Just How Big is Next Week’s Canadian Cannabis Legalization?

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In just eight days, marijuana will be legal to grow, distribute and use recreationally in Canada, one of the world’s first major markets for the controversial drug.

In preparation for this major milestone in the industry, we’ve tracked companies set to benefit. We’ve looked at potential opportunities for future growth. And we’ve even dug into the best methods to begin investing in this volatile space.

Today, with just a week left, we are going to explore exactly how large this market is expected to be… and what moves major companies are making to get themselves ready for this vast legalization.

In a new study by C.D. Howe Institute, legal cannabis supply in Canada will reach a whopping 210 metric tons in just the first year following this upcoming legalization. That sounds like a lot, until you consider just how much demand there already is.

The study finds that demand during this first year will hit more than 600 metric tons. Meaning, despite the enormous growth plans companies are projecting and investing in, they will only be able to supply roughly one-third of the total demand.

While this unfortunately does mean that the black market for marijuana won’t be going anywhere anytime soon, it also shows just how enormous the opportunity is for early industry leaders like Canopy Growth Corp. (NYSE:CGC) and Aurora Cannabis (TSX:ACB.TO). Incidentally, the latter just announced which major U.S. exchange it will be joining… the NYSE. This too points to just how large this new industry is expected to grow.

Now, another way to track the growth potential of this industry following Canada’s new law implementation is to follow the money.

We’ve previously mentioned the major – and still largest – investment in the cannabis industry by Constellation Brands (NYSE:STZ), when it injected industry leader Canopy with a $4 billion investment. That alone would be enough to turn heads to the high profit potential in cannabis. But there have been other, even more recent news across the industry.

Molson Coors Brewing Company (NYSE:TAP) just closed on a new joint venture project with HEXO Corp (TSX:HEXO.TO), a Quebec-based cannabis grower and products manufacturer. Its current products include time-of-day strains — recommended to be used at specific parts of the day for maximum benefit — as well as THC and CBD pills, sprays and oils.

This new partnership will be focused on production of new lines of cannabis-infused beverages for the Canadian market. There’re no numbers yet available for how big this market might be on its own just yet, but analysts have put a $600 million cannabis-infused beverage target for the U.S. by 2022. Canada, which will be legal in all provinces, could be even larger.

Molson isn’t the only one to eye this lucrative market. Heineken launched its own trial THC-infused drink through its California-based Lagunitas brand this summer.

This relatively untapped (no pun intended) market isn’t only being targeted by beer companies. The Coca-Cola Company (NYSE:KO) has reportedly shown interest in CBD-based drinks as alternatives to the declining sales of traditional soft drinks in certain regions. No major move yet, but we believe it’s a matter of time.

Of course, growing cannabis and developing products like THC-infused beverages and CBD sprays is only a part of the potential about to open up next week. While many growers won’t actually be too affected by the new law, other than higher demand for their products, the other side of the coin will abruptly change… distribution.

Cannabis has largely been decriminalized and even overlooked in parts of Canada for years prior to this law. Some, to be sure, have even semi-legally sold products through various smoke shops, coffee shops and bars. But they were relatively few and far between.

Now, part of this new law, large-scale retailers will be opening up for the first time in the country. Under the law that is making cannabis legal, each province will be responsible for putting in place rules for distribution. Most, it seems is regulating the number and location of these future distributors by issuing limited number of licenses.

This is going to be a huge issue for at least the first few years after this law goes into effect. Think of it this way, in Alberta, only 17 interim cannabis licenses have been issued so far. We know this because Alcanna Inc. (TSX:CLIQ.TO) announced it received five of them. That will really narrow down who can actually sell this newly legal cannabis.

These near-monopoly systems scattered around Canada, based on province, will certainly be important to follow going forward. As with anything, scarcity often comes with opportunity… and large profit potential.

We’ll continue to follow these trends after next week’s legalization. When we’re talking about billions in new investments, distribution rights for only a few lucky players and interest from companies like Coca-Cola, you know there is huge money here. For now, we’ll continue to track it and report back when something changes.

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