Even though this hasn't exactly been a banner year for marijuana stocks, there's little denying the growth that legal cannabis can offer over the next decade. Between 2014 and 2018, we witnessed legal marijuana sales more than triple around the globe to $10.9 billion, and we're liable to see sales increase fivefold to 18-fold by 2030, if Wall Street's various estimates prove accurate.
Yet, one aspect of the cannabis industry that continues to be stuck in neutral is the idea of legalization at the federal level in the United States. Despite 66% of Americans favoring the legalization of marijuana in an October 2019 Gallup poll (this ties last year's all-time high), and 33 states having legalized medical pot in some capacity since 1996, I'd affix zero chance of the federal government changing its tune on marijuana in 2020. Here are five reasons consumers and investors should be looking toward 2021 (or beyond) for any chance of cannabis reform in the United States.
1. Republicans control the Senate until (at least) January 2021
To begin with, it can't be overlooked that the Senate will remain majority-controlled by Republicans until January 2021, at minimum. This is noteworthy given that surveys have consistently shown members of the GOP to have a more adverse view of cannabis than Democrats or Independents. In the aforementioned Gallup poll from October, 76% of Democrats and 68% of Independents favor the idea of a nationwide legalization, which compares to only 51% of Republicans. Although members of the GOP have softened their stance on weed over the years, the Party isn't exactly supportive of reform.
To add to this point, when the current Congress came into session in January 2019, the average age of U.S. senators (regardless of party) was 61.8 years. Polls have shown that seniors have a more negative view of marijuana than younger adults, so this could very well add fuel to the fire as to why cannabis has no chance of reform in the Senate.
2. Mitch McConnell is Capitol Hill's most ardent cannabis opponent
Maybe the biggest reason there's no zero chance of marijuana reform in the U.S. in 2020 is Senate Majority Leader Mitch McConnell (R-Ky.). With Jeff Sessions stepping down as attorney general in November 2018, it vaulted McConnell into a role he's gladly accepted: the most ardent opponent of cannabis reform on Capitol Hill.
Put plainly, McConnell has thwarted all attempts by lawmakers to bring cannabis reform legislation or marijuana riders to the Senate floor for vote. For example, McConnell blocked an amendment in December 2018 that would have attached the States Act to a popular justice reform bill. The States Act, if passed, would have recognized that compliant transactions in legalized states aren't "trafficking," and would thereby have protected banks that offered financial services to pot companies in these legal states. But as long as McConnell remains Senate majority leader (presumably at least until January 2021), reform isn't on the table in the Senate.
3. It's not a very polarizing issue
A third consideration here is that marijuana, while popular among the public, isn't a very polarizing issue when it comes to politics.
As noted, two-thirds of Americans would like to see cannabis legalized. However, in 2018, the independent Quinnipiac University polled Americans to find out whether they could still vote for a candidate who they mostly agreed with, politically, but who disagreed with them on cannabis reform. Just one out of eight respondents said that they would not vote for a political candidate who doesn't share their view on marijuana. Comparatively, more than four out of five people would still vote for that candidate. In other words, even with the idea of cannabis reform being popular among the public, lawmakers can still take the unpopular view of opposing reform and are generally safe from losing their elected seat in Congress.
4. It would create a money problem in Washington, D.C.
An oft-overlooked issue with marijuana legalization in the U.S. is that it would create a cash flow problem for Congress. You see, cannabis-focused businesses in the U.S. are subject to Section 280E of the U.S. tax code because marijuana is a Schedule I substance. This tax code disallows businesses that sell a federally illicit substance from taking normal corporate income tax deductions, save for cost of goods sold. In effect, it legally allows the federal government to collect an exceptionally high income tax rate from profitable pot companies.
If weed were suddenly legalized in the U.S., cannabis companies would no longer be bound by 280E. This would be great news for pot companies looking to hire new workers and reinvest in their business, but it would lead to an estimated $5 billion reduction in revenue for the federal government over the next decade. Congress could always look to institute a federal tax to generate additional revenue, but such a move would only widen the gap between legal and black market pot, thereby strengthening the black market.
5. Safety data remains dicey, at best
Last but not least, lawmakers are still likely to be unsure of the risk-versus-reward profile associated with cannabis.
As an example, nearly three weeks ago, the U.S. Food and Drug Administration (FDA) provided a consumer update on cannabidiol (CBD), the cannabinoid found in cannabis and hemp that's best known for its perceived medical benefits and doesn't get users high. While most consumers figured the FDA's review of CBD as a food, beverage, and dietary supplement additive would be a nonevent, it's been anything but. The FDA's consumer update notes that CBD "has the potential to harm you" and that "there are many important aspects of CBD that we just don't know."
The point being that if the FDA is this concerned about the nonpsychoactive cannabinoid found in cannabis and hemp, imagine what lawmakers could be thinking about tetrahydrocannabinol (THC), the psychoactive cannabinoid.
Hold your horses
Long story short, there's plenty of potential for investors to benefit if the U.S. ever changes its tune on cannabis at the federal level, but those changes aren't coming in 2020.
What does that mean for pot stock investors? Well, for those focusing on the U.S. market, it generally means a continuation of higher costs for multistate operators. Acreage Holdings (OTC:ACRGF), for instance, is a top-five holder of retail licenses in the U.S., and on a pro forma basis will have operations in 20 states. However, because weed remains entirely illegal at the federal level and can't be transported between states (even legal ones), Acreage is having to operate cultivation and/or processing facilities in each of the states it intends to sell marijuana. Until the federal government legalizes marijuana, Acreage Holdings' income statements will be constrained by its need to duplicate its operations in all 20 of these states.
Some pain could also be felt by Canadian growers, because they all want a piece of the U.S. weed market. Canopy Growth (NYSE:CGC) is spending $150 million on a hemp-processing facility in New York State, and made the bold decision in April to acquire Acreage Holdings on a contingent-rights basis in a massive cash-and-stock deal. The contingency being that Canopy only gets to buy Acreage if the U.S. federal government legalizes marijuana. But none of these investments will be particularly fruitful for Canopy until the federal government makes its move on marijuana.
For the time being, investors would be smart to hold their horses on investing in most U.S. pot stocks.