One of the primary determinants of whether the federal government’s plan to legalize recreational weed will end up being a success story is how much a gram of legal weed will cost the Canadian consumer.
If the price of legal weed is higher than the current market price of black market weed, there’ll be very little incentive for people to go the legal route. On the flip side, if legal weed is roughly the same price as illegal weed, or lower in price, it is fair to assume that demand for legal weed will quickly outpace illegal weed.
According to an analysis from consulting firm Deloitte, the average price for illegal weed stands at $8.24 per gram across the country. That of course, differs according to province — for instance customers in Ontario pay an average of $8.33 per gram for weed, but in Quebec, the average price of a gram of weed stands at just $7.53.
Now let’s take a look at what legal weed might cost. The federal government has already proposed a scheme that would add an excise tax of $1 per gram of weed, or 10 percent of the final retail price — whichever is higher. 75 percent of that tax revenue will go to the provinces, while 25 percent will remain with the federal government.
On top of the excise tax, you’re going to have to pay the usual 13 to 15 percent in GST (depending on province) for any purchase of legal weed. So effectively, if cannabis producers end up pricing a gram of weed at present market prices, expect to pay up to 25 percent more for a gram of legal weed. Based on the average black market price of $8.24 per gram, that brings us to a legal price of $10.30 per gram.
“I think Canadians will end up paying a higher price — but that’s mainly because you’re getting something safe and regulated compared to what’s out there on the black market,” said Deepak Anand, the Vice-President of Business and Government Relations at Cannabis Compliance.
Deloitte’s research backs up Anand’s assumption on consumer habits — the report says that cannabis consumers in Canada expect, and are willing to pay more after legalization. More specifically, the price of weed would have to reach nearly $14 or more per gram for half of current consumers to stop buying legal weed.
Current cannabis consumers are in fact likely to move nearly two-thirds of their purchases to legal channels, even though they might have to pay at least 10 percent more per gram post-legalization, according to the Deloitte report.
Price will also depend on the demand and availability of different strains, and how much supply the licensed producers are available to deliver to the legal market come October 17th. The current weed supply regime in Canada has been supporting a medical marijuana market of about 250,000 patients. While there isn’t an accurate figure as to how much demand might rise post-legalization in terms of number of consumers, an analysis from Mackie Research Capital recently pegged total demand for marijuana in 2018 at approximately 795,000 kilograms — licensed producers had a capacity of just over 100,000 kilograms at the end of 2017.
“Legal weed production, as it stands right now, is an oligopoly, and prices will reflect that. There won’t be a significant variation in terms of how each producer will price a gram of weed until they get a better sense of the market,” Anand says.
There’s also an argument that legalization will end up driving down prices in the long run, due to competition.
In Colorado, data from BDS Analytics shows that prices peaked six months after cannabis became legal there, but has been falling ever since because of more players entering the market. In Washington State, prices peaked a month after legalization in mid-2014, but fell from $23 per gram to a mere $5 per gram by the end of 2017.