The $US150 billion pot opportunity

By Damon Frith

Spurred by a wave of liberalisation in North America, the formerly prohibited pursuit of cultivating and supplying cannabis is fast transforming into a flourishing legal industry.

For investors, opportunities abound in both the listed recreational and medicinal sectors, as well as hemp as a food additive.

In the medical sphere, marijuana has been long accepted as an alternative treatment for conditions including epilepsy, acne/dermatitis, insomnia, anxiety and cancer-related pain. But until recently there’s been a dearth of proper clinical trials and drug regulators have approved only a handful of cannabis-based drugs.

While pain treatments rely on cannabis containing the psychoactive tetrahydrocannabinols (THC), most medical applications are based on other cannabidoils (CBDs) that do not induce a 'high'.

At last count, medical cannabis was legal in 22 countries – including Australia, Canada and 35 US states. In November, Britain and South Korea followed suit, a surprising move for the latter given the country’s tough marijuana possession laws.

In Australia, patients can only access treatment via a special access scheme overseen by the Therapeutic Goods Administration.

More recently, investor attention has turned to recreational usage in North America. In the US, ten states have now legalised usage, following the lead of Colorado and Washington in 2012. Canada also legalised cannabis in October 2018.

Many other countries have decriminalised use of the substance – perhaps a stepping stone to legalisation.

Grand View Research of the US estimates the global legal marijuana market was worth $US9.3 billion in 2016, with North America accounting for $US7.06bn. But with the rapid legalisation of both medicinal and recreational dope, Grand View expects the global market will be worth $US146bn by 2025 (with medicinal cannabis accounting for $US100bn of this).

Others believe the real growth lies with the use of hemp as a food supplement.

The potential in hemp

Just before Christmas, President Trump signed off on the 2018 Farming Bill that also includes the Hemp Farming Act. As a result, hemp is no longer a controlled substance and will be treated as any other agricultural commodity.

The Australian government legalised the sale of edible hemp in November 2017.

The US already has a burgeoning hemp industry, with the ASX-listed Elixinol Global emerging as a key supplier. But the passing of the Bill means that hemp farmers will be able to access traditional banking and insurance arrangements, as well as water rights.

Containing little or no THC, hemp has long been used as a food additive in the form of oils, flours and powders. Hemp has the ‘super food’ qualities of being packed with protein, fibre and omega acids and is also gluten free.

Big name food and drink companies have been quick to recognise hemp’s potential: in August, beverage giant Constellation Brands spent $US4bn to increase its stake in Canada’s Canopy Growth from 9.9 per cent to 38 per cent.

Facing a protracted decline in traditional fizzy drinks, Coca-Cola Company is keeping a "close watch" on the hemp sector in view of developing a 'wellness' beverage¹.

Looking locally

Locally, the ASX-listed cannabis sector consists of no fewer than 20 stocks. These companies are promoting anything from cannabis-infused gin and beer to chewing gum and cosmetics, but in the main, they have maintained a medical focus.

The biggest ASX-listed cannabis stock, Cann Group was the first to be granted a cultivation licence and has already produced crops for medicinal usage. The company has signalled its serious intent with a planned $AUD100m, custom-built facility near Melbourne Airport.

But the local medicinal market is still small, with fewer than 2000 patients registered under the TGA’s special access scheme.

Other participants include Roto-Gro International, Zelda Therapies, MMJ Phytotech, MGC Pharmaceuticals, Medlab Clinical, Lifespot Health, The Hydroponics Company, Eve Investments, eSense Lab, Elixinol Global, Creso Pharma, CannPal Animal Therapeutics, Botanix Pharmaceuticals, Bod Australia, AusCann Group, Atlas Pearls and Algae Tec.

Cann Group CEO Peter Crock notes that the company’s Tullamarine facility has a capacity of 50,000 kilograms a year – enough to service the local medicinal market 130 times over.

"That's why exports are so important, as is getting up to scale and being locally competitive" he says.

With Australia unlikely to legalise recreational cannabis use in the near future, the real action lies in the unique properties of hemp and the increasing diverse range of uses within the agricultural, medicine, food and beverages and fabric industries.

With the hemp industry still in its infancy it offers a ground floor opportunity for investors but it is also a “buyer beware” investment opportunity as corporate participants will have to prove an ability to enact growth strategies and create long term returns.

Damon is the content editor for Citi's wealth business

^[1] Forbes.com, Coca Cola dipping into the cannabis infused drinks market, (Oct 2018), https://www.forbes.com/sites/korihale/2018/09/27/coca-cola-dipping-into-the-cannabis-infused-drink-market/#11b8b39b5e0e.