Two Threats to the Marijuana Industry: Supply Glut and Trade Wars

Threats to the Marijuana IndustryMarijuana Market Fears

Prudent investors are always on the lookout for situations or events that could benefit their portfolios—or harm them. When it comes to the marijuana market and pot stocks, it’s especially prudent to pay attention to the news and legal progress, as it often has an outsized effect on the value of marijuana stocks. Two recent developments have, unfortunately, threatened to slow what has already been a flagging market in 2018. Between a potential U.S. trade war and a marijuana supply glut in Canada, should investors be wary of pot stocks?

U.S. Trade War Threatens Pot Stocks

One of the biggest indirect threats to the marijuana market is that the U.S. has been particularly aggressive in its disposition recently, at least when it comes to trade.

President Donald Trump made a large part of his campaign about China; Trump’s trade war has often been associated with his largest economic rival. But the U.S. has also butt heads with closer countries, namely Canada.

The two countries are currently still in the process of renegotiating the North American Free Trade Agreement (NAFTA). While there has yet to be any significant movement on the deal, should talks fall through and the treaty dissolved, expect there to be a massive market reaction.

This could be especially crippling to Canadian pot stocks, as Canada will likely bear the brunt of the pain should the treaty talks fail.

To make matters worse, Trump drew the ire of his NAFTA partners when he imposed two tariffs: a 25% tax on imported steel and a 10% levy on aluminum. He eventually did give Canada and Mexico exempt statuses from the tariffs, but that could all change again should NAFTA cease to exist.

As it stands, the U.S. has been more aggressive in its trade policies in 2018 so far, making investors less likely to take on riskier positions. And as we all know, the marijuana market is one of the more volatile ones around. (Source: “Is this a good sign? The first marijuana mutual fund is cutting back on pot stocks,” Financial Post, April 6, 2018.)

That’s all played a part in why the marijuana market continues to remain in a downturn.

While I’ve touched on the issues with overvaluation and how the market needed to make a correction following the massive run that the industry enjoyed at the end of 2017, ancillary events like a potential trade war only exasperate the issue and make pot stocks that much more vulnerable.

I think that, like most things we’ve seen out of this White House administration, the bark is usually worse than the bite. With the economy in a relatively strong position, it doesn’t make much sense for the U.S government to threaten its own well-being by engaging in trade wars with allies and adversaries alike.

That doesn’t mean a trade war won’t happen, but I feel the chances of one materializing are not especially high.

For pot stock investors, however, it’ll pay to keep up with U.S. trade policy, as a shift toward an even more aggressive position could hurt the marijuana market substantially.

Marijuana Supply Glut

Another fear more directly tied to the marijuana market has to do with a feared marijuana supply glut.

What this means is that some analysts believe that marijuana companies are going to produce more supply than there is demand. As we all know, too much supply without demand leads to lowered prices, lost value, market downturns, and all manner of other bad news.

So, is a marijuana supply glut likely?

Looking at some recent figures, Deloitte predicts that Canadian demand for marijuana will be about 600,000 kilograms per year. Company projections are expected to exceed that number by several factors, with well over a million kilograms of cannabis produced each year by several of the biggest marijuana companies.

Doing simple math, that may seem like a big discrepancy. But what is important to remember is that while these Canadian marijuana companies are looking forward to Canadian marijuana legalization and the expected boon to share value we’ll see then, they are also internationally focused.

Taking into account international demand for cannabis, you have a lot of room to grow. Just counting countries with laws either in effect or on the way regarding cannabis, you already have more than enough demand to gobble up that million or so kilograms of cannabis produced per year.

Germany alone will account for a large chunk of that supply. Several of the largest companies in the industry have already targeted Germany for cannabis sales, including Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED) and Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB). So the marijuana supply glut isn’t necessarily as scary as the numbers make it seem.

Analyst Take

The last thing the flagging marijuana industry needs right now is more threats. The good news, however, is that both the marijuana supply glut and a potential U.S. trade war are not guaranteed. In fact, there’s a good chance the industry will be untouched by either event, if not both.

In this case, it pays to pay attention to these two possibilities, but as it stands, I don’t expect either to play a significant role in the future of pot stocks.