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Legalization Sets the Stage for Cannabis Market Growth: A Look at the Industry in 5 Charts

Our research shows the cannabis market is on track for a ninefold increase over the coming decade

Kristoffer Inton, Morningstar Research Services, LLC

 

Cannabis companies are poised to see sales grow by nearly nine times through 2030 as legalization gains popularity and distribution widens, according to Morningstar’s latest research. 

The U.S. recreational, U.S. medicinal, Canadian, and global medicinal export markets have penetrated just 8%, 21%, 11%, and 19% of their estimated markets, respectively. We believe this large, underserved market will provide top-line growth and fixed-cost leverage for cannabis companies, supporting a “green rush” through at least the next decade. 

These findings are among the key takeaways detailed in our Basic Materials Observer on cannabis market growth. The full report provides a playbook for investors seeking exposure to different cannabis trends, as well as market-size forecasts and regulatory outlooks for major cannabis markets.  

It also includes initial equity-research summaries for five cannabis companies: Canopy Growth (CGC), Aurora Cannabis (ACB), Tilray (TLRY), Cronos (CRON), and Curaleaf (CURLF), as well as Scotts Miracle-Gro (SMG), which provides investment exposure without touching the plant.  

Below, explore some of our findings about the current state and future expectations of the cannabis industry. 

U.S. expects massive recreational and medical cannabis market growth 

In the U.S., the recreational cannabis market is larger than the medical market both at its current size and long-term estimate. The current market estimate of the legal recreational market is about $5.4 billion, primarily dominated by the western U.S., where recreational legalization is more common and distribution more developed. As shown on the chart below, we estimate the market will become nearly 13 times larger than the status quo by 2030, at roughly $68 billion in constant dollars (representing about 25% average annual growth).  

We Forecast a 2030 Market for Recreational Cannabis Nearly 13 Times the Size of Today Constant Dollars in Millions

Source: 2018 Marijuana Business Factbook and Morningstar.

Legalization will expand both at the state and federal levels  

In the U.S., state laws differ greatly. As shown on the chart below, as of May 2019:  

  • Twenty-three states have legalized medical cannabis. 
  • Twelve states have legalized low-THC/high-CBD hemp or cannabis derivatives. 
  • Eleven states and Washington, D.C., have passed laws legalizing both recreational and medical cannabis. 

Further Legalization and Commercial Distribution Across 9 States Will Drive More Growth in the U.S.

Source: National Conference of State Legislatures. http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx#3 (accessed April 2019). Morningstar.

By 2030, we expect legalization to take effect in nine more states: 

  • Six states are expected to legalize recreational cannabis (Connecticut, New Hampshire, New Jersey, New Mexico, New York, and Rhode Island). 
  • Three states have already passed legalization (Michigan, Vermont, and Illinois), and implementation is ongoing. Commercial operations are expected to expand in the next decade as these programs are applied. 

However, these laws stand in stark disagreement with the ongoing, full federal prohibition of cannabis. 

We contend that the most likely resolution to the federal and state legal discrepancy is a change in which the federal government would be legally prevented (and not simply directed to by the attorney general) from interfering in cannabis operations and consumers operating within a state's laws. This potential change would mean states that have legalized, or are likely to legalize cannabis for any purpose, will not be inhibited from doing so. However, it would also mean states that have showed staunch opposition to legalization would be able to continue to prohibit it. 

Read the summary and key takeaways from our report on cannabis market growth.

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Robust recreational growth doesn’t rely on significant participation expansion 

Although we anticipate wider acceptance and increased participation rates for cannabis, our forecast (shown on the chart below) implies that it won’t surpass alcohol in participation rates. It may, however, modestly exceed today’s participation rates for tobacco. In other words, tremendous market growth doesn’t need to come from converting nonconsumers; instead, much of the participation already exists today, just in the black market. The legal cannabis industry has the ability to unlock tremendous growth by converting existing black-market customers. 

Our Recreational Forecast Implies That Cannabis Will Not Surpass Alcohols Popularity

Source: Substance Abuse and Mental Health Services Administration, CDC, and Morningstar.

The Canadian cannabis market will be 9 times larger in 2030 than it is today  

In stark contrast to the confusing U.S. cannabis laws, Canada’s laws are very clear. In June 2018, Canada’s House of Commons and the Senate approved Bill C-45 (the Cannabis Act), which legalized recreational cannabis throughout the country. The law took effect in October 2018, making Canada the second country after Uruguay to fully legalize cannabis for adult use.  

Canada’s current market penetration is at just 12% of the market, shown below. This leaves a significant runway for growth and underpins our forecast that cannabis sales will grow nearly 20% per year on average.

Recent Legalization Can Expand the Canadian Market by More Than 9 Times by 2030

Source: State of the Legal Marijuana Market by Arcview Market Research and BDS Analytics (cited by Digital Journal) and Morningstar.

Medical cannabis market growth is expected internationally, but competitors are emerging  

Internationally, a growing number of countries have recognized the benefits of medical cannabis and are expanding access. With cannabis’ popularity already growing organically due to expanded-use cases, widening legalization is expected to create further demand. Still, the global market (excluding the U.S. and Canada) remains severely underpenetrated, leaving room for it to expand to more than 11 times its current size.   

On the chart below, we size the current global medicinal cannabis market (excluding the U.S. and Canada) at roughly $3.7 billion based on estimates ranging from $3.5 billion to $11 billion from Coherent Market Insights and Research and Markets. We forecast total-market potential of nearly $43 billion by 2030, with the addressable market at an estimated $20 billion. More than half of that market potential lies in countries that will expand their own cannabis production, limiting the opportunity for exporters. 

Significant Opportunity in the Global Medicinal Market, but Increased Competition Limits Updside

Source: Current market estimate based on Coherent Market Insights (as cited by MarketWatch), ResearchAndMarket.com (as cited by GlobeNewswire). Forecast from Morningstar.

Read the summary and key takeaways from our report on cannabis market growth.

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate.

The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar.

Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. 

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