U.S. cannabis industry as a whole will improve tremendously.
Tim Seymour is portfolio manager of The Amplify Seymour Cannabis ETF and CIO of Seymour Asset Management (indication: he is long on the stocks mentioned). He is also a CNBC contributor and a CNBC “Fast Money” trader.
Jeff Schultz is a partner at Feuerstein Kulick LLP and an independent board member and strategic advisor to various cannabis companies and investors in the cannabis industry.