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. The industry broke new ground last year as New Jersey, Montana, South Dakota, and other states and jurisdictions voted to legalize the recreational use of cannabis. This year, New York, Virginia, New Mexico, and Connecticut were added to the list of states legalizing recreational use.
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 $33.6 billion by 2025. 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 faces major challenges in 2022.
Here is a look at the year ahead.
- The cannabis industry is growing rapidly, with global sales expected to reach $33.6 billion by 2025.
- 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.
- The Federal Reserve's announcement on Dec. 15, 2021, that it will raise interest rates in 2022 will make it harder for marijuana 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. This 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 a study published in the Journal of Addictive Diseases in September 2020 indicated the rising use of medicinal cannabis. Specifically, the study found that people with mental health conditions increased their use of medicinal cannabis by 91% since COVID-19 was declared a pandemic on March 11, 2020. The emergence in November 2021 of Omicron, a new variant of the coronavirus, could keep marijuana use at high levels among mental health patients.
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 of December 2021, only 18 out of 50 states have now fully legalized marijuana use. 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 earlier this year. 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.
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.
Investors should watch out for news about the Secure and Fair Enforcement (SAFE) Banking Act and the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, both of 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 five times 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. That's about to change. The industry may face increasing challenges in 2022 after the Federal Reserve signaled this month that it plans to raise interest rates three times by the end of next year.
The Bottom Line
Though the cannabis industry is growing and its use is becoming more accepted in society, it faces major challenges to its growth. These trends also will create a volatile and fast-changing environment both for investors and cannabis companies in 2022. 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.