Cannabis And The Mexico Opportunity

This article by Alex Halperin was originally published on WeedWeek, and appears here with permission.

The lower chamber of Mexico’s legislature recently voted to legalize recreational cannabis. With the upper chamber and President Andrés Manuel López Obrador expected to approve the bill, the country is poised to become the world’s largest legal market. 

In Mexico, legalization enjoys less support than in the United States. It’s happening now due to a deadline imposed by the country’s Supreme Court. And while some supporters have tied legalization to ending the drug cartel violence that plagues the country, criminal gangs are more focused on other drugs. Their shift away from cannabis has likely been accelerated by legalization in the U.S. 

While the bill’s merits for good governance and the country’s economy are disputed, legalization presents a significant business opportunity for domestic and international firms. 

Mexico has 76.3M adults, about 2.5 times as many as California. However, cannabis data firm Headset projects it will take “quite some time” for Mexico to match California in terms of sales volume in dollars.

In the first 12 months of access, Headset projects legal sales in Mexico will exceed $840M, compared with nearly $1.5B for the first year of legal sales in California. The difference reflects several factors including significantly lower product prices and the difficulties inherent to rolling out the world’s largest legal market. Additionally, edibles, one of the most popular U.S. product categories, will not be available to Mexican REC users until the country can conduct additional research.

Just as in many U.S. states, Headset anticipates Mexico to encounter various logistical delays. They include a track and trace system that will be difficult to implement in rural areas. Additionally, the requirement that legal buyers obtain a permit could also dissuade consumers from the legal market.  

Opportunities ahead

Emily Paxhia, managing partner at investment firm Poseidon Asset Management, considers Mexico a promising domestic market, as well as a potential low-cost production hub for the future global supply chain. 

In addition to Mexico’s population, the country is among the most visited in the world with about 49M annual arrivals. Access to legal cannabis could be both an appealing amenity and a draw for more tourists. One potential obstacle for visitors: The country won’t allow public consumption, at least initially. 

Paxhia expects much of the early action to involve CBD, with companies able to manufacture food and “pharma grade” finished products. Unlike the U.S., where CBD regulations remain murky and many major consumer brands are reluctant to get involved, Mexico offers the opportunity to create a national CBD brand, which Paxhia says could immediately become cash flow positive. As an added benefit, Mexico is creating export licenses which could help make it a global hub for CBD manufacturing. 

She expects the THC market to take a bit longer to rev up, perhaps Q3 of this year, if President Obrador signs the bill next week. “I’m sure there are groups that will cut corners. But as investors we want to be working with the regulated supply chain,” she said. 

It’s not yet clear which North American companies are serious about the Mexican market. Paxhia said she’s aware of one public Canadian company and several private U.S. companies looking to get involved but declined to identify them citing non-disclosure agreements. 

Her take is that most of the biggest U.S. multi-state operators are too busy in the markets they’ve already entered, especially in the northeast to set up in Mexico. However, she thinks some smaller companies with a medical or scientific focus could set up joint ventures there.   

Some players, especially Canadian ones, have talked up the opportunity but she suspects that has more to do with attracting headlines than actually getting involved. (Mexico’s population is four times the size of Canada’s.)  

In a week that brought big news that MSO Curaleaf is expanding into Europe, Mexico presents a very different kind of opportunity. “Europe is a smaller market and we have to think very sensibly about the cost to manufacture and distribute,” Paxhia said. “I’m very interested in Latin America [Colombia and Mexico in particular] and how they can contribute to the global supply chain.”

Read the original Article on WeedWeek.

Benzinga's Related Links: 

• How Mexico's Legal Cannabis Market Impacts Domestic And International Markets
• Mexico Sees Another Delay In Cannabis Bill Debate | Benzinga
• Más de WeedWeek en español en El Planteo