How Cannabis Craze May Spread To The Futures Markets

Cannabis stocks have seen explosive growth in recent years as the plant's use - for recreational and medical purposes - has won legal approval in a growing number of government jurisdictions across the world. In the process, many corporate founders and investors have become rich. Now, the potential for profits may spread to the agricultural futures markets, where pot could sell alongside corn, wheat and hogs, according to a detailed story in Bloomberg.

The foray into pot futures is being driven by New Leaf Data Services LLC of Stamford, Connecticut, which tracks wholesale cannabis prices in North America. The company says it's in discussions with a “globally recognized exchange” about introducing Cannabis futures, which would enable traders to speculate on the price of cannabis, according to CEO Jonathan Rubin, per Bloomberg. "2019 is going to be a pivotal year for the industry in terms of the involvement of the financial community,” said Rubin. His goal is to offer multiple contracts on various exchanges for both marijuana and hemp, the latter which is a variety of the Cannabis species.

A futures contract allows a seller and a buyer to lock in a price for a commodity at a future date, regardless of how the price moves over that period. In the marijuana industry, this would give growers and buyers an opportunity to hedge against price volatility, as explained by economist Garrett Baldwin in an interview with Money Morning.

To be sure, significant hurdles stand in the way of making marijuana a tradable commodity. One of them is drawing enough trading volume for the plant, which remains illegal on the federal level in the U.S., according to Scott Irwin, an agricultural economist at the University of Illinois, per Bloomberg.

For his part, economist Baldwin says that “we’re a long way off before investors can get in on marijuana futures,” advising them to have lots of patience. He says that once the U.S. government decriminalizes cannabis on a national level, the first challenge would be placing marijuana futures on a U.S. commodity exchange.

Another hurdle is standardizing factors like quality and content of tetrahydrocannabinol, the psychoactive agent in the cannabis plant, says Irwin. Given the craft nature of the cannabis space, standardization could be tough because growers prefer variability with different strains and standards.

The lure of rich profits, though, may prompt investors, traders and exchanges to attempt to launch cannabis futures -- given the industry's growth thus far. Analysts at Cowen & Co expect legal and illicit sales of marijuana in the U.S. to reach $80 billion annually by 2030. In Canada, they expect the market to generate 12 billion Canadian dollars in sales by 2025. And sales of CBD, or cannabidiol, the non-psychotropic substance in cannabis, is also entering the mainstream.