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Canada’s cannabis stockpile not going up in smoke

Canada is sitting on a glut of legal cannabis. Two years after legalization, the law of unintended consequences has kicked in. More Canadians than ever are consuming cannabis and CBD products, but the main beneficiary seems to be the black market as the government doesn’t seem to understand consumer behaviour.

As of 15 October 2020, hundreds of thousands of kilograms of cannabis sit idle in producers’ vaults. Warehouses operated by provincial wholesalers are filled to the brim with finished products. Meanwhile, illicit growers remain active and add to a country-wide stockpile that is far outpacing market demand. 

Despite a nationwide police investigations that seized hundreds of thousands of cannabis plants over the past year, including a recent bust in August where C$42 million worth of illegally-grown cannabis was captured in Ontario’s Niagara region. 

Combating the illicit market has not been an easy task, but some producers are going toe-to-toe with their unregulated counterparts, growing cannabis for less than US$1 per gram while others have turned to the great outdoors to produce it for pennies. More than 1,200 acres of land is being used to grow outdoor cannabis this year, more than twice as much as last year, according to Health Canada.

“How else do you beat the black market? You do what they do,” Geoff Benic, chief executive officer of Aleafia Health Inc., told BNN Bloomberg as he stood in the middle of the company’s property outside of Toronto where 50,000 cannabis plants would soon be harvested.

“You play their game, just with more sophistication.” 

While production doesn’t appear to be slowing down, next year should bring some optimism to the beleaguered sector

Raymond James’ Sarugaser expects growth to continue in the space, propelled by ongoing cannabis store openings and more familiarity with new products that should hit the market.

“We’re starting to see a loosening up of the markets,” he said. “We’re seeing an opening up of retail, we’re seeing the value segment drive top line revenue for the good operators, and then we should see the eventual adoption of Cannabis 2.0 products into 2021.”​

But in the shorter term, the Canadian cannabis mountain will grow once producers – both legal and illicit – finish their “Croptober” harvest, the term used within the cannabis industry in reference to the period around October when outdoor cannabis crops are chopped down and processed. 

“There has been too much cultivation in Canada,” said Sarugaser. “But that is secondary to the fact that there have been too many players and as a result, there’s too much competition in the market.”

There are 507 producers that Health Canada has licensed to grow cannabis legally, with roughly 60 of them selling into the recreational market. That’s created a market where there are 45 million packaged cannabis products held by cultivators, processors, distributors, and retailers across the country, roughly four-and-a-half times the amount being sold in June, according to recent Health Canada figures. 

That supply imbalance is causing major headaches for the industry.

More than a dozen cannabis companies have filed for creditor protection and major producers like Canopy Growth Corp. and Aurora Cannabis Inc. have written down billions of dollars in inventory and assets. Meanwhile, industry woes accelerated by the COVID-19 pandemic have led to hundreds of layoffs. Even the eagerly-anticipated “Cannabis 2.0” rollout of vapes and edible products was met with early delays and launch stumbles. 

Sarugaser expects the supply glut to ease in the coming years as companies that aren’t able to produce cannabis in an economically viable manner fade away. 

Retail is also turning a corner after a myriad of stumbles in the first year, notably in Ontario. The country’s most populous province now counts 200 stores open and is adding 40 new shops a month, while there are more than 1,200 licensed pot shops available nationwide. 

“There are big names that maintain the largest market share that produce negative gross margins quarter-over-quarter. That’s simply not a way to run a business,” he said. 

There have been some notable successes, however, with spending in the legal recreational and medical cannabis market now eclipsing the illicit market, according to recent figures from Statistics Canada. Total sales have risen steadily each month and the Canadian market is currently forecasted to produce annual sales of about C$2.8 billion. 

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