Canada might have blown its chance to become a global pioneer in pot production, with investors seeking out opportunities south of the border. According to CIBC World Markets analyst John Zamparo, his firm has been in discussions with investors who have indicated they’re shifting their attention from Canada to the United States.

“Many investors we have spoken to have begun to rotate capital from Canada to the U.S. on the fear that Canadian players will be unable to capture growth south of the border,” said CIBC World Markets analyst John Zamparo in reaction to the biggest cannabis industry investment of all time.

The investment we’re talking about saw Canadian cannabis cultivator Canopy Growth acquire New York company Acreage Holdings for $3.4 billion. Acreage, a multistate owner and operator of cannabis licenses and assets, boasts the most diverse portfolio of cannabis investments of any other American company in the legal weed space. The deal is contingent on the U.S. legalizing cannabis at the federal level – an indication, perhaps, of where things are headed? Zamparo seems to think so.

Chief Executive Officer and founder of Infor Financial Group Inc., Neil Selfe, recently went as far as telling Bloomberg that Canada “blew it” on cannabis legalization and is quickly being overshadowed by the U.S. cannabis market. If legalization is imposed at the federal level, it could put the U.S. – with its well-established weed industry – in a prime position for global domination.

Slump in Canadian cannabis stocks forces investors to search south of the border

With Canopy’s colossal investment hinting that Uncle Sam may be on the cusp of federal cannabis legalization, it’s not surprising that investors are steering away from Canada. Weed was legalized in the northern country in October of last year, but with its population on-par with California’s, Canada’s cannabis industry faces some stiff competition.

So far, 33 U.S. States have legalized cannabis for medical purposes and 11 have legalized the plant on a recreational level.

“I think the impetus for that has been the valuation divergence between the two countries. That’s starting to close a little bit, but it still certainly exists,” said Zamparo “It’s a valuation advantage, for one. The second reason is not simply multiples but the belief that there are real operators south of the border with talented management teams, with meaningful experience in adjacent industries, whether that’s in alcohol, tobacco, pharmaceuticals.”

Zamparo analyzes cannabis industry data on behalf of CIBC World Markets, which is a subsidiary of the Canadian Imperial Bank of Commerce. The CIBC analyst often initiates coverage of pot stocks. Zamparo says that, following a decline in Canadian pot stocks earlier this year, investor’s heads quickly turned in the direction of the U.S.

Cannabis prohibition in the U.S. causing investors “temporary inconvenience,” says Zamparo

Zamparo says the current situation concerning cannabis’ legal status in the United States is causing a “temporary inconvenience” for a lot of investors hoping to cash in on the green rush. In 2018, cannabis industry investments hit the $10 billion mark. An investor can dabble in various areas of the legal cannabis space, such as by investing in pot stocks or by purchasing shares in companies that specialize in extraction, cultivation, and manufacturing.

“You’ll see a significant expansion for U.S. names,” says Zamparo, who believes that pot companies in the U.S. will blossom if they are able to conduct business operations in-line with federal law.

Former congressman Ex-Rep. Rohrabacher is optimistic about cannabis legalization and sees it unfurling across the U.S. before 2022. Rohrabacher, a longtime cannabis advocate and board member for BudTrader.com, pinned Trump as the man capable of ending pot prohibition.

CIBC analyst thinks derivative cannabis products will be key for the industry to blossom

Zamparo is adamant that various other aspects of the cannabis industry will require additional funding. An example is extraction companies, many of which will need to ensure the equipment and technology they utilize is state-of-the-art if they are to satisfy the demand for extracted cannabis consumer products. The CIBC analyst believes that derivative products will be “key to unlocking this industry.” However, unless cultivators can tap into some extra capital to expand business operations, it’s unlikely that large-scale licensed producers who require extracted forms of cannabis – but don’t possess the necessary technology to make their own – will have their extraction needs met.

Cannabis-derived products, such as CBD and THC oils, waxes, supplements, capsules, and topical solutions, account for a significant portion of the market. Health Canada published statistics showing a 56 percent increase in demand for cannabis oil over flower in 2018. When compared with statistics from 2017, this indicates an 86 percent increase. California, which is home to the biggest cannabis market in the U.S., earned $1.2 billion in sales of concentrated cannabis products and edibles last year.

Many licensed producers tend to outsource the job of extraction since it requires plenty of space. In Zamparo’s opinion, extractors will be forced to increase the square footage of their extraction operations in order to meet the rising demand for derivative products. He also believes that both Canada and the U.S. will necessitate more capital in order to bolster cultivation operations.

“The biggest and strongest of the sector probably don’t need additional capital for cultivation purposes,” Zamparo said. “But we’re learning as an industry that this plant is a lot more challenging (to grow at scale) than people thought.”