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Recreational Cannabis: How Is Michigan Shaping Up?

Michigan is one of the 11 states in the US that have legalized recreational or adult-use cannabis. In November 2018, Michigan residents voted in favor of legalizing recreational marijuana and created the MRTMA (Michigan Regulation and Taxation of Marihuana Act). LARA (the Michigan Department of Regulatory Affairs) was given the task of developing and enforcing the state’s recreational cannabis laws. However, the state hasn’t officially announced the date for the launch of the sale of recreational cannabis.

On July 3, LARA’s MRA (Marijuana Regulatory Agency) released emergency administrative rules for the legalization of recreational cannabis. According to these regulations, the MRA will start accepting applications for commercial cannabis business licenses on November 1. The MRA has developed various types of licenses to meet the different needs of prospective licensees. Further, it’s put in place rules for the transfer of cannabis products across these license categories.

As reported by the Detroit Free Press on September 5, for all license categories, the application fee is $6,000. However, the cost of each adult-use license varies from $1,000 to $40,000. The report also stated that current medical marijuana license holders will get preferential treatment for at least one year.

The MRA has mandated that all recreational marijuana license applicants provide a social equity plan that will encourage communities that have been affected by marijuana prohibition laws to participate in the marijuana industry.

Recreational cannabis expected to drive sales

With the MRA expected to start its commercial license allotment process on November 1, we expect cannabis sales to rise in Michigan. Michigan has 283,770 registered patients, the second-largest population of medical marijuana patients in the US, as reported by the Detroit Free Press on August 19. The report added that the state’s House Fiscal Agency expects annual cannabis sales in Michigan to reach $949 million with fully established recreational cannabis in 2020.

We expect the growth in cannabis sales to increase tax revenue and create more jobs. However, the cannabis sector has its own unique challenges, such as black market sales. Michigan has the lowest tax rates on recreational cannabis in the US, according to Bloomberg Tax. We expect lower taxes to mitigate some of the problems of illegal sales.

Legalization of recreational cannabis in other states

Washington, Oregon, Colorado, Nevada, Massachusetts, California, Maine, and Alaska already sell recreational cannabis. Illinois will start selling adult-use cannabis on January 1, 2020, and Vermont will start selling recreational cannabis in mid-2021.

Colorado legalized cannabis in 2014. The state’s total legal cannabis sales have crossed $1 billion, CNBC reported in June. Washington, which was the second state to legalize cannabis, is planning to revamp its marijuana laws. For more info, read Marijuana: Why Is Washington Changing Its Laws?

Growth in the hemp business

The 2018 Farm Bill legalized hemp at the federal level in the US, which removed hemp from the country’s list of controlled substances. It also allowed for the transfer of hemp-derived products across state lines. The legalization of hemp has led many Michigan farmers to take up hemp farming. The legalization has also helped many cannabis players expand their hemp businesses in the US.

Canopy Growth (CGC) (WEED) is researching hemp and hemp derivatives at its Batavia facility in Illinois. It also plans to open a Hemp Industrial Park in New York. In March, Canopy Growth acquired AgriNextUSA, which was involved in the hemp business. Canopy stock is down 2.5% this year. Its weak fiscal 2020 first-quarter performance led to a fall in its stock price.

Tilray (TLRY) is also expanding its hemp business in the US with the acquisition of Manitoba Harvest, which manufactures and sells hemp products. Tilray failed to meet analysts’ EPS expectations in the second quarter, which led to a fall in its stock price. The company is down 57.3% this year.

Another player that’s looking at expanding its hemp business is Aurora Cannabis (ACB). Last month, the company closed on its acquisition of Hempco Food and Fiber. Year-to-date, ACB is up 16.7%. Its management has provided better-than-expected guidance for its fourth quarter, which has led to an increase in its stock price.

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