Canadian marijuana producers have bankrolled more than enough capacity to meet rec demand

(This is the second installment of a two-part collection analyzing the anticipated provide and demand of Canada’s hashish market.)

If a leisure marijuana scarcity materializes in Canada come 2019 – as most business observers predict – don’t blame Health Canada, which more than doubled the variety of manufacturing licenses it granted in 2017.

Instead, look to regional provide imbalances – probably in provinces that choose to promote adult-use hashish via government-run shops – and producers who fail to stay up to their cultivation targets.

On paper, at the least, the Canadian marijuana business has loads of paid-for manufacturing capacity to meet demand by mid-2019.

Companies, briefly, have been spending tons of of tens of millions of dollars to increase manufacturing to meet demand beginning this summer time.

The Marijuana Policy Group (MPG) – a Denver firm that gives evaluation and coverage recommendation to personal and authorities shoppers – and a Marijuana Business Daily evaluation have discovered that Canada’s publicly traded licensed producers have already bankrolled (or principally bankrolled) capacity to produce over 1.25 million kilograms (1,370 tons) of hashish slated to come on-line between this yr and 2019.

That’s about 3 times more than MPG believes might be wanted to serve the authorized hashish market within the first yr. (The consultancy serves as an adviser to Health Canada, however this batch of knowledge wasn’t compiled for a specific authorities.)

Two key questions will assist decide Canada’s supply-and-demand state of affairs within the months forward:

  • How a lot of the black market – estimated at more than 900,000 kilograms (992 tons) – can Canada anticipate to convey into the regulated fold in that point?
  • How profitable will licensed producers be in truly assembly their disclosed cultivation targets?

MPG reckons Canada will corral roughly 40% of the black marketplace for leisure hashish, which means LPs can be anticipated to produce round 360,000 kilograms of marijuana in Year One.

The producers have to hit solely 35% of their disclosed cultivation capacity to meet market demand within the first yr, MPG estimates.

“Licensed producers are well capitalized in Canada, making it easier for them to ramp up production in the first year. Supply may be limited initially but should ramp up sharply after a few months,” stated Miles Light, a co-founder and associate with MPG.

“Remember, legal demand won’t be 100% of the market. Some portion of that will be supplied by home growing, and some is going to be supplied by the same black market that exists today. Then you have what’s being already supplied in the medical market.”

Canada’s licensed medical hashish manufacturing at present sits at about 75,000 kilograms a yr, in accordance to Daniel Pearlstein, an analyst with Eight Capital in Toronto.

Where shortages might happen

MPG sees any scarcity of hashish as the results of market distortions on the retail and wholesale finish of the availability chain, after the marijuana is produced.

“You’re unlikely to have a systematic shortage or bottleneck in cultivation, but there may be bottlenecks further down the supply chain, especially in distribution and retailing,” Light stated.

That’s as a result of there is probably not enough gross sales retailers, notably in provinces choosing government-run retail monopolies, together with Ontario and Quebec.

Those two provinces, for instance, account for nearly two-thirds of Canada’s inhabitants and can have round 70 adult-use marijuana retailers in 2019 – far much less than their mixed 1,066 government-run liquor shops — and the present crop of roughly 250 unlawful marijuana dispensaries.

Market imbalances may be seen regionally, with some locations having an excessive amount of marijuana and different locations not enough.

Conversely, analysts anticipate provinces with private-sector retail methods will see entrepreneurs tackle any retail bottleneck by opening retailers with a higher number of merchandise in addition to a wider vary of costs.

Khurram Malik – a companion with Jacob Capital Management, a Toronto-based monetary advisory agency – stated regional retail networks shall be key.

“If you have 50 stores in Ontario where you need 500 stores, that’s not a supply glut, that’s a bottleneck in distribution,” he stated. “There will be an inventory glut first before there is excess supply in the market.”

Any stock glut within the business will profit smaller producers, who will discover it simpler to produce at a better utilization fee, he stated.

Larger difficulty

A much bigger provide concern is the breadth of merchandise out there on the market in Canada come legalization: Will the merchandise bought within the regulated market be what shoppers need to purchase?

That begins with in-demand strains of marijuana and consists of edibles, which gained’t be a part of the preliminary legalization rollout.

Ian Dawkins, president of the Cannabis Commerce Association of Canada, drew a parallel to alcohol gross sales.

“It’s like liquor stores. You can’t just carry three kinds of rum and expect everyone to buy it. If you went into your local government liquor monopoly and they only carried one kind of whiskey, everyone would be lining up at the border to shop in the U.S.,” stated Dawkins, is also a principal advisor of British Columbia-based Althing Consulting.

“Talking about supplying the market in raw kilograms is not the way you want to be approaching this,” he added. “The shortage is going to be in certain subsegments that the big LPs don’t understand and don’t have experience in.”

Canopy Growth, traded on the Toronto Stock Exchange beneath the image WEED, is likely one of the main licensed producers diversifying its product providing for that cause.

A spokesman pointed to the corporate’s CraftGrow platform, which provides hashish varieties grown by a various set of producers.

“Looking ahead to rec sales, CraftGrow partners allow us to stand out to provincial bodies by bringing multiple producers to their shelves through a single transaction, which again makes us more attractive amongst the other available options,” stated Canopy’s Jordan Sinclair.

“Variety is important in every market. By carrying more than one brand in the shop, we attract more customers.”

Editor’s notice: The knowledge took into consideration disclosed cultivation capacity for Canada’s publicly traded licensed producers. Marijuana Business Daily was additionally given funded manufacturing capacity for some privately owned licensed cultivators on situation of anonymity. 

Matt Lamers may be reached at [email protected]

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