Commodities To Come: Marijuana
By: Owen Higley
In recent times, the idea of the legalization of marijuana for recreational use has become both a more common and a more controversial topic. In the United States alone there are differing regulations state by state on the ability of civilians to use marijuana recreationally. In further depth, 24 of the 50 states along with Washington D.C. have legalized the recreational use of cannabis while the drug is still either decriminalized or completely illegal in the remaining 26 states. With its wider spread legalization, marijuana has snuck its way into financial markets as seen in many small-cap publicly traded companies which operate in the cannabis industry such as Cronos Group Inc. (CRON), and Aurora Cannabis Inc. (ACB). The legalization of marijuana being implemented into a larger number of states, caused by what seems to be a “monkey see, monkey do” attitude by various states as the amount of states committing to legalization procedure following Washington and Colorado in who legalized the drug in 2012.
As previously mentioned, the more widespread acceptance of the drug has led to Marijuana making its way into the financial markets, particularly as an equity. Another contributing factor to marijuanas presence on the stock market is likely due to the drug’s popularity and laxed depiction amongst the youth population. Relative to older generations of whom matured and grew up with marijuana being criminalized in every state, younger generations have been exposed to cannabis through various platforms on top of news of legalization including the drug's major presence in pop-culture, as well as the idea of cannabis as an asset for health and wellness.
Through the combination of increased legalization, and a larger tolerance to the concept of marijuana had by younger generations, marijuana has managed to subtly become linked to tradable financial assets, however, as of now cannabis and cannabis related investing can only occur in the form of equities. Cannabis itself is a plant, which must be produced in massive quantities by marijuana companies to meet demands in states where the drug is legal. The popularity, larger amount, and increased presence of marijuana make it seem as if the drug could be a new addition to the United States regime of agricultural commodities, yet there seem to be no talk of such an event occuring. Why is this the case?
In the United States, commodity exchanges including the CME, COMEX, NYMEX, and other federally regulated commodities exchanges are overseen by the Commodities Futures Trading Commision (CFTC). Also, in the United States, marijuana is still considered to be a federally illegal drug, even if it is able to be traded legally at the state level. Because marijuana is still considered federally illegal and the CFTC is a federal agency, it cannot allow for cannabis to be publically traded on any exchange even on the previously mentioned Chicago Mercantile Exchange (CME) or New York Mercantile Exchange (NYMEX) both of which are based in states where marijuana is legal.
Another case which highlights the struggle that comes with policy and integration of legal marijuana into new environments can be showcased with the case of New Jersey. A New York Times article, published on March 27th, 2019, which dives into the implications behind New Jersey’s failure to legalize marijuana states: “All the elements for swiftly legalizing marijuana in New Jersey seemed to be in place: A proposed bill was enthusiastically backed by Gov. Philip D. Murphy and had been endorsed by leaders of the Democratic-controlled State Legislature. Also, statewide polls showed support for the issue. Then the plans unraveled. Some lawmakers were unsure about how to tax marijuana sales. Others feared legalization would flood the state’s congested streets and highways with impaired drivers. Some would not be deterred from believing that marijuana was a dangerous menace to public health”.
A further complication lies in the fact that cannabis cannot legally cross state lines, even between two states where it is fully legal. This restriction is a significant obstacle to creating a standardized, national market for cannabis which is a core requirement for any product traded as a commodity. Commodity trading depends on consistent quality, unified regulations, and the ability to ship or deliver goods across a broad market, making state to state transportation and trading a crucial element for any successful commodity. Cannabis's current state-by-state patchwork of laws and its inability to legally flow across borders fragments the market, making it a highly localized item which is inconsistent, and preventing the establishment of nationwide benchmarks or futures contracts.
In summary, the case is that cannabis cannot become a publicly traded commodity available for exchange on major commodity indexes under the Commodities Futures Trading Commission until it is declared federally legal, enabling the resource to cross state lines hassle free, and to be available for recreational use in all states and territories within the USA. While it cannabis isn’t currently traded publicly as a commodity, with the scenarios described earlier including cannabis businesses’ equity being publically sold, a greater tolerance to marijuana as a part of everyday society largely influenced by pop-culture and by the dynamics of a new generation, as well as states continuing to legalize or take steps towards legalizing cannabis, it wouldn’t come as a surprise of cannabis finds its way into our domestic commodity markets in the foreseeable future.
