Pot report encourages more growers

A task force appointed by the Canadian government to study the legalization of marijuana has acknowledged the need to diversify the cannabis market to prevent a monopoly of major pot producers. From a product and distribution point of view, the task force was emphatic about encouraging smaller growers to enter the market, by promising to continue issuing licenses to grow weed.

“I think it’s very clear what we heard from a great many parties—they want a diversity of producers. I would say our goal is to encourage smaller producers to operate within the new legal regime, and meet those standards,” said Anne McLellan, a former Liberal cabinet minister and chairman of the task force, when speaking to reporters this morning.

If the task force’s recommendations are adopted by the Liberal government, Canada will become the first country in the world to legalize the distribution of cannabis. There are currently 36 licensed producers of marijuana in Canada—all for medical purposes. They include pot behemoths like Canopy Growth Corporation and Aphria Inc., whose stock prices have soared dramatically in the last six weeks, in the lead up to today’s report.

Under the present regime, none of these producers have the legal right to enter the recreational weed market. If the Liberal government ends up legalizing the recreational use of weed, that would mean a massive new market of consumers who use weed for non-medical purposes.

If you’re gearing up to enter the weed market however, be prepared to get behind an extremely long list of growers. According to Jeffrey Lizotte, CEO of NextWave, a marijuana consulting firm, there are roughly 400 active applications of licenses to Health Canada right now. “100 of those applications are in the final stage of the process, and will most likely be approved,” Lizotte told VICE Money.

A boon for Big Weed?

Despite a potential scenario of more weed producers boosting competition by entering the recreational weed market, industry players conclude that this is mostly a favourable report for them, specifically the surprise suggestion of the age limit to consume weed of 18 and older—markedly lower than what was expected.

“What’s great is the proposed legal age increases the size of our market, and really helps combat the illicit industry,” Marc Lustig, CEO of marijuana investment firm CannaRoyalty told VICE Money.

But what’s key, according to Lustig, is that medical marijuana producers begin investing in production methods more suitable for the recreational use of weed. “Future ‘rec’ products will come from extracting oil from the plants, not by using the leaves, which is how medical marijuana is currently made,” Lustig said.

Marijuana stocks reacted positively to the task force report. Canopy Growth Corporation (CGC), Canada’s first billion-dollar weed company saw its stock jump 7 percent by early afternoon. Aphria, the other hot pot stock that recently went public, shot up 6 percent in the first few hours of the morning, immediately after the report was released.

“It’s encouraging to see that the task force embraced the fact that there has been an illegal market for some time, and they have to be brought into the legal market. The tricky part is how much they (the government) are going to let market forces work to produce the kind of competitive progress we need to see in the weed market,” said Khurram Malik, a marijuana stock analyst at Jacob Securities.

Health concerns

The task force’s recommendations on the advertising and promotion of weed were in line with current standards for cigarettes. The report suggested plain packaging for cannabis products that carries some information on packages like company name, strain name, price, as well as the amounts of THC and CBD.

Moreover, the report outright rejected Ontario Premier Kathleen Wynne’s suggestion that cannabis sales in Ontario be restricted to LCBO stores. “No co-location of alcohol or tobacco and cannabis sales, wherever possible,” the report said. Instead, it suggested dedicated storefronts with “well-trained, knowledgeable staff” and “limits on density and location”

Eliminating the illicit market

A government discussion paper prepared earlier this year estimated that the illegal trade of marijuana in Canada reaps an estimated $7 billion in income annually for organized crime. In fact, in 2015, the Criminal Intelligence Service of Canada reported 657 organized crime groups in Canada, of which over half were known or suspected to be involved in the illicit marijuana market. A legal recreational market, according to a recent study by Deloitte, could generate $22.6 billion annually for the Canadian economy.

Marijuana industry consultant Jeffrey Lizotte was particularly enthused by the recommendation that edibles and concentrates be legalized. “It shows a real understanding of what consumers want. They know edibles are the fastest growing product in the illicit market and has to be regulated.”

CannaRoyalty’s Marc Lustig echoes this sentiment. “I think our big concern was that the report would continue to recommend the over-regulation of the cannabis industry that would keep the black market thriving. But it’s pretty forward thinking. They left all doors wide open.”

Vanmala Subramaniam is VICE Canada’s Money & Economics Editor. Follow her on Twitter.