Morningstar - Winter 2019 - 27

cycle is determined by artificial lighting, yearround cultivation is possible, leading to
four to six harvests annually. Indoor cultivation
has numerous advantages but comes at a
significant cost, largely due to electricity from
lighting. In addition, constantly running
lights cause temperatures to rise, so facilities
incur significant cooling costs to normalize
the temperature and humidity.
Greenhouse cultivation grows plants indoors
using clear walls and natural sunlight
(like outdoor cultivation) while still protecting the
crops from outside environmental factors
(like indoor). Natural sunlight makes greenhouse
cultivation comparatively cheaper than
indoor, with lower lighting and cooling costs.
However, given that the light cycle is
not completely controlled, greenhouse cultivation
typically averages three to five harvests
per year.
Consumption: Concentrates Growing Fast

Cannabis is consumed in many different forms.
The most common include:
gFlower: The dried and cured flower of the plant
can be smoked through pipes, rolling papers, and,
to a lesser extent, vaporizers.
gConcentrates: Oil or wax is typically consumed
by vaporizer, dabbing, ingestible oils, tinctures,
and so on.
gEdibles: Cannabis-infused food and drinks are
absorbed through digestion.
gTopicals: Cannabis-infused lotions, balms, and
oils are absorbed through the skin.
The form closest to cannabis' natural state, flower,
reigns as the most popular form of consumption.
Nearly 70% of all cannabis consumed in
Colorado, Washington, Oregon, and Nevada in
2017 was consumed in the form of flower.
Although flower continues to hold dominant
market share, concentrates have grown rapidly

( E X H I B IT 1 ). From 2015 to 2017, concentrates' share
of consumption rose from 16% to 21%. Growth
most likely stems from the same trend as
the growing popularity of e-cigarettes, given the
potential health benefits of avoiding smoking
during consumption. The growing popularity of
concentrates has significant implications
for the cultivation industry. This method requires
that cannabis be processed into a concentrated
form, so the quality of the cannabis is less
important than it would be if it were to be
consumed as flower. Because initial flower quality
is less important for concentrates, its rising
popularity is a potential tailwind for cheaper but
lower-quality cultivation methods like outdoor
and, to a lesser extent, greenhouse.
Easing Legal Environment

The United States will be the largest and fastestgrowing cannabis market in the world. Only
a conflicted regulatory environment is holding the
country back from reaching its potential. We
estimate that current U.S. recreational and
medicinal cannabis sales have penetrated just 8%
and 21% of their estimated markets, respectively.1
This leaves a significant runway for growth.
We forecast that recreational cannabis sales will
grow 25% per year and medicinal cannabis
sales will grow 15% per year.
Our forecast centers on the continued easing of
legal restrictions. In the U.S., cannabis remains
illegal under federal law for any purpose. Despite
this, individual states have legalized cannabis
for both medicinal and recreational purposes. The
disagreement between federal and state laws
has created a confusing regulatory environment.
Cannabis businesses operating in legalized states
simultaneously violate federal laws. Although
this situation has existed for decades, we believe
a resolution will come in the next few years.
Today, federal laws have been purposely
unenforced for individuals who abide
by legalization laws within applicable states. The
most relevant federal law is the Controlled
Substances Act of 1970. The law makes cannabis
illegal for any purpose-including medicinal.

1 For our purposes, we define the market as the demand available to legal markets in 2030.

It classifies cannabis as a Schedule I substance
(the strictest classification), a category
reserved for substances with a high potential
for abuse and no accepted medical use.
Despite this federal classification, states have been
softening their cannabis laws. The laws among the
states differ greatly. As of June, 23 states had
legalized medical cannabis, 12 states had legalized
low-THC/high-CBD hemp or cannabis derivatives,
and 11 states and Washington, D.C., had
legalized both recreational and medical cannabis
( EXHIB IT 2 ). By 2030, we expect Connecticut,
New Hampshire, New Jersey, New Mexico,
New York, and Rhode Island will have expanded
legalization of recreational cannabis.
These laws stand in stark disagreement with the
federal prohibition of cannabis. However, the
federal government also has softened its stance.
The most significant step occurred in August
2013, when then Deputy Attorney General James
Cole issued a Department of Justice memorandum
to all U.S. attorneys. It would come to be known
as the Cole Memorandum. The Cole Memorandum
stated that, due to limited resources, the Justice
Department would not enforce federal prohibition

EXHIBIT 1

Flower Power Flower remains the
most popular form of consumption, but
concentrates are gaining.
Flower Concentrates
Edibles Topicals
<1
<1
10
11
16

11
21

1 100%
75
50

67
25

0
2015

2016

2017

Source: 2018 Marijuana Business Textbook

Yes, legal

No, illegal
100%

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Morningstar - Winter 2019

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