“There’s a lot of assets just not worth anything, so they’re just going to go away,” said Morgan Paxhia, co-founder of pioneering cannabis investment firm Poseidon Asset Management. “We’re seeing defaults picking up; we’re seeing businesses shuttering.”
While a new glut of semi-legal weed has helped sink prices, industry executives and investors say the lack of progress on federal marijuana legislation is the single biggest factor driving the sector’s economic downturn — and it’s unclear when their odds will improve. After Democrats won total control of the federal government in 2021, optimism swept the industry that Congress and the Biden administration would loosen restrictions on the drug and make it easier to run a profitable business.
“Stocks went freakin’ hog wild, because everybody thought, ‘Holy shit, Democrat White House, Democrat Senate, we’ll get legalization,’” Scott Greiper, president of Viridian Capital Advisors, which tracks the sector, recalled.
Greiper pointed out that cannabis companies raised more money in the first quarter of 2021 than at any time in the history of the decade-old industry.
But that euphoria proved misguided. In the ensuing 16 months, Democrats in Washington have done nothing to lift federal cannabis restrictions, and the once-bright outlook for legislative progress has dimmed. The latest blow: Last week’s announcement by Senate Democrats that they’re delaying the introduction of comprehensive cannabis legalization legislation, perhaps until August.
Amber Littlejohn, executive director of the Minority Cannabis Business Association, says there was a misguided exuberance among cannabis investors who failed to understand how difficult it would be to achieve policy victories in Washington.
“That really drove a rally on prices and a false sense of optimism about what could be done within this period of time,” Littlejohn said.
The one glimmer of hope for marijuana businesses is that a measure designed to make it easier for cannabis companies to access banking services was included in the House version of a China competitiveness package. House and Senate negotiators are poised to try and hash out a compromise between two very different versions of the legislation in the coming weeks.
“Certainly, there’s been a missed opportunity to unleash this industry, and I would direct that criticism at Congress,” said Andrew Kline, a cannabis attorney at Perkins Coie and the former director of public policy for the National Cannabis Industry Association. “People made campaign promises and we can’t even get banking passed.”
Industry experts point to other factors that have exacerbated the economic doldrums. In some states, there’s simply too much product, leading to plunging prices. In California, for example, wholesale cannabis prices plummeted by about 50 percent last year, although they’ve since started to rise. States like Colorado, Washington and Oregon are also seeing significant declines.
“Oversupply hit the market, and it crushed pricing, and that hurts margins,” Greiper said.
Littlejohn points to another factor that has scuttled the industry’s growth: the continued vibrancy of illicit markets. She argues that tight rules limiting the number of marijuana businesses — especially on the East Coast — have made it nearly impossible for cannabis sellers to make the transition to legal, regulated sales.
“The tendency for large operators to push for highly limited markets is actually coming back to bite them in the behind,” Littlejohn said. “You have a legacy market that is flourishing, and very limited means to be able to do anything about it.”
The cannabis industry also benefited from a surprising surge in sales during the early waves of Covid-19, as stressed out, hunkered-down Americans — flush with cash — started buying record amounts of weed.
“People were locked in their apartments. So they ate more Campbell’s Soup than ever in the history of Campbell’s Soup,” said Jonathan Sandelman, CEO of Ayr Wellness, a multistate cannabis company that’s seen its stock price tumble by more than half over the last year. “They drank more alcohol than ever before. And they smoked more marijuana than ever before.”
Then the pandemic honeymoon eased and Ayr became one of many cannabis firms to see its stock price tank. The AdvisorShares Pure US Cannabis ETF — a pooled collection of cannabis assets that’s a popular gauge of the broader industry — saw its price fall more than 50 percent over the last year. In addition, capital raises to bankroll expanded operations or acquisitions are down by about 70 percent this year compared to the comparable period in 2021, according to Viridian Capital Advisors.
Itay Goldstein, an expert on financial markets at The Wharton School of the University of Pennsylvania, said it’s not particularly surprising that the industry is struggling given the legal and regulatory uncertainty that continues to cast a shadow over it.
“There are a lot of ups and downs, because it is a critical point in time for this industry in terms of where it’s going to go,” Goldstein said. “And I think this introduces a lot of volatility into the pricing.”
Garden State buzz
Industry executives are hoping that this week’s 4/20 celebration — typically the single biggest day of sales of the year — and the launch of New Jersey’s recreational market on Thursday will shake the weed world out of its economic slumber.
And most industry observers remain bullish on the long-term trajectory of the industry. Legalization has spread rapidly across the country, with 37 states now permitting medical sales and 18 states allowing anyone at least 21 years old to possess and consume marijuana. Polling consistently shows that roughly two-thirds of Americans support marijuana legalization, and even the most staunchly conservative states are easing restrictions.
The bottom line: Most investors and industry officials believe it’s only a matter of time before the federal government finally catches up to the states and makes it easier for cannabis companies to operate and make money.
“There’s lots of promise in front of us,” said Kline, the cannabis attorney with Perkins Coie. “But the federal government right now is falling down on the job.”