THE LOOMING POT SHORTAGE
Canada plans to legalize marijuana by summer, but some wonder if there will be enough to go around
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 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.
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 fulfil 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.
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. As more provinces line up to sign supply contracts, producers have been racing 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.”
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 she also pointed to recalls earlier this year, after product at certain producers was found 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 fully prepared or qualified to do the job.
As for medical marijuana users, it is not clear what effect the competition from recreational marijuana will have.
Rifici said that most producers may wish to prioritize medical patients over recreational customers as interest in medical pot appears to be exploding.
For its part, Health Canada says medical users should be prioritized.