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7 Things Investors Should Know About Canadian Cannabis

Wayne Duggan

What investors can expect from cannabis investments.

Recreational cannabis use was legalized nationwide in Canada in 2018, and the fledgling market will provide plenty of useful information for long-term investors over the next several years. Most cannabis investors expect the global market to boom in coming decades, particularly in the United States. Canada can provide a blueprint for how the marijuana industry will mature in the U.S. if and when cannabis is legalized on a federal level. Bank of America analyst Christopher Carey recently released an extensive report on the Canadian cannabis market. Here are seven things investors should know from the report.

Cannabis usage is on the rise.

As expected, legalization has resulted in increased cannabis usage in Canada. Carey says 17.5% of Canadian adults reported using cannabis in the first quarter of 2019, the first full quarter of legal cannabis sales. That share is up 3.5% year-over-year. Only 6% of Canadian users consider themselves daily users, up just 1% since recreational legalization. That number is a positive early sign for investors concerned about legalization leading to potential abuse or overuse. Carey says he anticipates use rates will increase further in coming years as a wider range of products are introduced.

The market is predominantly male.

In the first quarter of 2019, 23.3% of male Canadians older than 15 used cannabis, up 7.5% year-over-year and 3.9% compared to the fourth quarter. However, only 12.7% of Canadian women used cannabis in the first quarter, up just 1.8% quarter-over-quarter and 0.5% compared to a year ago. For comparison, the 2015 National Alcohol Survey found that 72% of American men consume at least one drink of alcohol in a typical week compared to 62% of American women.

Cannabis spending is still dwarfed by alcohol.

Alcohol may be the closest mature market for cannabis investors to use for comparison. Canadians spent about 1.25 billion Canadian dollars ($950 million) on cannabis in the first quarter of 2019, roughly 25% of what they spent on alcohol during the same period. Carey says that CA$1.25 billion cannabis budget also represents about 34% of the amount Canadians are spending on tobacco and 52% of what they are spending on non-alcoholic beverages. U.S. alcohol sales hit $253.8 billion in 2018, so 25% of the market would potentially represent a $63.4 billion annual opportunity.

First-time cannabis users are older.

Another concern for cannabis investors is the impact legalization could have on underage use. Quebec is already aggressively regulating edibles and is cracking down on color and flavor additives that could appeal to children. However, early statistics suggest new post-legalization users are not necessarily younger. In the first quarter, 646,000 Canadians reported using cannabis for the first time, about twice the rate of first-time usage reported prior to legalization. Surprisingly, more than half of the new users are age 45 or older. As of 2017, only 14% of Canadians age 15 to 17 reported using marijuana.

Illegal businesses are taking a hit.

One of the positive early signs from the Canadian cannabis market is that legal sales clearly seem to be taking a bite out of the black market cannabis market share. In the first quarter of 2018, only 23% of Canadian cannabis users purchased their supply from a legal source. Not surprisingly, that percentage more than doubled to 47% in the first quarter of legalized sales. As the market continues to develop and more legal supply becomes available, Carey says that percentage should continue to climb, placing pressure on the Canadian black market.

Cannabis prices are falling.

Another positive development from legalization is falling prices. In 2018, consumer cannabis prices in Canada fell to around CA$7 per gram. Canadian cannabis prices have been consistently trending lower since peaking at around CA$11 per gram in 2003. Prices are already at their lowest levels in nearly 40 years and they will continue heading lower if the current trend continues. Quebec currently has the lowest average prices at around CA$5.85 per gram. Unfortunately, illegal cannabis prices are still significantly lower than legal cannabis prices due in large part to the excise taxes on legal sales.

The Canadian government is profiting.

One of the biggest selling points for U.S. legalization is potential tax revenue. In Canada, the tax dollars are already rolling in. Canadian federal and local governments have collected CA$186 million in cannabis taxes since recreational legalization in October 2018. In the first quarter, Canada collected CA$9.8 billion in federal excise taxes, CA$42 billion in provincial excise taxes, CA$22.3 billion in general federal sales taxes and CA$33 billion in general provincial sales taxes. That total cannabis tax revenue was up 35.6% compared to the fourth quarter of 2018.

Top things to know about Canadian cannabis legalization:

-- Cannabis usage is on the rise.

-- The market is predominantly male.

-- Cannabis spending is still dwarfed by alcohol.

-- First-time cannabis users are older.

-- Illegal businesses are taking a hit.

-- Cannabis prices are falling.

-- The Canadian government is profiting.

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