Legalized pot could mean empty cannabis cupboards
Growers unlikely to meet demand by July 1, 2018, target date: experts
Inside a nondescript building in an industrial park in Carleton Place, construction crews are building growing rooms for cannabis plants.
RockGarden Medicinals is the third medical marijuana grower to pop up within an hour’s drive of Parliament Hill. The mother-son team behind the business is hoping to be awarded a licence from Health Canada this summer.
It’s part of a green rush of growops as Canada moves to legalize recreational marijuana. The federal government’s target date is July 1, 2018.
But don’t plan a Canada Day 2018 shopping bonanza at your local pot shop yet. Canadians may be more likely to find empty shelves — in provinces where stores are even up and running — and shortages.
That’s because there will not be enough marijuana produced to meet the demand, say a range of cannabis industry experts.
Canada’s medical cannabis growers now supply about 170,000 patients, and many producers regularly sell out or run short of strains, says Aaron Salz. He was the first investment analyst on Bay Street to specialize in Canada’s cannabis industry, and is now a consultant to some of the big growers.
The industry won’t be able to expand quickly enough to immediately supply all the Canadians who might want to buy recreational marijuana, he says.
Between four million and six million Canadians will use cannabis recreationally next year, says Health Canada, drawing on estimates from both government and private sources.
In 13 months, when “the taps are turned on” for legal recreational pot, says Salz, “We are going to have a supply shortage. I’m highly confident of that.”
A shortage would compromise one of the government’s major goals in legalization: stamping out the black market.
Health Canada recognizes the problem. In late May, the department announced it was streamlining the process and almost doubling the number of staff assigned to review applications for growing licences. The changes also make it easier for the 45 existing producers to expand. But while applications will be handled more quickly, the rigorous requirements for safe production and security still apply.
It typically takes anywhere from six months to three years to build a growing facility and bring it up to full production, experts say. Health Canada is giving priority to 137 applications that have passed the initial screening, and some already have facilities built. But the department says it’s impossible to estimate how long each application will take to process or what the production capacity will be of new growers, which is “highly variable and difficult to forecast.”
In the past, obtaining a growing licence typically took millions of dollars and several years. Health Canada has said it wants to open the market to smaller growers, though.
Cannabis consultant and investor Paul Rosen agrees there won’t be enough time to ramp up the heavily regulated industry quickly enough.
“I think we will be critically short.” In the meantime, Canadians will continue to rely on traditional ways of obtaining pot — from their dealers, he says.
Many ancillary businesses, which supply everything from specialized lights to security systems for the industry, would also not be able to meet demand for their products if there was a massive expansion of legal grow-ops in one year, says John Prentice, president of Ample Organics. His company provides “seed to sale” software for the industry.
“It’s actually a pretty desperate problem. As far as I’m concerned, we’re going to be in pretty rough shape come July 1 (2018).”
Some existing producers are expanding, including the Tweed company in Smiths Falls. Construction crews are going full speed to more than double the production capacity at the old chocolate factory.
Legalization is a process, says Bruce Linton, the CEO of Canopy Growth Corp., which owns Tweed. “There won’t be 14,000 (marijuana) stores on Day 1. For some period of time, expect there will be more people who will want to buy cannabis than can access cannabis.”
Estimating both supply and demand is tricky.
Prentice suspects that federal surveys underestimate how many Canadians use marijuana, because of the stigma surrounding the drug.
“I don’t know If I’d respond honestly if some guy asked me (in a survey) ‘Hey, do you smoke weed?’”
On the other hand, demand may be tempered by consumers who aren’t interested in buying dried weed and cannabis oil, the only two products that will be available at first. Industry insiders assume Canada will follow trends in the American states that have legalized pot, where edible products such as cannabis cookies and gummy bears, concentrates and cannabis creams are increasingly popular. All those products are sold at illegal dispensaries and online outlets in Canada.
It’s also not known where marijuana will be sold, or how much it will cost. The provinces are in charge of distribution and supply, and none has made any decisions yet. A federal task force recommended stores with knowledgeable staff, but some in the industry doubt whether all provinces will adopt that idea, especially right away. The federal government can take over sales and distribution in any province that hasn’t done so, probably by mail order.
If pot isn’t sold at stores in all provinces, that could put a damper on demand, says Chuck Rifici, a pioneer in the Canadian cannabis industry who is CEO of Nesta Holding Co., a private equity firm focused on cannabis.
On the supply side, the numbers look insurmountable.
By the time pot is legal, Canadians will be consuming 655,000 kilograms of recreational cannabis a year, according to a report by the office of the Parliamentary Budget Officer.
Salz estimates that medical growers now collectively produce 80,000 kg a year. They have capital funding in place to expand that amount to about to about 400,000 kg to 500,000 kg.
But even under ideal expansion circumstances without “execution risk” — anything from delays in construction to trouble getting financing — it would take two to three years for producers to supply enough cannabis to meet demand, he says.
The same thing happened in the U.S. states that first legalized recreational pot. It took two to three years after legalization to increase the supply, say both Salz and Rosen.
Rosen says the Canadian government’s “slow, steady” approach to legalization is the correct one. It’s important to be thoughtful when creating a huge new industry and to strike a balance, he says.
If the government moves too quickly, it will lose track of the regulatory process, which some call the “gold standard” in the world. But if regulations are put into place too slowly, the government will lose market share to illegal pot sellers.
It may take several years to stamp out the black market in marijuana, but “we are going to win,” says Rosen. “The white market is going to overtake the black market. It just won’t be on July 1, 2018.”
There won’t be 14,000 (marijuana) stores on Day 1. For some period of time, expect there will be more people who will want to buy cannabis than can access cannabis.