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Mexico Moves Closer to Legalizing Cannabis, but 1 Issue Still Remains

This is expected to be another history-making year for the rapidly growing global cannabis industry.

In 2018, we witnessed Canada become the first industrialized country in the modern era to greenlight recreational marijuana. This was followed in 2019 by Illinois becoming the first U.S. state to legalize the consumption and sale of adult-use weed entirely at the legislative level, as well as include an expungement clause for persons previously convicted of pot possession.

But this year holds something truly special in store. In 2020, we'll witness Mexico become the first country to legalize recreational marijuana based entirely on a ruling by its Supreme Court.

Image source: Getty Images.

Mexico must legalize adult-use cannabis by the end of April

While this legalization is likely to happen soon, there's still a pretty big issue that needs some ironing out. But before delving into the reason for the holdup, let me provide a little background on how Mexico even landed on the verge of legalization.

It all began in late October 2018, when Mexico's highest court ruled that an absolute ban on the recreational use and possession of marijuana was unconstitutional. This ruling happened to be the fifth such occasion over a period of roughly two years where Mexico's Supreme Court reached a similar verdict. Under Mexican law, when its highest court reaches a similar verdict five times, it becomes the set standard throughout the country. In effect, the Supreme Court legalized adult-use marijuana and tasked lawmakers in Mexico with creating the legal framework for a retail marketplace.

Following this ruling, the Mexican Supreme Court gave lawmakers one year to craft the appropriate legislation and implement it. However, lawmakers didn't really get into the weeds of discussing this framework until October 2019, leaving little time to spare or room for compromise. Ultimately, Mexico's lawmakers asked for a last-minute extension to the Supreme Court's deadline and received it (albeit on a one-time basis). Now, lawmakers are required to come up with the regulatory framework for a legal market environment by no later than the end of April.

Sounds pretty straightforward, right? Well, it's not as cut and dried as it would appear.

Image source: Getty Images.

Social equity remains a holdup during the negotiating process

This past week, Marijuana Moment reported that, according to a top senator in Mexico, Congress would vote on a bill to legalize cannabis this month. Although the exact nature of the bill hasn't been released, we were privy to an October 2019 proposal (prior to the Supreme Court's extension) that had relatively broad favorability on a number of points.

For those who may recall, the October 2019 bill called for:

  • A legal age for consumption and purchase of 18 or older.
  • Consumption to occur in private.
  • Strict packaging regulations designed to deter adolescent usage.
  • Edibles and infused beverages to be off-limits for recreational users.
  • The creation of The Cannabis Institute to oversee the industry.

While not every lawmaker in Mexico necessarily wants to see cannabis legalized, the Supreme Court decision forces their hands. Among these provisions above, there was virtually no public pushback last year.

There's been disagreement in regard to social equity provisions contained in the October bill, and also in the proposal making its rounds now in Mexico's Congress. In particular, some lawmakers have called for low-income individuals, small farmers, indigenous peoples, and those most impacted by the drug war in Mexico to be first in line to receive licenses, rather than big businesses.

Considering the pushback against this provision in October, it's to be expected that lawmakers are, once again, disagreeing over this social equity provision in the new bill circulating in Congress. This makes it unlikely that Mexico will legalize marijuana in February, especially with Marijuana Moment noting that legislative leaders have yet to convene meetings on the new proposal as of yet. However, the clock is ticking, and the Supreme Court has made it clear that there's no extension to be granted this time around.

Image source: Getty Images.

Mexico is unlikely to be a land of riches for marijuana stock investors

Although Mexico is forecast by the 2019 State of the Legal Cannabis Markets report to top $1 billion in annual sales by 2024, making it one of the highest revenue-generating marijuana markets in the world, it's unlikely to become a market of significance for investors. As noted, some lawmakers are attempting to implement a social equity provision to ensure that Mexico's adult-use industry is dominated by small businesses and local farmers. That's no good for investors in publicly traded marijuana stocks.

Making matters worse, if the new proposal were to mirror the October bill and limit access of edibles and infused beverages to medical patients, it would be a pretty significant blow to investors. Derivatives, such as edibles and infused beverages, sport considerably higher margins than dried cannabis flower. Over time, dried flower has demonstrated a propensity to be oversupplied and commoditized in a number of recreationally legal U.S. states. Thus, pot stock investors looking for their piece of the Mexican cannabis market would be banking on quantity, not quality.

Lastly, even if Mexico's lawmakers allow big businesses to get in on the green rush, there just aren't any intriguing options to take advantage of the Mexican cannabis market. Aurora Cannabis (NYSE: ACB) has a presence in the country through its ownership of Farmacias Magistrales, but the company isn't exactly on the best financial footing.

Aurora Cannabis recently announced a sweeping overhaul that called for significant cost cuts, including 500 layoffs, and a focus on foreign markets that would immediately generate revenue for the company. Given Aurora's potentially serious cash situation, it doesn't exactly have a lot to gain by chasing low-margin cannabis sales in Mexico when it becomes legal.

While recreational legalization should be no more than 10.5 weeks away in Mexico, it's not an event of significance for pot stock investors.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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