Cheddar's Crystal Ball: The 2019 Outlook for Cannabis and Hemp

December 27, 2018

By Chloe Aiello

When U.S. Attorney General Jeff Sessions moved to undermine Obama-era marijuana industry protections in January, there was little indication how pivotal 2018 would prove to be for the cannabis industry. Nationwide, 10 states and Washington, D.C., have voted to legalize marijuana for recreational use, and 33 states have legalized medical marijuana. Major beverage and tobacco companies bet huge money this year on pot, and President Trump in December signed a version of the U.S. Farm Bill that legalizes hemp ー a major step toward the legitimization of CBD. As 2019 approaches, Cheddar is looking ahead to next year and forecasting what's in store for the U.S. marijuana industry.

Legalization Race between New York and New Jersey

The race is on as New York and New Jersey both rush to legalize marijuana. New Jersey has been at the effort slightly longer, but New York may have pushed ahead after Gov. Andrew Cuomo announced a major policy change earlier this month, making marijuana legalization one of the top priorities for his upcoming his third term. New Jersey Gov. Phil Murphy campaigned in part on a promise to legalize marijuana during his first year in office, but hit snags in the state legislature, according to NJ.com.

"I think that the race is on certainly between the two states. I think whichever of the two states can legalize first will enjoy the benefits of consumers coming from both states until the other state can sort of catch up," said Tiffany Carrari, an associate at cannabis law firm Margolin & Lawrence. But there are also certain advantages to being second. Carrari said it gives the laggard a chance to learn from the first state's mistakes.

Hemp Legalization ≠ CBD Legalization

Hemp legalization will be a boon for some industries ー but those hoping to capitalize on hemp-derived CBD will likely face some major obstacles in 2019.

"Legalizing hemp is going to impact other industries that are centered on making products and biodegradable products from hemp ... As far as the cannabis industry, I think there are still some hurdles because the [Food and Drug Administration] still does not recognize CBD as being safe for edible food products," Carrari said.

President Trump in December signed the updated Farm Bill, which contains language that legalizes the cultivation of industrial hemp, or cannabis-derived products with next to no THC, the principal psychoactive component of cannabis. One major myth surrounding the Farm Bill is that it legalizes CBD. In reality, the bill only legalizes cannabinoids extracted from hemp that have been produced under very specific circumstances, according to the Brookings Institute.

Anything else is still considered Schedule 1, with the exception of Epidiolex, an FDA-approved epilepsy drug that contains CBD. Earlier this year, the DEA rescheduled Epidiolex) into the least restrictive category of the Controlled Substances Act, although it still requires a prescription.

"We are not going to see a lot of products incorporating the use of hemp-derived CBD until the FDA approves it," Carrari said.

Canada, Eat Your Heart Out

When Canada legalized recreational marijuana in October, edibles, vape products, and beverages were conspicuously absent from the bill. But come October 2019, those cannabis-infused staples are due to hit the market, and producers are already knee-deep in research and development for what's been termed the "second wave" of Canadian legalization, according to the CBC.

"I think if you're not preparing things two years in advance, you're never ready," Canopy Growth CEO Bruce Linton told CBC.

Canopy is working to develop products under its Tweed arm, one of the most well-known cannabis brands in Canada. And it's far from the only company trying to get a jump on the market. Others, like Auxly Cannabis Group, view edibles and beverages as an opportunity to flesh out their brand identities and move beyond selling exclusively flower.

Brand-building will undoubtedly be beneficial for companies at risk of becoming low-margin commodities, but critics of monster valuations on Canadian marijuana aren't convinced these new classes of products will be enough to justify the premiums at which Canadian marijuana companies trade.

"It's another opportunity to change the margin profile, which would only be better for them. It's another opportunity for some form of disruption, but I don't know what they are going to do that isn't already being done in a sophisticated way in California," Navy Capital founder and portfolio manager Sean Stiefel said.

2019 Is the Year of the Brand

By the end of 2019, you'll probably know the name of a cannabis brand ー if you don't already. So will your spouse, and maybe even your mom. That's because 2019 will most likely be the year when the marijuana brand finally breaks into the mainstream.

But that breakthrough brand likely won't be courtesy of Snoop Dogg or Tommy Chong of famous stoner duo Cheech and Chong. It's going to be a more modern source, and will likely relate to health and wellness.

"The future of cannabis is not in line with historical weed smokers," Stiefel said. "I think it's going to look like any other [consumer packaged goods], or health and wellness brand. The branding is cleaner, newer, healthier ー it will be more of a story, and less about a celebrity."

Stiefel is adamant that branding will come out of the U.S., rather than Canada, since the U.S. already has such a lead on Canadian brands. But whether or not the branding success story comes from a free-standing marijuana company (like California-based MedMen) or is borne from a partnership between a marijuana company and tobacco or beverage giant remains to be seen.

Mainstream Investment Continues

In 2018, mainstream consumer goods companies Altria ($MO), Molson Coors ($TAP), and Constellation Brands ($STZ) forged partnerships, some billions of dollars strong, with marijuana companies. Next year might yield more of the same. And there are still plenty of attractive acquisition targets for established giants like PepsiCo ($PEP), Coca-Cola ($KO) or Diageo ($DEO), all of which have reportedly expressed interest in the space.

PepsiCo was rumored to be considering marijuana investment but said in October it had no plans to invest in marijuana. Coca-Cola was reportedly in talks with Aurora Cannabis to develop CBD-infused functional wellness beverages. The company later clarified that it was watching the growth of CBD, and “no decisions have been made at this time,” CNBC reported.

Of course, not all acquisition targets are game. Aurora Cannabis CEO Terry Booth told Cheddar in December, "Aurora is not for sale.”

"Big pharma, big booze, big alcohol, big tobacco, big beverage, big snack industries are looking at cannabis and its derivatives," Booth said. "It is too early, in my opinion, to lock horns with any of those big players."

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