Why Colombia poses a threat to cannabis stocks

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Popular cannabis stocks including Canadian giants Canopy Growth Corp. (CGC), Tilray Inc. (TLRY) and Aurora Cannabis (ACB) - the poster companies of the marijuana wave - now face an emerging threat as North American pot growers start to move their farms to low-cost Colombia. The migration seems to be following the earlier pattern of American rose growers moving south of the border, as outlined in a detailed Barron’s report.

Paul Henderson, whose Monterey-based company Grupo Flor was key to the growth of the region's marijuana industry, is leading the migration. He expects North America’s cannabis growers to experience the same fate as Monterey’s more than 180 rose growers, which disappeared as production shifted to Colombia.

“When the industry starts to move toward commoditization over the next decade,” says Henderson, “Colombia is the only place that makes sense.” Henderson told the publication that his company is preparing to plant its first crop outside of the Colombian city of Cali, near the equator.

Low Cost Colombia

By growing marijuana in Colombia, “The only difference between us and Tilray is that we can cut our price 90% and still make money,” said Kyle Detwiler, CEO of Northern Swan Holdings, which is currently building nearly one million square feet of greenhouse and extraction facilities there.

The Colombian cannabis industry has a number of advantages compared to its rivals in North America. For starters, the new crops won't need expensive, climate-controlled operations that are currently required to cultivate marijuana in North America. Also, Colombia’s labor is skilled and much lower cost. Decreased production costs also should help Colombian producers reach a cost of 50 cents a gram, compared to Canadian producers’ long-term goal of reaching two Canadian dollars per gram, according to Barron’s.

The legalization of medical marijuana in the country for both domestic use and export is also a plus as Colombia shifts away from a decades-long war on drugs financed by the U.S. government.

Cannabis Faces Other Headwinds

Colombia has emerged as a threat as cannabis stocks are coming under pressure on other fronts. Many of them suffered huge declines on Friday as U.S. regulators expressed reluctance to quickly legalize CBD, one of the many cannabinoids found in the marijuana plant.

CBD proponents say it helps relieve pain, inflammation and anxiety at low risk compared to other treatments. But it was not removed from a federal ban and, instead, was placed under the regulatory purview of the FDA. Even though it's a non-psychoactive part of the cannabis plant, and does not contain THC, the substance behind the marijuana “high,” the cloud now hanging over its legalization has affected cannabis stocks overall. “Considering the extent to which the CBD cat is out of the bag, it remains to be seen how the FDA will regulate this industry," wrote Evercore ISI analysts in a recent note, per MarketWatch.

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