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Here’s why Canada won’t face a legal weed shortage in 2018

“If there is a supply crunch, it will be because of distribution methods,” one researcher says

by Vanmala Subramaniam
Dec 8 2017, 3:00pm

There will be no shortage of cannabis on the market come July 2018 when the drug officially becomes legal in Canada, according to an unpublished analysis commissioned by Health Canada that refutes widely held claims that the demand for recreational cannabis will greatly outstrip the supply.

“There’s a lot of talk out there about how there will be an acute shortage of legal cannabis next year, but our analysis tells us that is very unlikely,” Miles Light, co-founder of the Denver-based Marijuana Policy Group (MPG), which provides cannabis-specific policy advice to the private sector and governments, told VICE Money.

According to Light’s estimates, before the end of 2018, there will be 500,000 kilograms of “flower-equivalent” — a term that Light uses to describe not just the “bud”, but every part of the cannabis plant that can be used in consumption — from all licensed producers ready to be sold in Canada’s recreational market.

That projection, however, is vastly higher than a number of other estimates that say a weed shortage in Canada is inevitable.

Investment firm Mackie Research Capital, for instance, forecasts that licensed producers will end the year with a production capacity of just over 100,000 kilograms — not nearly enough to fulfill expected demand in 2018. In fact, Mackie analysts are not convinced supply will meet demand until late 2020, a September 20th report revealed.

“There is no way supply of legal weed is going to outstrip demand in the short-term,” Jacob Securities analyst Khurram Malik told VICE Money. “I expect that there will be at least 700,000 users that want to consume weed almost immediately after legalization. That’s a huge jump for legal demand, and there is definitely not enough capacity for that right now.”

Industry heavyweights share similar concerns. Sebastien St. Louis, director of the Canada Cannabis Association told the Financial Post recently that even if every member of his association moves forward with “aggressive expansion plans,” that would only represent 25 percent of the estimated future demand for weed.

But Light, who was hired by Health Canada this year to analyze the efficacy of the government’s steps towards legalization, is convinced of his calculations. “We’re adding up production from LPs that are currently producing, and those that are planning production. We’re not even counting new applicants yet,” he said.

Light claims the misconception around weed supply is a failure to recognize how large and well-financed Canadian licensed producers are. “There might have been far more LPs in say Colorado back when they legalized, but these producers are far, far larger than the average producer was in Colorado. They’re doing a massive buildup.”

There are currently 80 licensed producers across the country, and hundreds more on Health Canada’s waitlist. In the first two fiscal quarters of 2016 (April to September), almost 10,800 kilograms of dried cannabis was produced — almost all of that amount was sold to medical patients. But licensed producers are not only ramping up production, they are keeping a large inventory of dried cannabis in anticipation of recreational demand. As of March 31, 2017, there were 18,140 kilograms of dried cannabis in storage, according to Health Canada.

For Light, a “successful” roll-out of legalization would be if legal production meets just 40 percent of overall recreational demand. So far, MPG’s research indicates that homegrown cannabis will meet about 8 to 10 percent of demand, and the black market will continue to serve 50 percent of customers, at least initially.

In that respect, 500,000 kg of legal recreational supply is more than enough to hit that 40 percent demand target. Of course, it’s worth noting that Light’s conclusions on supply are based on precisely this demand target — it is virtually impossible to immediately eliminate illegal sources of supply, he says.

The Mackie Research report for example, assumes a supply shortage from the licensed market based on a 100 percent demand target — people who will consume weed recreationally, from any source, legal or illegal.

According to previous MPG reports, when weed became legal in Washington state, licensed growers only managed to capture 18 percent of total market demand; in Colorado however, 65 percent of the market switched over to legal sources of supply. The reasons for that were two-fold — price, and ease of access.

“If there is a supply crunch in Canada, it will be because of distribution methods,” Light predicts.

While some provinces, like Manitoba and Alberta have chosen to allow privately run retail stores, others, like Ontario and New Brunswick are putting sale and distribution in the hands of the government, a model that has been heavily criticized for its potential inefficiencies. In Ontario, for instance, only 40 government-run stores will be allowed to operate in 2018 to serve a population of more than 14 million, though the number of storefronts is set to increase to 150 by 2020.

Light was reluctant comment specifically on the proposed Ontario model, although he did call it a “high-risk game”.

“They’re taking on a very complicated system in a very short amount of time. A state-run system that is well run could be more successful than a private system. But if it doesn’t go 100 percent right, that will be a major problem for the government.”

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