The Marijuana Industry: Everything You Need to Know

It began with doctors who frequently prescribed opium for pain relief in soldiers returning from the Civil War. The situation accelerated amid immigration from China, where recreational use of opium was common. "Dens" in various U.S. cities facilitated the use of the drug for its mind-altering effects, and a national crisis emerged. By 1895, 1 in 200 Americans was affected in one way or another by opiate addiction, and by 1900, the use of opium and morphine, another potent opiate, had reached epidemic proportions in America. This brought about federal laws designed to reduce opiate use in 1909, and in 1914, the Harrison Narcotic Act outlawed recreational use altogether.

Around the same time, concern about the negative effects associated with widespread alcohol consumption was mounting. In 1918, Congress passed the Wartime Prohibition Act, banning beverages with an alcohol content higher than 1.28%, and in 1919, it passed the 18th Amendment to the U.S. Constitution, prohibiting alcohol outright.

Given the attitudes of the time, it's unsurprising that marijuana also came under scrutiny. The use of marijuana as medicine had increased in the U.S. throughout the 1800s, particularly for gastrointestinal problems. Recreational use also expanded markedly because of immigration from Mexico, where use of the drug for pleasure was more common. Individual states, worried that increasing marijuana use would lead to an opiate- or alcohol-like epidemic, passed anti-marijuana laws in the 1920s and 1930s; when the Marijuana Tax Act was passed in 1937, marijuana became illegal nationwide.

Cannabis came under increased scrutiny in 1961, when most of the developed world signed a treaty called the Single Convention on Narcotic Drugs. That was followed in 1970 by the U.S. Controlled Substances Act, which classified marijuana as a Schedule I controlled substance, creating the modern era of marijuana prohibition.

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Marijuana legalization efforts

Despite laws and treaties prohibiting marijuana use, momentum has been steadily increasing for worldwide legalization. Initially, much of this push was for medicinal marijuana use, but a groundswell of support has emerged for adult recreational use as well.

In 1996, California became the first U.S. state to pass laws allowing the medical use of marijuana. Since then, 33 states have followed suit, and all but three of the 50 U.S. states have legalized CBD. In 2012, Colorado and Washington State became the first to pass laws creating adult-use markets for recreational marijuana, and as of February 2019, seven others have followed (including California, where a statewide recreational market opened in January 2018).

Despite steps to break down barriers to marijuana access in individual states, the substance remains illegal at the federal level. Under President Obama, the Department of Justice directed federal attorneys not to prosecute most federal marijuana crimes in states with recreational pro-pot laws. However, federal laws still hamstring the market by limiting access to banking services and eliminating many tax deductions for industry participants.

In Canada, the situation is different. Canada's national medical marijuana market has flourished since a licensing system was put in place in 2014. In 2018, Canada became the first of the G8 developed nations to open a national adult-use market for marijuana, too.

There's also growing momentum to legalize marijuana in Germany, where a national medical marijuana market was created in 2017. Other large European Union countries also appear ready to open the door to medical marijuana. For instance, Canadian cannabis companies have begun shipping medical marijuana to the United Kingdom following a 2018 decision that allows limited use there. Elsewhere, 14 sovereign countries have passed pro-medical marijuana laws as of February 2019, including Australia.

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A marijuana industry primer

All that said, most marijuana sales still take place on the black market. Of the $150 billion-plus per year the United Nations estimates is spent on marijuana, only a small portion is pocketed by companies operating legally. For perspective, Statistics Canada estimates Canadians spent $6 billion in Canadian dollars on marijuana in 2018, but legal sales for medical use were only in the hundreds of millions, and recreational markets were only open for two months that year.

The situation is similar in the U.S., where the marijuana market is worth $50 billion annually. Legal recreational sales were just $8.4 billion in 2018, and medical sales were only $4 billion, according to Matt Karnes of GreenWave Advisors.

That said, more and more marijuana sales are shifting to legal markets, and that makes it important to understand the industries that are benefiting from this trend -- including growers, processors, retailers, suppliers, and drug makers.

Marijuana growers

Cannabis farming is big business, and it's likely to get bigger since the passage of the U.S. Farm Bill in 2018. That bill removed hemp from the controlled substances list, clearing the way for cannabis companies to grow more hemp indoors, in greenhouses, and on farms in America. The cheapest way to cultivate cannabis is outdoors, but it's more difficult to maximize yield and maintain quality outside. Indoor facilities provide the best environment for cultivation, but they're more expensive than greenhouses to operate, so most growers are embracing greenhouses instead.

Marijuana processors

Dried marijuana flower accounts for a lot of marijuana market sales, but companies are also increasingly processing cannabis to extract its chemical cannabinoids into value-added products such as oils. These cannabis-derived concentrates can be sold to consumers at a higher price per gram than dried flower, or they can be used as ingredients to produce other products, such as food and beverages.

Marijuana retailers

In some jurisdictions, consumers can buy marijuana from online stores, but mostly, it's purchased at physical stores called dispensaries.

Marijuana industry suppliers

Growing marijuana indoors requires specialized equipment; extracting cannabinoids from marijuana requires chemicals; and marijuana packaging is regulated by governments to prevent underage use. Therefore, specialized suppliers are seeing demand increase because of marijuana legalization, too.

Marijuana drug makers

It used to be very hard for scientists to acquire adequate amounts of research-grade marijuana for clinical studies. These obstacles are disappearing, prompting companies to start more studies evaluating marijuana's safety and efficacy as medicine. If successful, these trials could support Food and Drug Administration (FDA) approval of new cannabis drugs, sidestepping marijuana prohibition in places where it remains illegal while providing a patent-protected revenue stream.

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Ways to invest in marijuana

If you're interested in profiting from pot, you can consider exchange-traded funds (ETF) or individual stocks.

ETFs pool together money from many investors so that they can own many stocks. Therefore, ETFs provide a simple way to gain broad exposure to pot stocks. However, ETFs do have drawbacks. Marijuana ETFs must be bought through a broker, so you'll pay a commission each time you buy or sell. Also, you'll pay annual fees (usually expressed as a percentage of assets) to the company managing the ETF. Furthermore, ETFs can buy or sell stocks more frequently than you might want, causing unexpected capital-gains taxes.