With both borders relaxing the regulations it’s only a matter of time before investors find new ways to connect consumers to capital-starved businesses — even if it means going around the lines.
Before negotiations broke down last week, it was starting to look like a new North American free trade pact would open an entire continent to the plant banned for generations.
Canada has legalized across its territory. Mexico has softened on medicinal use and is eager to decriminalize in order to take leverage away from the cartels.
And with the map in between their borders filling in year by year, 95% of the U.S. population now has the right to buy cannabis products for at least medicinal purposes as well.
Mexican farms are eager to plant as many acres as it takes to supply the entire continent. Canadian banks are finding ways to invest everywhere in order to make it happen.
If anything, the latest diplomatic chill around NAFTA only raises the odds that the biggest fortunes to be made in the U.S. legalization process will be concentrated in the north and south.
The Canada boom
Canadian investors got a head start because support for legalization came from the top instead of emerging out of a fragmented state-by-state framework.
Blanket prohibition was declared unconstitutional in 2000, leaving it up to Justin Trudeau’s government to make good on 2015 campaign promises and roll back the restrictions.
Since then, Canadian operators have had a long-term road map that their U.S. counterparts haven’t enjoyed. While the Obama era effectively decriminalized the plant at the federal level, regulations remained in place and were always in the background.
When Jeff Sessions came to the Department of Justice, the rules were once again enforced, which once again chilled most forms of conventional investment.
People could still buy shares of cannabis-oriented entities on both sides of the border. But beyond using their equity as a checkbook, U.S. companies were cut off from normal banking relationships.
They couldn’t get business loans to expand or smooth their cash flow. They still can’t accept electronic payment. Given the constraints, it’s easier for many to simply incorporate in Canada and export the work to friendly U.S. jurisdictions.
Over the last few years we’ve seen a bona fide boom in “green rush” stocks based in Canada. Most recently, with key suppliers becoming global M&A targets for Big Liquor, Canadian companies like Canopy Growth have started leading the entire Toronto market in both performance and turnover.
Meanwhile, back in New York, the Sessions shadow kept institutions far from the industry. The risk was simply too high for conventional players to get involved.
Apparently it wasn’t even the fault of operating companies in Colorado, Washington, Nevada and across the map. Some are running fantastic cash businesses while regulatory oversight ensures accounting practices that guarantee transparency throughout the industry.
But with the threat of a new freeze as long as Sessions remains the nation’s top enforcement official, it just wasn’t worth building the systems it takes to serve that industry.
Canadian institutions have no such constraints. The ambitious ones now need to build those systems in order to serve what’s now a viable and tempting domestic market.
The leaders are already attracting the best talent in the emerging cannabis financing field. Once they do, there’s no structural obstacle to exporting that talent to Denver, Seattle, Las Vegas and beyond.
One way or another, their investment isn’t going away as long as Canada avoids reversing itself. The green genie isn’t going back in the bottle.
And in that scenario, one way or another, capital will find a way to flow. Jurisdictions will vary, but it’s going to get easier on the whole for these companies to get access to funding and for investors to get exposure to the industry.
They may need to spend some time in Toronto or Vancouver. But on the other hand, there’s already a tradition of cannabis tourism on the consumer side.
Pioneers in Denver and Seattle and Las Vegas are doing great things, but where would you rather be based for maximum long-term clarity?
Even in a post-Sessions world, that dynamic isn’t going to change.
One interesting detail: NAFTA discussions don’t change the pace at which cash can flow across borders. This is all about the flow of physical commodities.
So think of cloud computing. The data stays in physical servers just like the cannabis stays in friendly jurisdictions from supply to consumption point. But the money is accessible anywhere.
As long as Canadian banks respect U.S. protocols, they can make the deals happen.
The southern side
And if Mexico gets serious about legalization, the physical commodity keeps flowing according to whatever new NAFTA rules end up happening.
The difference is that instead of today’s network of smuggling routes, Mexican cannabis would shift to more normal channels just like kale or spinach or avocados.
That’s the real threat to U.S. producers who pride themselves on a vertically integrated footprint. Take the agriculture out of the equation and a key margin driver drops out of the business plan.
Granted, most U.S. operators are more interested in the value-added end of the industry, working to develop new biotech strains, commercial extracts and other products.
They’re not as eager to get their hands dirty growing the physical plant. If Mexico becomes a legitimate exporter, they’re not even going to have the option.
Either way, these disruptive moments are where fortunes happen. The legitimate industry has gone from zero to billions in less than a decade. Those who seize the opportunity are getting rich. And those who aren’t interested can look elsewhere.
