The 3rd Country to Legalize Marijuana Is... Going to Have to Wait Up to 8 More Months

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From The Motley Fool
The 3rd Country to Legalize Marijuana Is... Going to Have to Wait Up to 8 More Months

The delays are mounting in Mexico's attempt to end cannabis prohibition.
Sean Williams
Apr 26, 2020
For much of the past half-decade, marijuana has been one of the fastest-growing industries. After generating $3.4 billion in worldwide sales in 2014, global weed sales more than tripled to $10.9 billion by 2018. According to various Wall Street estimates, worldwide pot sales should hit $50 billion on an annual basis by 2030, with North America generating the bulk of this revenue.

Although there are more than three dozen countries around the world where medical cannabis has been legalized to some degree, it's recreational marijuana that's going to be the industry's long-term revenue driver. The patient pool for adult-use weed is considerably larger than it is with medical marijuana, and recreational sales tend to cannibalize the medical pot industry, once legal. After all, there's no need to wait for a physician's prescription if you can simply walk into a dispensary and buy cannabis products.

To date, only two countries in the world have waved the green flag on recreational marijuana. Uruguay was the first to do so in December 2013. The second was our northerly neighbor, Canada, which officially began selling adult-use marijuana on Oct. 17, 2018. The question has been, with popularity for cannabis budding like never before, which country would next to legalize recreational pot?

Mexico's Supreme Court extends the recreational cannabis legalization deadline... again

We appeared to get our answer to this question on Oct. 31, 2018. On that date, Mexico's Supreme Court ruled that it was unconstitutional to ban the possession or use of recreational marijuana. This happened to be the fifth time that Mexico's highest court had issued this ruling, which in Mexican law makes this ruling the standard to be set throughout the country. Effectively, Mexico's Supreme Court gave adult-use marijuana a green light on Halloween 2018.

However, Mexico's Supreme Court is only able to decide what is and isn't lawful. It has no say on actually crafting legislation. Thus, this ruling meant Mexico's lawmakers would need to come together to develop a framework for a regulated and legal marijuana market. The Supreme Court gave lawmakers a full year to get that done.

Unsurprisingly, though (note the sarcasm), they waited until October 2019 to really dig into the details of a proposal. As such, Mexico's highest court granted a one-time extension to hash out the details and approve legislation concerning a legal cannabis market by no later than end of April 2020. At the time, the Supreme Court was very clear that this would be the only extension granted on this issue.

And then the coronavirus disease 2019 (COVID-19) struck. There are more than 2.6 million confirmed cases of this respiratory disease worldwide, with dozens of countries around the globe taking stringent measures to reduce transmission rates. With Mexico among those countries shutting down businesses to slow disease proliferation, legislation at the congressional level has come to a virtual standstill. This prompted the Supreme Court to go back on its "one-time extension" and once again extend the deadline for lawmakers to end the prohibition of cannabis.

The new deadline is December 15, 2020, which marks the end of the legislative session for Mexico's congress. Considering how lawmakers have slow-stepped working out the details of this proposal thus far, legalization shouldn't be expected, in full, for another eight months.

Legalizing marijuana in Mexico will likely be a non-event for pot stock investors

Although there are still plenty of details left to be discussed, there are some aspects of Mexico's marijuana legalization proposal that are pretty much decided, according to Marijuana Moment. In no particular order:

  • Adults aged 18 and older will be allowed to purchase and cultivate marijuana for personal use.
  • Personal possession is to be limited to 28 grams, but possession would be decriminalized up to 200 grams.
  • People would be allowed to grow up to 20 registered plants, as long as the yield doesn't top 480 grams annually. Medical pot patients could apply to cultivate even more plants.
  • Legal marijuana would be taxed at a 12% rate.
  • Public consumption of cannabis would be allowed, except for spaces that are specifically designated as smoke-free.
  • The Mexican Institute of Regulation and Control of Cannabis would be in charge of regulating the legal marijuana market and issuing business licenses.
Then again, there are particulars of the legalization proposal that remain very much up in the air.

For example, there continues to be push-back from legalization advocates over the lack of protections for domestic farmers, as well as other social equity provisions. In other words, legalization proponents want to see those most disenfranchised by the drug war benefit most from its legalization. Lawmakers have offered no certainties one way or the other whether this would happen, albeit a previous iteration of this legalization proposal significantly limited the ability of big corporations to land cannabis business licenses in Mexico.

Previous legalization proposals have also suggested that edibles and infused beverages would remain banned for recreational consumers and only be available to medical pot patients. This is noteworthy given that dried cannabis flower is easily commoditized and generally a low-margin product. Edibles and infused beverages are expected to be a source of juicy margins for marijuana companies. Without access to these products, Mexico's recreational sales potential may be limited.

The only major company with any sort of presence in Mexico at the moment is Aurora Cannabis (NYSE:ACB). Aurora acquired pharmacy distribution business Farmacias Magistrales a little over a year ago, giving the company access to more than 500 hospitals throughout the country. However, if higher-margin derivatives are effectively banned on the recreational side of the equation, Aurora Cannabis would have to settle for quantity over quality in terms of revenue generation.

And, at this point, there's no guarantee that a company like Aurora Cannabis would even qualify for a recreational business license given its size. With advocates focused on propping up domestic farmers and businesses, Mexico looks to be a market pot stock investors will want to watch from a safe distance.

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