What the Fed’s rate cut means for cannabis

J-POW
What the rate cut means for cannabis

What happened: The Federal Reserve cut rates yesterday by 50 basis points, or a half point in plain English. It was the first rate cut since the pandemic, and a more aggressive cut than experts expected.

So, what does this mean for cannabis? In short, borrowing costs are going to start to fall for cannabis firms. And some investors will start to look to make riskier bets, potentially on emerging sectors like cannabis equities, as they move their money out of safer bonds and money market accounts. 

Earlier this month, Green Thumb Industries — which has perhaps the strongest balance sheet in cannabis — refinanced its debt at just over 10%. That’s cheap for an industry where some companies are forced to pay rates upward of 17%, or more. 

Expect these costs to come down further. And expect more cannabis companies to tap debt markets to fuel growth. 

On the equities side, investors who have mostly shied away from risky, emerging sectors like cannabis might start dabbling. 

Explain like I’m five: Lower interest rates make parking your money in safe bonds or interest-bearing money market accounts less attractive, and investors will start looking to take more risk and maximize returns.

Cannabis may be desirable for those with a risk appetite, given the big federal catalysts on the horizon like rescheduling — endorsed by both presidential candidates — and more murmurs that Congress may take up cannabis banking legislation again. 

What they’re saying: “Where this easing cycle can have an impact on the industry is a return to a more risk-on appetite for investors generally and the potential for that to bring in new investors to the sector,” NewLake Capital Partners CEO Anthony Coniglio said.

And: “As borrowing costs decrease, we can expect more businesses to seek debt financing and an increase in capital flowing into the cannabis sector in pursuit of higher risk-adjusted returns. However, without federal reform to remove the systemic barriers that have constrained capital access, the near-term impact will remain somewhat limited,” Safe Harbor Financial Chief Credit Officer Dan Roda said. 

Back up: I’m not a macro analyst (in fact, I’m a less-than-middling Econ student per my professors at school), so I’m not going to go into how this affects the broader economy. 

But generally, the Fed cuts rates to stimulate people to borrow more money, start new businesses, and buy more things. Investors will take more risks. 

It’s also a signal that the economy is doing fine, despite what one party’s presidential candidate says, and that inflation is under control as it dropped to a three-year low of 2.5% in August. Though, the rate cut is a move to get ahead of weakness in the job market. 

The last word: “The US economy is in a good place,” Federal Reserve Chair Jerome Powell said. “Our decision today is designed to keep it there.”

-JB

“There are Pennsylvanians who may be traveling out of state to purchase cannabis, and that’s, I think, something that we want to be focused on doing here in our commonwealth,” Pennsylvania Gov. Josh Shapiro said on Wednesday, in an event touting the state’s expanded alcohol sales.

Pennsylvania lawmakers are taking another crack at legalization this year, after lawmakers failed to get it into the budget. Reps. Aaron Kaufer (R) and Emily Kinkead (D) filed a bill that would legalize up to 30 grams of cannabis for adults over the age of 21 last week.

The DOOBIE Act 👀

The cleverly named DOOBIE Act, or Dismantling Outdated Obstacles and Barriers to Individual Employment, passed a key Senate committee on Wednesday. The bill, which would bar federal agencies from denying employment and security clearances on the basis of past cannabis use, cleared the Senate Homeland Security and Governmental Affairs Committee by a 9-5 vote. All of the panel’s Democrats supported the bill, while only Sen. Rand Paul supported it on the Republican side. The next hurdle is a full floor vote.

Schedule III not a panacea for research ⏰

Moving cannabis to Schedule III won’t be a panacea for cannabis research, per a new report from the Congressional Research Service (CRS). The report says that while researchers are subject to less-onerous restrictions for Schedule III drugs than Schedule I drugs, they would still have to register with the Drug Enforcement Administration as a consequence of the Medical Marijuana and Cannabidiol Research Expansion Act, passed by Congress in 2022. The CRS says that Congress would have to change this law to make it easier for researchers to study cannabis. The full report is worth reading. 

Ayr Wellness President and CEO David Goubert stepped down from his position effective immediately last night. He’ll be replaced by Steven M. Cohen, previously an outside legal adviser to the company. The board will look for a permanent replacement.

Movies 🤝 Weed

New York dispensary chain The Travel Agency will be the first-ever cannabis sponsor of the New York Film Festival, the company said. The Travel Agency will also host two pre-festival movie trivia nights at its Union Square location.

We say cannabis and movies go hand-in-hand, so we want to see more of these types of partnerships — looking at you, Alamo Drafthouse.

This partnership also follows Green Thumb Industries’ recent deal with Barstool Sports.

Jaunty vibe

New York cannabis firm Naturae is rebranding to Jaunty, the name of their best-selling product line. (Naturae/Jaunty was a stop on Cultivated’s Summer Road Trip, in case you missed it.)

Medical cannabis can save billions on health insurance 🌿

The US could save $29 billion in healthcare costs if all 50 states legalized medical cannabis, according to a new report published in the journal Applied Health Economics and Health Policy by the medical cannabis firm Leafwell. Companies in states with medical cannabis had an average of 3.4% reduction in coverage plans compared to states without, and the study noted that cannabis users generally had lower body mass indexes and drank less alcohol.

Former Attorney General Bill Barr loves to cite the gateway drug theory on why he’s so opposed to cannabis reform — and why his law firm is working with anti-legalization group Smart Approaches to Marijuana in advance of the December 2 hearing on rescheduling cannabis.

Here’s Jeremy’s take. Let us know what you think:

This is a nice chart from Viridian Capital Advisors, looking into the relationship between multi state operators’ credit ranking and the cost of debt in recent financings. 

As you can see on the chart, Green Thumb Industries has the highest credit ranking determined by Viridian — and thus, it has the cheapest debt at just over 10%. Acreage has a low credit ranking, determined in part by the ratio of liabilities (debt) to assets and liabilities to market capitalization on its balance sheet, and therefore has the highest cost of debt. 

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