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5 Reasons the Marijuana Black Market Won’t Go Away

IMAGE SOURCE: GETTY IMAGES

Illicit pot production continues to dominate legal weed sales, even with Canada and select states legalizing cannabis.

Cannabis has been anointed by Wall Street as one of the fastest-growing industries on the planet. After sales more than tripled worldwide between 2014 and 2018, Wall Street has forecast a roughly fivefold to 18-fold increase in global annual revenue by the time 2030 rolls around. This type of growth is impossible for Wall Street and investors to ignore, which is a big reason pot stocks have been all the rage.

But if you’ve been paying close attention to the industry, you’re likely well aware that marijuana stocks have been nothing short of a buzzkill over the past six months and change. Many have seen their share price cut in half, or possibly worse, as a host of challenges have cropped up.

Black market marijuana is here to stay

Worse yet, the legalization of recreational marijuana in Canada, as well as in select U.S. states, hasn’t stomped out black market cannabis, as initially expected. In California, the largest legal weed market in the world by annual sales, illicit marijuana sales are projected to outpace legal pot sales in 2019 by a significant margin: $8.7 billion to $3.1 billion. Meanwhile, analysts at Scotiabank estimated in early February that the black market would be responsible for 71% of total cannabis sales in Canada in 2019.

How are illicit producers bucking the push toward a legalized marijuana environment, you ask? The blame rests with the following five factors.

1. Supply issues in Canada

In our neighbor to the north, supply shortages have been a persistent problem since recreational weed sales began one year ago, with a trio of problems to blame.

First, regulatory agency Health Canada has been buried by cultivation, processing, and sales license applications. It entered the year with more than 800 applications on its desk, and despite implementing aggressive changes to the cultivation licensing process, it’s going to take months, or perhaps more than a year, for the agency to work through its backlog. In the interim, cannabis growers are forced to wait to either grow or sell marijuana.

Secondly — and I’ll have more to say on this in a subsequent point — certain Canadian provinces have been slow to give the green light to physical dispensary licenses. With few retail stores for consumers to shop at, illicit marijuana has filled the void.

And thirdly, pot growers have been slow to start and complete cultivation projects. All of these factors have allowed illicit weed producers to thrive.

A businessman placing crisp hundred-dollar bills on two outstretched hands.

IMAGE SOURCE: GETTY IMAGES.

2. Tax issues in select U.S. states

In the United States, high tax rates have been effectively driving consumers to purchase black market marijuana.

California, for example, is taxing the daylights out of its pot buyers. In addition to passing along a state tax and local tax, buyers are paying a 15% excise tax, as well as a wholesale tax of $9.25 per ounce of dried cannabis flower, or $2.75 per ounce of cannabis leaves. Add this up, and it could work out to an aggregate tax rate of 45% on legal pot. And, mind you, this doesn’t include additional costs such as the laboratory testing on weed grown in the Golden State, which is also being factored into the price that consumers pay.

To Read The Rest Of This Article By Sean Williams on The Motley Fool

Published: October 19, 2019

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