Canada’s marijuana producers are scrambling to prepare for the legalization of recreational cannabis next summer, lining up financing, expanding their greenhouses and signing deals to supply provincial governments.
But as those provinces prepare their cannabis-selling regimes, a major question is lingering over the nascent industry: Will there be enough pot to go around?
The consensus among producers is that it won’t even be close.
I would be shocked if they did not sell out on the first day
“I don’t think there’s (a licensed producer) today that could even do the initial stocking order for 40 stores,” said Chuck Rifici, chairman and chief executive of Cannabis Wheaton Income Corp., referring to the number of locations Ontario alone hopes to have open by legalization. “Canadians are already consuming a very high amount of pot per capita, and so a good percentage of those are going to walk into the CCBO in Ontario and I think they will clear the shelves.”
While Rifici acknowledges that he is biased because his company — which exchanges financing for a right to buy a quantity of output from a producer — is ultimately “a bet on lack of supply,” he is not alone is his assessment.
Customers line up at the NuLeaf marijuana dispensary in Las Vegas.
Mackie Research Capital, for example, recently pegged total demand for marijuana in 2018 at approximately 795,000 kilograms — but forecast that licensed producers will end 2017 with production capacity of a little over 100,000 kilograms annually. This “will not nearly be enough to fulfill near-term demand,” analyst Greg McLeish wrote in a Sept. 20 report.
The firm doesn’t foresee supply meeting demand until late 2020, McLeish said.
Even the finance minister of Ontario wasn’t sure of successfully stocking the province’s proposed e-commerce channel and approximately 80 retail outlets they expect to have ready in the first year of legalization, which is still slated to begin by July 2018.
“These numbers are contingent on getting enough supply from federal licensed producers,” Charles Sousa said last month, when announcing the program.
The prospect of empty shelves at government pot retailers poses problems not just for officials looking to curb the influence of the black market, but also for regulators tasked with keeping watch over a snowballing sector, producers hurrying to meet demand, and even for medical marijuana users, who could face competition for scarce product.
Some governments have tried to get out in front of the problem. New Brunswick announced in September that it had signed two supply deals with licensed producers, which were worth an estimated $40 million to $60 million apiece annually, and secured about nine million grams of recreational cannabis a year.
More such deals are expected, and as provinces line up to ink supply contracts, producers have found themselves in a race to expand their capacity.
McLeish found that more than $1 billion has been raised by marijuana businesses since the start of 2014, with most of those funds going towards the construction of new facilities or the expansion of existing ones. Funded expansion plans will bring total production capacity up to about 720,000 kilograms, he wrote.
“However, though a number of these developments are well underway or are in the final design phase, it can take two years for new facilities to be fully operational, so the majority of this new capacity will not come online until late 2018 or 2019,” McLeish noted, adding that “growing this amount of cannabis is unprecedented, and we believe that licensed producers will likely experience production challenges when they scale up their facilities.”
Sébastien St-Louis, chief executive of Quebec-based Hydropothecary Corp., said his company has “aggressive expansion plans underway.” The company announced Thursday it had broken ground on a 250,000-square-foot, $25-million greenhouse expansion that will now allow it to churn out 25,000 kilograms of dried cannabis a year.
Such expansions may still not be enough. St. Louis, who also serves as a director of the Cannabis Canada Association, which represents most of the licensed medical producers in the country, said their construction plans aren’t likely to meet the initial demand.
“When that group represents about 70 per cent of the production in Canada of medical marijuana, and when you look at those, at all the expansion plans from those members, including Hydropothecary, that represents about 25 per cent of the estimated future demand for marijuana,” St. Louis said, basing his projection on a $20-billion annual market for weed.
St. Louis said that the group would ultimately be able to meet supply, “whether that’s 24, 36 months down the line.”
“But I think it’ll take some time for the market to pick up as well,” he added.
Some are warning that the race to expand supply could have other consequences.
Jennifer Maccarone, chief quality officer and vice-president of regulatory and governmental affairs for Up Cannabis Inc., a Brantford, Ont.-based licensed producer of medical cannabis, said people in the industry are “making rash decisions and not thinking methodically about how things are being put together.” One example she gave was ensuring a company selects the right water and fertilization systems.
But Maccarone also pointed to recalls earlier this year, after it was discovered that product at certain producers was tainted with a banned pesticide, namely myclobutanil. While Health Canada inspects licensed producers to ensure they are in compliance with the rules, and earlier this year said it would begin conducting random tests of cannabis products, Maccarone suggested that not all officials may be completely prepared to do the job.
“The auditors that we’re seeing now are not coming equipped with the right education to properly audit, and therefore it’s very easy to dupe them if you’re in that realm,” she said. “Which is also allowing for all of these recalls that are happening with companies, because if the auditing process was there, then these myclobutanil recalls would have been captured by the regulator.”
In addition, Maccarone said applicants for licenses are now being allowed to submit a video of their security features, rather than having government inspectors come out to a facility to see for themselves, and that the government is short-staffed and underfunded given the extent of the industry ramp-up and market demand.
The spokesperson added that they inspect all facilities before growing begins and before a license to sell cannabis to the public is issued.
“Health Canada will schedule this first inspection after it has determined that an application meets the regulatory requirements and it has issued a license to cultivate, and once the producer is ready to initiate production in its facility,” they said.
As of May 25, Health Canada said it had received 1,665 applications under the current medicinal marijuana program. Of those, 428 were being processed, 265 had been refused, 69 had been withdrawn, and 858 were “incomplete and have been returned.”
Health Canada said in May that it would “streamline” the application process for medical cannabis production licenses, allowing for greater production. As part of that process, the department also said existing licensed producers in good standing and proposing a “straightforward” modification or expansion of a facility could get that project approved without a physical inspection beforehand.
As for medical marijuana users, it is not clear what effect the competition from recreational marijuana will have.
Market data published by Health Canada suggests interest in medical marijuana is exploding ahead of the recreational legalization. As of the end of the first quarter of the 2016-17 fiscal year, there were 75,166 medical clients registered. By the end of June, that number stood at 201,398. The amount of dried marijuana sold to clients in the first quarter of 2016-17 was 4,037 kilograms; by the fourth quarter it was 5,836.
Several media reports have suggested there have already been issues regarding supply in the medical market, albeit with respect to specific strains or products and not overall.
Rifici said that most producers may wish to prioritize medical patients over recreational customers.
“The growth of the medical market is actually a big piece as to how much will be left over for the rec market,” he said.
For its part, Health Canada says medical users should be prioritized.
“The Government expects that licensed producers will prioritize sales to individuals who require cannabis for medical purposes over non-medical sales,” a spokesperson for Health Canada said, noting that some had already publicly committed to doing so.
But a September report from PwC warned the increased focus on recreational pot could draw attention away from the medical regime.
“The tight timeline will require cannabis regulators, retailers and producers to prioritize efforts and may put some key areas of the recreational cannabis policy objectives — such as curbing the black market — in jeopardy,” said the report. “Because decision-makers will have so little time for regulatory development, the focus will be exclusively on recreational cannabis, to the detriment of changes that may be required for medical cannabis.”
Pot activist Jodie Emery suggested one solution would be for the government to ease up on those already doing business.
“There’s no way that (the legal industry) can provide the actual recreational demand,” she told the Financial Post in an interview. “But, in fact, that demand’s already being supplied by the existing industry, and that’s another reason to legalize cannabis, is to stop criminalizing that existing industry.”
Canada wouldn’t be the first jurisdiction to be hit with supply problems after legalizing recreational marijuana. Nevada put out a “statement of emergency” shortly after its legal market opened in July, noting that the state’s medical marijuana stores had been swamped by customers.
“The initial weekend of legal operation of marijuana establishments resulted in well over 40,000 retail transactions and some establishments report sales of more than double their estimates,“ said the Department of Taxation’s notice.
The population of Nevada, though, is just shy of 3 million. Canada’s is more than 35 million, making for a much larger marijuana market.
Unless precautions are taken, Rifici predicted the government’s recreational supply would not last long.
“I would be shocked if they did not sell out on the first day,” he said.
credit:420intel.com
