BUDDING ISSUE
How Canada’s pot producers could overshoot demand
In all the great songs written about pot, from Bob Marley’s Kaya to John Prine’s Illegal Smile, none have dealt with the problem of there being too much weed.
As legalization looms on the Canadian horizon, suppliers concerned about not being able to meet initial demand are ramping up production capacity ahead of Oct. 17. (On a corporate earnings call this spring, Aphria CEO Vic Neufeld noted that “unless someone’s out there hiding 100,000 kilograms, we’re looking at a real shortfall.”)
But with that push to produce more pot — fuelled by a desire to capture as much of the market as possible along with piles of investor cash — comes a real possibility that the industry will produce far more marijuana than it knows what to do with. It’s a situation that has been common in U.S. states where cannabis is legalized.
Though precise figures are hard to come by, calculations based on corporate statements, production estimates and financial filings suggest that even just 10 of the largest cannabis producers in Canada will be able to churn out around 1.8 million kilograms of cannabis annually by 2020 or so, assuming their construction projects all go to plan. The Parliamentary Budget Office figures that by 2021 demand will only be as high as 734,000 kilograms.
But Michael Garbuz, who works in corporate strategy and legal counsel with Ottawa-based cannabis investment firm CannaRoyalty, said oversupply could prove beneficial for consumers as it will push companies to focus on producing higher-quality cannabis and effectively branding those products in order to compete.
“If you’re able to make product, whether it’s dried bud or advanced product (like edibles or oils), that resonates with consumers … that’s going to be the key to success,” he said. “For companies who are not able to sell product effectively, it’s going to be a bad situation for them.”
Other observers have said an oversupply could throw cold water on larger players such as Canopy, who will likely dominate the market whether it’s oversupplied or not. Ian Irvine, professor of economics at Concordia University, said he has some concerns with “exuberance” in the market.
“I can’t see how all of these firms are going to continue to exist and make the profits that they ’re counting on,” he said. “There’s going to be pressure on prices, I think. If there’s a lot of production capacity out there in the legal market, then that’s going to squeeze prices down at least.”
Irvine said that in a regulated market like Canada, where much of the purchasing will be done by government middlemen, that government wholesale purchasers will play an important role in managing supply and demand issues.
“If there’s a whole load of excess supply out there, how is that government monopoly buyer going to be paying?” he asked, adding that “the government is going to have an awful lot of power” over what the cannabis market looks like, even in provinces where retailing is done through the private sector.
Other jurisdictions where cannabis is legal have encountered oversupply situations. A report issued in August by the Oregon-Idaho High Intensity Drug Trafficking Area program found that “a glut of cannabis stockpiles stemming from overproduction has caused a 50 per cent annual price drop since 2016.”
According to the report, two years after legalizing pot, 69 per cent of it remains unconsumed in stockpiles. Annually, Oregon cannabis growers produce around 911,000 kilograms of cannabis, which is “far outpacing annual state consumption demands,” which upper-end estimates place at around 169,000 kilograms per year.
While that might be bad news for smaller cannabis producers with tight margins, it may actually help the government achieve its stated goal of snuffing out the black market.
So where could all that excess cannabis go?
Well, for starters, the gradual expansion of regulations to allow for edibles, topicals and other oil-based products, which are expected to begin a year or so after legalization starts, will mean that companies can divert their dried bud to the making of those products, many of which require larger volumes of cannabis.
Garbuz thinks those will be big sellers among consumers who are looking for a premium experience.
“We’ve seen in recreational states that all those types of consumers ... do become really interested in starting to try these oilbased products,” he said. “For the average Canadian buying a dime bag and having a gross, grinded-up product in your hand that smells, it’s a pretty gross experience for a lot of people, especially in today’s culture.”
Another avenue that is often talked about as a destination for excess supply is the international export market. In 2017, more than 400 kilograms of cannabis oil was sent overseas.
“I can’t say if it would be enough to eat up all of that excess supply beyond Canadian demand, but I do think that it’s a very profitable market for Canadian producers,” said Rosalie Wyonch, a policy analyst with the CD Howe Institute.
But for all the promise and profit that exporting may hold for producers, it remains one of the most highly regulated and complex parts of the cannabis industry.
“If you actually look at the dollars and cents of what’s gone out, it’s pretty insignificant,” said Garbuz. “I don’t think it’s going to play a huge part in this supply and demand game.”