The Canadian marijuana industry is facing a supply crunch

Canada is now just 13 months away from making marijuana a legal drug for recreational consumption. What’s critical to the Trudeau government at this point is to ensure that come July 1st 2018, there will be a sufficient supply of weed on the legal market to meet the sudden rush of demand that’s expected.

So it was not altogether surprising when Health Canada recently announced that it would speed up the licensing process for the production of legal medical weed, in an attempt to ramp up cultivation ahead of next July.

Managing the supply-demand dynamics of a new legal commodity that has been operating in an unregulated market is indeed a tricky balancing act. If too many licensed producers enter the market at the same time, supply will surge and prices will plunge, slowing production altogether. If there isn’t enough weed on the market to match the expected surge in demand post-legalization, the illicit market will continue to thrive — a politically damaging scenario that the federal government most certainly wants to avoid.

How much weed is too much weed?

There are currently 45 licensed producers (LPs) of medical marijuana in Canada, and 428 others in line to become LPs. These 45 existing LPs sustain a $400 million market of 153,000 medical marijuana patients, a number that has doubled in just one year, and continues to grow at a rapid pace.

That’s just users who have actually registered as medical marijuana patients. A November 2016 report by Canaccord Genuity estimated that once weed becomes legal, the number of recreational users could rise from 1.8 million in 2018, to more than 4 million by 2021, creating a combined market worth a staggering $8 billion.

“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 thousand 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.”

Malik believes that while the government has certainly gotten more lenient in issuing production licenses, the only way supply will outstrip demand is if there is a staggered rollout of the recreational program across the country.

“All this weed would have entered the market for a nationwide rollout. But let’s say Ontario and B.C. are ready to go on July 1, 2018, they have their sales and distribution sites up and running, and Alberta and Manitoba are delaying. I could possibly see an oversupply issue in that scenario.”

There are many factors that affect the time it takes to grow weed, the most common being plant strain, desired yields and the method employed. On average, it can take between seven months to a year to cultivate weed on a large scale and get some form of meaningful production into the market.

“You’re going to have to issue double the amount of licenses right now to ensure that there is sufficient supply for next July. I expect that we’ll only see supply and demand even out in the recreational market come 2019,” said Malik.

Vahan Ajamian, an analyst with Beacon Securities who has been closely observing the marijuana industry shares a similar view. Over the last four months, he says, only two licenses for production have been issued each month.

“At this rate, it will take two years for us to double production. And that doesn’t include the fact that you can be given a cultivation license, which means you can start growing weed, but you still need to get your “authorization for sale” license, which could take up to a year.”

Colorado’s pot glut

In the first half of 2016, Colorado experienced a glut of pot — prices plunged from $2,106 per pound, to $1,402 in just six months. “Capital is attracted to grows. Everyone wants to be the Bud Light, the Coors, the Bob Marley, the defining brand, and there simply aren’t enough people in Colorado to buy up all this product in real time,” Jennifer Beck, the CEO of Cannabase, a wholesale marijuana marketplace told the Marijuana Business Daily back in June 2016.

The Canadian marijuana industry is experiencing the same kind of rush of capital that descended upon Colorado and Washington State a few years ago. Pot stocks listed on the TSX have more than doubled in value in the last 12 months alone. If you’re a budding cannabis grower, seed money isn’t hard to come by. But in the long-run, will this irrational exuberance lead Canadian weed producers into oversupply territory?

Not exactly, according to Alan Brochstein, the founder of New Cannabis Ventures, a Houston-based marketing and communications company for the weed industry.

“Look, the system in Colorado is much more unregulated than it is in Canada. You had 500 licensed producers in Colorado who were all growing for the domestic market. Same thing in Oregon, it is suffering from terrible oversupply right now. In Canada, you have fewer licensed producers, and a central body that is regulating everything,” he told VICE Money over the phone.

Brochstein believes that Canadian LPs might in fact be inflating the numbers when it comes to the amount of weed they will be able to supply come July next year. “It’s not intentional, but I don’t think they will be able to deliver what they’re projecting to deliver.”

Growing pains

Even if all the LPs are growing at capacity, we will still be 10 times short come July 2018, says Terry Roycroft, President of the Medicinal Cannabis Resource Centre.

“They are certainly doing a faster job of it (growing weed), but the bottom line is the new growers are going to start with the same growing pains as the original producers who are now large scale operators. It will take them a while to really understand the process.”

Roycroft points out that weed isn’t a homogenous product, and supply will vary according to strain.

“There is currently an undersupply of certain strains of marijuana, specifically those that contain a higher amount of CBD. A lot of producers started out with 20 different strains, then they realized that was too complicated and expensive to produce so they focused on producing the most popular strains that tend to contain more TBD.”

Ultimately though, accurately estimating how much demand there will be for marijuana once it is legal is a tough game, says Brochstein.

“You don’t have accurate numbers from the black market, and you also don’t know how many people out there who would like to buy weed for recreational use but don’t right now because it is still illegal. It’ll be interesting to see what happens on Day 1.”

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