The cannabis industry has grown dramatically in recent years in response to expanding legalization and a flood of capital from venture capital firms and other investors. In Nov. 2022, voters in Maryland and Missouri approved the legalization of recreational marijuana, bringing the total to 21 states and Washington, D.C. 37 states allow legal medical use of cannabis products.
The legalization and sale of cannabis are advancing rapidly not only in the U.S. but globally. Global cannabis sales are expected to increase from $13.4 billion in 2020 to $148.9 billion by 2031. That growth opportunity has spawned a long list of startups, IPOs, and also a wave of cannabis-related mergers and acquisitions (M&A) involving companies in production, distribution, real estate, retailing, and other areas.
Despite that growth, the global COVID-19 pandemic created a major upheaval in the cannabis industry in 2021, and the industry has continued to face major challenges in 2022.
Here is a look at the year ahead.
- The cannabis industry is growing rapidly, with global sales expected to reach nearly $149 billion by 2031.
- Though the industry has seen significant improvement, particularly around legality, it will continue to face many challenges.
- Legality and regulation will continue to be key forces driving the industry as different countries and states within the U.S. approach the use and sale of cannabis differently.
- Banking will continue to be a challenge because cannabis companies within the U.S. cannot legally access traditional banking services.
- Through partnerships and acquisitions, companies in established "addiction" industries such as alcohol and tobacco will further cement themselves in the cannabis market.
- Recent rate increases by the Federal Reserve may make it more difficult for cannabis companies to raise capital for future growth.
An Ever-Changing Landscape
As the industry grows, it has to adapt to a fast-changing, complex legal landscape. Cannabis companies' challenge is that different states within the U.S. as well as different countries have varying laws applying to the legality, use, distribution, and growth of cannabis.
As the legal cannabis industry continues to mature, more established companies outside of the industry are expanding their foothold. The so-called "addiction" industries—alcohol, tobacco, and pharmaceuticals—have been heavily investing in the cannabis market. They have been acquiring many companies with the intent of selling cannabis en masse as they do their own products. In the process, entirely novel lines of cannabis-infused products have launched, including cannabis drinks marketed as an alternative to alcohol. These trend could dramatically transform the cannabis industry.
The COVID-19 Pandemic's Effects on Marijuana Use
The COVID-19 pandemic is affecting how many people use cannabis for medical uses and how much. That's because the pandemic has taken its toll on people's mental health globally. There were 53.2 million additional major cases of depressive disorder and 76.2 million additional cases of anxiety disorders globally due to the pandemic in 2020, according to a study by The Lancet in October 2021. It's no surprise, then, that the global medical cannabis market is predicted to grow at a compound annual growth rate (CAGR) of a whopping 26.6% from 2019 through 2027.
To be sure, the pandemic hasn't boosted use on every front. A study led by researchers at the University of Michigan focused on adolescent drug and alcohol use. The study found that marijuana use among adolescents has not changed significantly during the pandemic, though the study also noted a record decline in the perceived availability of marijuana.
The U.S. Market
The U.S. market remains highly complicated for cannabis companies and investors. As mentioned above, fewer than half of U.S. states and territories have legalized recreational cannabis use as of Nov. 2022. This limited legality exists even though most Americans think that marijuana should be legal for recreational or medical use, according to a survey by the Pew Research Center conducted in April 2021. As many as 60% think it should be legal for both recreational and medical use, while 31% think it should be legal for medical use only.
Lobbying for federal legalization of marijuana picked up in recent years. Banks, tobacco and alcohol companies, and other corporations have joined union advocates, personal-use supporters, and social-justice activists in pushing for federal legalization.
In July 2021, three U.S. Democratic senators—Senate Majority Leader Chuck Schumer, Finance Committee Chairman Ron Wyden, and New Jersey Senator Cory Booker—unveiled a discussion draft of a bill that seeks to legalize cannabis at the federal level. The draft bill, known as the Cannabis Administration and Opportunity Act, would allow adults to buy and possess up to 10 ounces of marijuana without facing criminal penalties. The bill also would eradicate non-violent marijuana crimes, advance medical research, and allow cannabis companies access to basic financial services, including bank accounts and loans. The bill was introduced in the Senate in July 2022 and there have been no further developments as of Nov. 2022.
In November 2021, Republicans in the U.S. House of Representatives led by Nancy Mace of South Carolina introduced separate legislation seeking to decriminalize marijuana at the federal level. Known as the States Reform Act, the bill would also remove legal hazards faced by cannabis-related businesses and regulate cannabis use like alcohol use. The act differs from the Democratic draft bill proposed in July in a number of significant respects.
In Nov. 2022, voters in Arkansas, North Dakota, and South Dakota voted against proposals to legalize recreational marijuana. This suggests that public opinion is varied across the U.S. and that passage of a broader federal legalization bill may be difficult to attain for the time being.
The Secure and Fair Enforcement (SAFE) Banking Act and the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act are both examples of recent proposed legislation which could have a dramatic impact on the ability of U.S. cannabis companies to grow and thrive.
Another issue is banking. Congress has yet to lift banking restrictions on cannabis companies, which has limited their access to capital. The Secure and Fair Enforcement (SAFE) Banking Act would prohibit federal regulators from penalizing financial institutions for providing services to state-legal marijuana-related businesses. It has passed the House seven times, most recently in June 2022, but never made it through the Senate.
Rising Interest Rates
Like any young industry, cannabis companies need to raise capital in order to finance future growth. Due to their precarious legal status, cannabis companies do not enjoy the access to banking services that many other companies enjoy. This makes raising capital harder and increases its cost. Low interest rates, however, have made those costs relatively cheaper in recent years. The industry may face mounting challenges in 2023 following a series of Federal Reserve rate hikes.
What is happening with the legality of cannabis in the U.S.?
While cannabis remains illegal on a federal level, a growing number of individual U.S. states and territories have legalized marijuana for recreational and/or medical use. As of Nov. 2022, 21 states and Washington, D.C. have provided for legal recreational cannabis. Though numerous bills have been introduced to make cannabis legal on a federal level, no such legislation has passed.
What are the main challenges facing the cannabis industry in 2023?
The cannabis sphere faces both industry-specific and broader economic challenges. Looking at the industry in particular, increasing competition from non-cannabis companies entering into the space is a major concern, as is the shifting landscape among start-up cannabis firms that are jockeying for market share. The complex legal landscape also makes doing business difficult for cannabis companies.
More broadly, rampant inflation in recent months has increased many costs for cannabis companies, and interest rate hikes may have made it more difficult for those companies to secure capital. Fears of a recession could decrease consumer spending on perceived non-essential items, potentially including cannabis products.
What advantages does the cannabis industry have in 2023?
The global cannabis market is expected to grow at a tremendous pace in the coming years, and companies well-positioned in the U.S. could capitalize on these gains. Marijuana use for both medical and recreational reasons is becoming increasingly accepted in the U.S. Finally, there is growing demand for cannabis products worldwide.
The Bottom Line
Though the cannabis industry is growing and its use is becoming more accepted in society, it faces major challenges. These trends also will create a volatile and fast-changing environment both for investors and cannabis companies in 2023. For investors, the big challenge will be deciding which of the scores of startups, IPOs, and established cannabis companies can surmount the upheaval and succeed long term.