Green Cloud Has Silver Lining, Moody’s Says in Economic Pot Study

MANHATTAN (CN) – Dispelling concerns that America’s embrace of marijuana will hurt alcohol sales, a new report by Moody’s says legalization efforts could create “opportunity” for spirits companies here.

“Legalization is both a challenge and an opportunity for US alcoholic beverage, tobacco, consumer product and pharmaceutical companies,” the bond credit ratings company revealed in a 10-page research paper on Tuesday.

“Legal marijuana could replace alcoholic beverages on some drinking occasions, but could also be used to formulate new beverages,” the report continues. “Legalization can also pressure pharmaceuticals in categories such as pain but presents opportunity for drug companies pursuing commercialization.”

Moody’s lists Constellation Brands, Alliance One and Scotts Miracle-Gro as companies already investing in marijuana-related businesses.

Complementing its third-largest position in the U.S. beer market, according to the report, Constellation Brands paid $190 million last year for a 9.9 percent stake in the world’s largest publicly traded cannabis company, Canada’s Canopy Growth.

“Working with Canopy, Constellation is seeking to create an entirely new category of cannabis beverages that would be sold only where marijuana is federally legal,” the report states.

“Canada appears set to legalize dry cannabis (for smoking) in July 2018, with retail sales to begin in September and legalization of edibles (including beverages) beginning 12 months later,” it continues (parentheses in original). “Through Canopy, Constellation is seeking to understand the cannabis business, which it expects will be a significant global industry. This fiscal year, Constellation plans to invest $10 million in cannabis initiatives in support of the investment in Canopy Growth.”

Moody’s found this fact especially significant because the beer industry would be the hardest hit from competition from legal marijuana.

“Beer is most at risk because it is less often paired with food than wine or spirits, and more often viewed as a party beverage for casual occasions,” the report notes.

Though the study primarily focuses on the effects of legal marijuana in Colorado, Washington and Oregon, efforts to decriminalize the herb have gone national with a bill introduced by New York Senator Chuck Schumer on April 20, a date traditionally associated with cannabis culture.

Analyzing how marijuana taxes benefit state governments, Moody’s found legalization to be a modest boon.

“For U.S. states and local governments that allow retail sales of marijuana, the related tax revenue is marginally credit positive,” the company’s senior analyst Grayson Nichols said in a statement. “Even for states with mature industries, such as Colorado, and large states like California, expected revenue will remain only a small share of annual general fund revenue, given the limited opportunities for significant market expansion.”

The study found that most U.S. states that have legalized marijuana earmarked its tax revenue for special programs.

“In Colorado, almost half of state fiscal 2018 marijuana revenues are directed to the Marijuana Tax Cash Fund where they are used for a variety of marijuana-related programs including enforcement, regulation and prevention, as well as substance abuse programs; 40 percent is earmarked for K-12 education including capital assistance for school construction; and 7 percent is distributed to local governments,” the study states.

That leaves roughly 5 percent for Colorado’s general fund, representing only a tenth of a percent of the state’s revenue.

“In Washington, only about one-third of state marijuana revenues are directed to the state’s general fund, representing only 0.6 percent of general fund revenue in the 2017-19 biennium,” it continues.

Moody’s found that federal enforcement puts that revenue at risk.

“Just the threat of stepped up federal enforcement is limiting investment in the industry in states that have legalized. And aggressive federal enforcement could result in a dramatic reduction in future sales and tax revenue,” the study says.

Nine company analysts collaborated on the report.

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