The Economics Behind the Rise of Cannabis Stocks.

By Donald K. Wilson and Jasper Shotts

Lately cannabis stock growth is all over the news, Marijuana Stocks In 2019: Time To Separate ‘Winners From The Sinners’ by, Cannabis Stocks Will Make More People Rich Before Diving by, and even a recent look, from on cannabis stocks, The Only Thing Growing Faster Than the Cannabis and Hemp Industry, are the Profits of Its Investors.   We all know about the massive amounts being made by cannabis entrepreneurs and other early Canna industry profiteers.  What are the economics behind the rise in cannabis stock price based on economics is what the experienced investor should be asking themselves?  We look to Michael E. Porter’s Five Forces model to understand what the economic future of the cannabis industry will face.

            First you must understand that each part of the cannabis industry is affected in a different way by each force.  The companies supplying inputs, the companies growing the cannabis, and the dispensaries supplying cannabis to consumers, all have a different piece and so each force effects them differently.

          The first force of we should look at is Industry Competition of rival companies.  Competition is growing in almost ever part of the cannabis chain, the goes from the suppliers of fertilizer, all the way through to the dispensary level.  The cannabis industry faces strong likelihood of increasing competition among rival, who will place increasing efforts and capital toward establishing higher market share.

          The secondly threat of new entrants into the industry is a threat to every industry.  The cannabis industry has large corporations preparing for entrance into the cannabis industry, they and the existing companies will likely profit, as increased regulations are called for.  The likelihood that increase barriers to entrance into the direct cannabis industry are created is high.  This will be mostly in the current form of costly licensing fees, and regulatory requirements.  The current ability to acquire large amounts of cheap cannabis and the high prices cannabis dispensaries are charging consumers is a tempting open window for new entrance of competition.

          The third threat of substitution is always a threat to any industry, currently cannabis is considered a disruptive force to the liquor industry.  This by proxy mean that the liquor industry is a direct competitive substitution.  Large efforts to shift how you choose to unwind will be made, and the likelihood of new acceptable consumer product substitutes is realistic.  Currently the cannabis industry offers a variety of options, from CBD oils, to pure THC distillate, so a simple single substitution is not likely an imminent threat.

The fourth power of the supplier is one that is affecting each component differently.  The large amount of increases in consumers growing their own, along with the amazing success of large scale grow operations has demand for growing supplies growing, but growers have options.  As the nation’s continues to work toward decriminalization of cannabis, it is likely to see even great demand of growing supplies, and the other inputs like packaging.  The large harvests of grow operations and large numbers of increased number of suppliers has left growers with shrinking profits, and a threat of dumping because of excess inventories.

The fifth power of the consumer is the one most affecting the cannabis industry.  The consumer had faced a period of probation of cannabis, and during the time consumers were less informed and discriminating.  With the growing acceptance of cannabis and the increased number of consumers, consumer knowledge and expectations have grown.  The consumer now expects a higher level of quality cannabis and is begging to have the ability to price discriminate, based on quality.  Consumers also have increasing knowledge to grow their own high-quality cannabis.  Consumer demands are trending towards expecting truly fine top shelf cannabis, or the consumer wants low cost cannabis.  The consumer is the most complex component, as its desires shift back and forth from price point desired, and even the products form.

          The reality facing the cannabis industry is an environment of risk and gain, winners and losers.  There will be large increases in the amount of the economy that is directly connected to the cannabis industry.  The forces between each component will create large profits for the savvy investor, but the most likely winners are those who are holding stocks before national legalization who capitalize on profiting on the regulatory shift.

          This article is not investment advice, it is a look at the cannabis environment through the lens of economics for the purposes of discussions and entertainment only

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