If the Great White North plans to market itself as the Great Green North following the passage of the Cannabis Act and the subsequent legalization of recreational marijuana, it will probably need some marijuana to sell.
Since October 17, 2018, when legal cannabis went on sale across the country, a supply shortage has plagued the country’s nascent retail cannabis industry. In the days following legalization, federally approved retailers were forced to shutter their businesses until they could get enough supply to meet a day’s demands.
Provinces immediately sold hundreds of thousands of dollars worth of cannabis, and in many places the demand was enough to empty out dispensaries on the first day.
Ninety-five years of prohibition had done nothing to quell Canadians taste for marijuana: 42.5 percent of Canadians have tried marijuana at some point, while one-third of people ages 15 to 24 had recently consumed cannabis.
Now that marijuana is legal, that number is expected to rise. But the shortages following legalization are leaving people with just as many questions as they had before legalization.
The two biggest questions: Who’s to blame? And, how does the shortage play out? The answers depend on whom you ask.
Who’s To Blame?
On the one hand, there are the licensed producers who control the country’s entire supply who may have underestimated what it would take to meet national demand for marijuana upon legalization. Dan Sutton, founder of British Columbia-based LP Tantalus Labs, revealed there are two types of master growers in the industry.
Within the Canadian cannabis industry, Sutton told Vice, there are those who came over from the black market and have a deep understanding of the cannabis plant but were likely running lots of smaller grows, and master growers who come from an industrial agriculture background not specific to cannabis. “Most licensed producers still have no idea how to cultivate cannabis in a repeatable way,†he said.
The cannabis industry in Canada will need to quickly gain the agricultural knowledge and procure the capital necessary to grow enough cannabis from season to season. Even though the state of Oregon grew seven extra years of marijuana in 2018, none of that surplus can make its way into the Canadian markets, mostly due to the intractable stance of the U.S. government towards cannabis.
But the lion’s share of the blame falls on the federal and provincial governments.
First, there are the stringent regulations which make production difficult. Growing marijuana at an industrial scale is a massive scientific and logistical undertaking, and thanks to Health Canada’s guidelines for legal cannabis, licensed producers must do it all without the use of pesticides. This is good for consumer health in the long run, but it requires a significant amount more care during the growing period to ensure the temperamental plants survived.
“Canadians had the opportunity of a lifetime to permit enough growing to supply not only their entire country but other parts of the world through exports,†Joe Barnes, executive vice-president of sales and marketing at GrowLife, Inc. (OTC: PHOT), said. His company provides world-class hydroponic equipment, lighting, nutrients, media, and other cultivation supplies to commercial and urban operations in both the U.S. and Canada. “Unfortunately we have seen that commercial growers in Canada have not been able to produce enough, as shown by the countries recent importation of marijuana from Columbia. If they could produce enough, they wouldn’t have to import it, giving jobs and boasting another countries economy through importation before our own.â€
In some ways, the shortage is a function, rather than a defect, of the rollout. Prior to the first sales of legal pot in Canada, The Washington Post’s J.J. McCullough wrote:
It is possible to imagine a government that takes seriously the documented dangers of consuming marijuana using the powers of the Cannabis Act as a legal framework with which to smother Canada’s steadily growing marijuana industry. It could be a project akin to how politicians of a previous era worked within the confines of legality to reduce the country’s tobacco presence to a shadow of its former self.
It isn’t hard to see how McCullough’s vision is playing out already, despite the ardent response of the cannabis industry and cannabis consumers. Despite recreational legalization, the hyper-regulated market that is suppressing the supply chain also has the effect of maintaining a culture of criminalization around marijuana.
Though it is has some of the most liberal cannabis policies in the world, there are still myriad ways Canadians can run afoul of the law, such as buying edibles, consuming cannabis in public, or possessing more than thirty grams, which carries a punishment of up to five years in prison. Thirty grams is just over one ounce. The same rules that make it easy to become a criminal cannabis user make it easy to become a criminal cannabis producer or retailer. The reality of the Cannabis Act has some people wondering whether Trudeau’s government is speaking out of both sides of its mouth as it supports legalization but carries on criminalizing marijuana, with provinces creating large anti-cannabis task forces to prepare for legalization.
On its face, one of the main reasons to legalize cannabis was to stamp out the black market in Canada. Yet, thanks to supply issues in the legal market, over a third of Canadian cannabis users are still going to the black market. It’s little wonder since in provinces like Ontario, there are caps being placed on retail licenses. In Ontario, the province placed that cap at 25 retail licenses being issued. The caps are being called temporary and the promise is that as marijuana is more readily available, more licenses will be granted.
That leads us to the second big question...
How Does The Supply Shortage Play Out?
The length of the supply shortage probably depends on your definition of “shortage.†If you define it as “more than there is now,†then the shortage will probably be over very soon. If you define it as, “enough to consistently meet consumer demand,†then the prospects are more bleak.
“By the end of the second quarter of next year, there’ll be a massive improvement in the amount of supply available,†Mark Goliger, CEO of National Access Cannabis, the country’s largest chain of retail stores, told the Calgary Herald, “We won’t reach surplus, but the big suppliers will reach a mass capacity to supply the market.â€
Goliger clearly falls into the “more than there is now†camp, and, somewhat confusingly, points to the coming legalization of cannabis edibles as a bright spot for the industry. As one of the most popular ways to consume marijuana, legal edibles were delayed as politicians determined how best to regulate them and keep them away from children.
For a market with supply issues already, the introduction of legal edibles is going to bring more demand to an already-strained system. Already, High Times reported that Canadian product shortages have led some cannabis retailers to reduce hours or limit purchases.
Other industry insiders are less optimistic than Goliger. “The rules here are so difficult to grow cannabis — quite frankly more difficult than anywhere else in the world — that if you’re a new licence holder and you’ve never done this before, it’s going to take you a year, year-and-a-half, or two years to get any decent, consistent quality product out the door in any predictable volumes,†Khurram Malik, CEO of Toronto-based cannabis company Biome Grow Inc., tells Global News.
Realistic estimates, according to Malik, point to 2020 as the year when production catches up to demand.
The shortages in Canada are also an indictment of the U.S. government’s draconian policies towards cannabis. A cross-border supply chain, with shared regulatory standards, would be mutually beneficial for U.S. and Canadian cannabis companies and consumers. As two of the largest markets in the world, it is silly for the fragmented marketplace to leave huge surpluses in Oregon — which could crash prices there — while an entire country just a few hundred miles away runs out.
“Prices will still stabilize to meet demand and growers and continuing to produce under an escalated price point, meaning to remain profitable in the future they will need to up output and decrease productions costs,†Barnes explained
Despite the supply chain challenges, excitement domestically and abroad continues to run high for the cannabis industry. Deloitte estimates that the base retail market value of recreational cannabis in Canada will soon grow to $8.7 billion, with a total economic impact of more than $22 billion when factoring in tourism, ancillary business, license fees and paraphernalia.
If supply meets demand in Canada, the Great Green North will be a visionary leader in the worldwide cannabis industry. That’s if Prime Minister Trudeau’s Liberal Party is ready to invest its political will to make it happen. Legalization was just the first step, now it's time for Canada to produce.
Photo by Javier Hasse. Metal work by Caos y Fortuna.
See more from Benzinga
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.