Illicit Use as a Predictor of MMJ Legalization

The recent Investor Report by New Frontier Financials has found a strong correlation between illicit marijuana use and adoption of medical marijuana laws. In other words, the higher the per capita illegal use of marijuana, the more likely the state is to legalize the use of marijuana for at least some medical conditions. The lower the per capita illicit use, the more likely a state is to adopt highly restrictive high CBD/low THC laws, if any. Further, medical marijuana cultivators, processors and retailers are better positioned to move into the larger adult-use market than non-participants. The study may provide investors with a strategic tool for targeting future investment.

The study uses data on illicit use collected by the Federal Substance Abuse and Mental Health Services Administration between 2010 and 2012. Many states where the rate of illicit use was high during those two years have already adopted some form of medical marijuana law. Based solely on that factor, 10 others appear to be likely to adopt or expand medical marijuana legalization in the near future.

Two, Nebraska and Ohio, have decriminalized marijuana but not yet adopted laws permitting medical use. Legislation is pending in both states. The 2015 Nebraska Cannabis Compassion and Care Act, LB 643, is pending in the Nebraska Senate. The Ohio Medical Cannabis Amendment will appear on the November 2015 ballot if supporters successfully gather the required signatures by July 1. Ohio HB 33, another measure, would allow only low THC extracts to be used in the treatment of epilepsy.

South Carolina has a low THC/high CBD law, which pending legislation, H3140, would expand. Legislation is also pending in Wisconsin and Missouri. Bills that would have permitted medical use were introduced but recently failed in Florida, North Carolina, Pennsylvania, Indiana and Idaho. Even with legislative setbacks, these jurisdictions appear to be statistically likely to embrace medical marijuana opportunities soon.

Of course, the rate of illicit use is not the only factor influencing the development of the medical sector, but it may be useful to investors trying to make an initial rough cut of potential prospects. It may carry more weight as a negative indicator. States in which illicit use is low, such as North Dakota, Kentucky, Kansas and Utah may not be ripe yet for medical marijuana investment.

The first 12 months of a legal market in Colorado suggest that medical operators have an early advantage in building brand presence and capturing market share and can pivot more easily from the medical to the recreational sector. It is a valuable advantage. In Colorado, sales of recreational infused products were nearly double the sales of medical infused products from January to the end of 2014.

As medical marijuana laws make operations possible in more states, investors will think beyond the present to the future potential in the adult use market. From a strategic point of view, early investment in medical cultivation, processing and sales may hold promise for a healthy return on investment in the future.

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