According to a summary report released Monday by Arcview Market Research, legal marijuana in North America reached $6.9 billion in 2016. While that might not sound like a lot of money (Philip Morris International Inc. (PM) brings in almost that much revenue in a month) the growth rate is astounding: up 34% from 2015.

Nor is the growth expected to stop there. Arcview predicts that the legal market will grow at a compound annual rate of 26% per year to reach $21.6 billion in 2021. The primary driver will be legalization. Nine states loosened marijuana laws in 2016, including California, Maine, Nevada and Massachusetts, which made recreational use legal. Arcview, perhaps optimistically, expects this trend to continue. (See also, Top 4 Medical Marijuana Stocks for 2017.)

If it does, the market for legal weed is in a rare and enviable position: the demand is already there, it is just limited to the black market. Arcview estimates the total North American pot market, including illicit sales, to be $53.3 billion. Dispensaries can grow the market by billions of dollars per year simply by swallowing a greater share of the illegal market. That shouldn't be difficult: give consumers the option of waiting (and waiting) for their "guy" in a parking lot or walking into a brightly lit store with posted hours of operation, and they'll go for the latter. In Colorado, just 33% of marijuana spending is illicit, compared to 88% in the country as a whole and, of course, 100% in states with prohibition.

Yet Arcview goes a step farther, predicting that not just legal sales, but total marijuana sales, will grow over the next five years. The rationale is that legalization allows for growth in total demand by opening up the market to more products than "traditional dried flowers." Old-fashioned bud made up less than 56% of sales in Colorado in the third quarter of 2016, according to Arcview, compared to 65% in the first quarter of 2015; concentrates now account for 22% and edibles for 14%. These products are not just replacing "flower" purchases, but "leading consumers to spend more," according to the report. The arrival of branding to the industry, which is understandably rare in the black market and much more common for edibles and other products than it is for plant matter, is also expected to contribute to growth. (See also, Teva to Market Medical Marijuana Inhaler in Israel.)

As a result, the total North American market, licit and illicit, is expected to reach $65.1 billion in 2025. (See also, More States Have Legalized Pot, But Can Supply Meet Demand?)

No Seshes for Sessions

Arcview's projections appear to rely on the continued march of legalization, but the incoming Trump administration may harsh the national vibe, as the report acknowledges. Marijuana remains illegal under federal law, which already presents a number of difficulties for dispensaries. Under a less accommodating administration, these challenges could increase.

President-elect Trump's nominee for attorney general, Alabama Senator Jeff Sessions, told Congress that "good people don't smoke marijuana" in 2015. Sessions was "less confrontational" during his Senate confirmation hearings on January 10 and 11, in Arcview's assessment, but "he offered only opaque responses to questions about how he would treat cannabis in states with legal regulatory regimes." The legal marijuana industry owes much of its success in recent years to the Department of Justice's (DOJ) leniency: in 2013 Deputy Attorney General James Cole issued a memorandum to federal prosecutors articulating a laissez-faire attitude to states with legal markets, while not altering "in any way the Department's authority to enforce federal law." If confirmed, Sessions may take a different attitude to prosecutorial discretion. (See also, DEA Keeping Marijuana Illegal: Economic Impact.)

The Treasury also has the potential to scupper the weed industry's plans. It permitted banks to work with dispensaries in 2014, but the industry has remained skittish. Just 51 banks and credit unions accepted marijuana businesses' deposits in 2014; 301 did so in 2016, but that's still less than 3% of the country's total. The IRS has not made matters any simpler by refusing to let marijuana businesses deduct expenses. As a result, many dispensaries pay an effective tax rate of around 70%. Finally, sites such as Facebook Inc. (FB) have removed many business' profiles, making it difficult to advertise through social media. (See also, Nasdaq Rejects Pot Startup MassRoots.)

Still, there are reasons for optimism. Gallup has polled U.S. support for marijuana legalization at around 60%, nearly double the rate in 2000. Politicians, in other words, could find crackdowns unpalatable. The Rohrabacher-Farr amendment, which was tacked onto a December 2014 omnibus spending bill, bars the DOJ from spending in order to interfere with states' efforts at legalization. Innovative industrial Properties Inc. (IIPR), a REIT that rents space to state-licensed growers, listed on the New York Stock Exchange in November. The Toronto Stock Exchange has become the first major exchange to list a "plant-touching" firm, the supplier Canopy Growth Corp. (TSX:CGC, OTC:TWMJF).

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