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Why California’s Legal Cannabis Sales Could Fall This Year

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On June 3, The Los Angeles Times reported that the budget proposed by Governor Gavin Newsom projected a decline in California’s cannabis sales. COVID-19 induced a recession in the US economy, which could drag cannabis sales down. At the beginning of this year, Newsom expected the excise tax on cannabis to bring in $479 million this year. For the fiscal year starting on July 1, he expects an excise tax of $590 million. Meanwhile, Newsom cut his forecasts to $443 million for this year due to lower cannabis sales. For the next year, he expects the excise tax to fall to $435 million.

The budget proposal added that marijuana isn’t recession-resistant like other defensive stocks including alcohol and tobacco. The proposal said that the lack of access to banking services for marijuana companies, the higher impact of job losses on the younger population, and thriving black market sales could drag cannabis sales down.

Since marijuana is prohibited by the federal government, businesses can’t get any federal or banking-dependent assistance. However, The Los Angeles Times added that Newsom’s administration provided some operating relaxations and deferred license renewal fees for cannabis licensees. The administration extended the deadline for cannabis companies to file their tax returns for the first quarter.

California announced a 60-day deferral for licenses expiring in May and June. The state relaxed its previous rule that retailers should only operate through secured buildings. Now, retailers can provide curbside pickup services. The state also waived some of the requirements, which include a mandatory customer signature at the time of delivery, accepting expired driving licenses, and allowing retailers to sell non-cannabis products, such as sanitizers.

Cannabis sector’s performance in 2020

The cannabis sector has underperformed the broader equity markets. The ETFMG Alternative Harvest ETF (NYSE:MJ) has fallen by 18.2% YTD. Meanwhile, the S&P 500 Index has declined by 3.7% during the same period. The lower-than-expected Cannabis 2.0 demand, increasing operating losses, pricing pressure, and robust black market sales have all been a drag on the marijuana sector. However, marijuana sales showed some strong growth before the lockdown. Consumers stockpiled products in anticipation of store closures and a marijuana shortage. However, Newsom’s proposal, which expects marijuana sales to fall, could impact the sector.

Canopy Growth (TSE:WEED), Aurora Cannabis (NYSE:ACB), and Aphria (NYSE:APHA) are some of the prominent players in the marijuana sector. Canopy Growth, Aurora Cannabis, and Aphria have all fallen by 18.0%, 43.2%, and 11.8% YTD, respectively. Last month, Aurora Cannabis reported an impressive third-quarter performance. However, Canopy Growth reported a lower-than-expected performance in the comparable quarter.

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