Canada should heed cautionary tale of Oregon's flooded pot market
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- Start date
As marijuana farmers in Oregon say a flood of supply is killing their businesses less than three years after recreational cannabis was legalized, economists say it’s a warning to Canada.
Stephen Easton, professor of economics at Simon Fraser University and senior fellow at the Fraser Institute, says large fluctuations in price and supply are bound to happen when you create a legal market where an illegal market already exists.
WATCH: Aurora Cannabis buys MedReleaf for $3.2 billion
“There is no reason to think it won’t happen here as well. In a broader sense, we are adding legal production to an already robust illegal production,” Easton said.
“Consumption may simply not increase in proportion to our ability to grow.”
Robin Cordell, owner and grower at Oregon Girl Cannabis Company, said she saw the influx of supply coming on social media that would choke out her farm.
WATCH: Pickering business ‘Weed Me’ gets license to cultivate cannabis
“I saw just massive fields planted on Instagram, just huge acres and I just knew that was going to be the result,” she said in an interview.
While she once sold her pot to a wholesaler for $2,200US per pound, she said that dipped to $600 per pound.
Cordell said she’s planning to pull the plug entirely on recreational pot and focus on medical marijuana and hemp products until new markets open up across the country.
“I think I am going to actually give up my licence and wait for nationwide legalization to happen, just because the market is terrible,” Cordell said.
READ MORE: Cannabis potency tests improving as legalization gets closer
Oregon’s inventory of marijuana is staggering for a state its size. There are nearly 450,000 kilograms of usable flower in the system, and an additional 159,000 kilograms of marijuana extracts, edibles and tinctures.
The Oregon Liquor Control Commission, which regulates the industry, said some of the inventory of flower goes into extracts, oils and tinctures, which have increased in popularity, but the agency can’t say how much.
Yet the retail price for a gram of pot has fallen about 50 per cent since 2015, from $14 to $7, says a report by the Oregon Office of Economic Analysis.
READ MORE: Canadian cannabis company picks Winnipeg for flagship growing facility
Commission spokesman Mark Pettinger said the agency still doesn’t have complete information about demand, but a comprehensive market study is underway that will be released in January.
He said about half of the 2,014 producer applications received have been granted in a process that has typically taken between two and six months.
“It’s a free market and the legislature did not provide us with any authority to limit licences,” he said, “so that’s probably an issue the legislature will need to take up during the 2019 legislative session.”
WATCH: CREA representative details laundry list of problems associated with cannabis legalization
The regulatory framework emerging in Canada already looks a little different.
There are 104 licensed marijuana producers in Canada, including 57 in Ontario and 22 in British Columbia.
As of May 11, Health Canada had received 1,974 applications from producers and had refused 268, while others were in progress, incomplete or withdrawn. The entire application process takes more than a year to complete.
WATCH: Cannabis edibles will not be legalized
Under the federal government’s proposed approach to cannabis, regulations would not prescribe a limit on the amount of cannabis a producer cultivates under a standard licence.
“However, the Minister of Health could establish a production limit as a condition of the licence if there were reasonable grounds to believe that a licensee was producing more cannabis than this licensee was able to sell, and that the excess inventory was at risk of being diverted to an illegal market or activity,” a November 2017 consultation paper by Health Canada says.
Werner Antweiler, professor of economics at the University of British Columbia’s Sauder School of Business, said market fluctuations will depend on whether the government restricts licensing and prices.
WATCH: City of Calgary receives hundreds of applications for cannabis retail stores
If left up to the free market, prices can drop to almost nothing, temporarily, he said. The market typically corrects itself over time, with smaller-scale producers that have higher production costs exiting the market and larger-scale producers being able to survive the roller-coaster because they work in economies of scale.
“If you want to prevent prices from dropping dramatically, there can be regulations in place that maintain a minimum price of some sort. That’s easier to do if the distribution channel is regulated,” Antweiler said.
But he said price controls can backfire.
READ MORE: Legal marijuana spurs demand for commercial real estate, particularly in Alberta
“That said, the danger is then, if prices are regulated and we have players trying to sneak around them and provide their product illegally at a lower price, that could lead to an undermining of the idea of liberalization, which is getting the market into the legal domain and preventing an illicit market from surfacing,” he said.
“It’s much better to get it right from the beginning,” he said, and decline to licence more producers than the estimated demand can support.
One Canadian producer says he’s not too worried about being pushed out of the market the way producers are in Oregon.
“I think it’s a function of a far more relaxed regime,” said Dan Sutton, CEO of Tantalus Labs based in Maple Ridge, B.C. “Right out of the gate, you’ve got a far more sophisticated production regulation regime, which inherently applies a barrier to entry.”
READ MORE: Aurora Cannabis to buy MedReleaf in all stock deal worth $3.2 billion
Tantalus Labs is a small-batch producer, which grows unique strains and only harvests about 100 plants at a time, he said.
Sutton is counting on recreational consumers to pay more for a higher quality product, which could mean unique strains, cannabis with a “farm to table” story or organic cannabis that has been meticulously cared for.
“In Oregon, while there are massive over-supplies of commodity-grade quick and easily grown cannabis, there are still cannabis products that sell for $15 or $20 a gram at the dispensary level,” Sutton said.
“All cannabis is not the same.”
Stephen Easton, professor of economics at Simon Fraser University and senior fellow at the Fraser Institute, says large fluctuations in price and supply are bound to happen when you create a legal market where an illegal market already exists.
WATCH: Aurora Cannabis buys MedReleaf for $3.2 billion
“There is no reason to think it won’t happen here as well. In a broader sense, we are adding legal production to an already robust illegal production,” Easton said.
“Consumption may simply not increase in proportion to our ability to grow.”
Robin Cordell, owner and grower at Oregon Girl Cannabis Company, said she saw the influx of supply coming on social media that would choke out her farm.
WATCH: Pickering business ‘Weed Me’ gets license to cultivate cannabis
“I saw just massive fields planted on Instagram, just huge acres and I just knew that was going to be the result,” she said in an interview.
While she once sold her pot to a wholesaler for $2,200US per pound, she said that dipped to $600 per pound.
Cordell said she’s planning to pull the plug entirely on recreational pot and focus on medical marijuana and hemp products until new markets open up across the country.
“I think I am going to actually give up my licence and wait for nationwide legalization to happen, just because the market is terrible,” Cordell said.
READ MORE: Cannabis potency tests improving as legalization gets closer
Oregon’s inventory of marijuana is staggering for a state its size. There are nearly 450,000 kilograms of usable flower in the system, and an additional 159,000 kilograms of marijuana extracts, edibles and tinctures.
The Oregon Liquor Control Commission, which regulates the industry, said some of the inventory of flower goes into extracts, oils and tinctures, which have increased in popularity, but the agency can’t say how much.
Yet the retail price for a gram of pot has fallen about 50 per cent since 2015, from $14 to $7, says a report by the Oregon Office of Economic Analysis.
READ MORE: Canadian cannabis company picks Winnipeg for flagship growing facility
Commission spokesman Mark Pettinger said the agency still doesn’t have complete information about demand, but a comprehensive market study is underway that will be released in January.
He said about half of the 2,014 producer applications received have been granted in a process that has typically taken between two and six months.
“It’s a free market and the legislature did not provide us with any authority to limit licences,” he said, “so that’s probably an issue the legislature will need to take up during the 2019 legislative session.”
WATCH: CREA representative details laundry list of problems associated with cannabis legalization
The regulatory framework emerging in Canada already looks a little different.
There are 104 licensed marijuana producers in Canada, including 57 in Ontario and 22 in British Columbia.
As of May 11, Health Canada had received 1,974 applications from producers and had refused 268, while others were in progress, incomplete or withdrawn. The entire application process takes more than a year to complete.
WATCH: Cannabis edibles will not be legalized
Under the federal government’s proposed approach to cannabis, regulations would not prescribe a limit on the amount of cannabis a producer cultivates under a standard licence.
“However, the Minister of Health could establish a production limit as a condition of the licence if there were reasonable grounds to believe that a licensee was producing more cannabis than this licensee was able to sell, and that the excess inventory was at risk of being diverted to an illegal market or activity,” a November 2017 consultation paper by Health Canada says.
Werner Antweiler, professor of economics at the University of British Columbia’s Sauder School of Business, said market fluctuations will depend on whether the government restricts licensing and prices.
WATCH: City of Calgary receives hundreds of applications for cannabis retail stores
If left up to the free market, prices can drop to almost nothing, temporarily, he said. The market typically corrects itself over time, with smaller-scale producers that have higher production costs exiting the market and larger-scale producers being able to survive the roller-coaster because they work in economies of scale.
“If you want to prevent prices from dropping dramatically, there can be regulations in place that maintain a minimum price of some sort. That’s easier to do if the distribution channel is regulated,” Antweiler said.
But he said price controls can backfire.
READ MORE: Legal marijuana spurs demand for commercial real estate, particularly in Alberta
“That said, the danger is then, if prices are regulated and we have players trying to sneak around them and provide their product illegally at a lower price, that could lead to an undermining of the idea of liberalization, which is getting the market into the legal domain and preventing an illicit market from surfacing,” he said.
“It’s much better to get it right from the beginning,” he said, and decline to licence more producers than the estimated demand can support.
One Canadian producer says he’s not too worried about being pushed out of the market the way producers are in Oregon.
“I think it’s a function of a far more relaxed regime,” said Dan Sutton, CEO of Tantalus Labs based in Maple Ridge, B.C. “Right out of the gate, you’ve got a far more sophisticated production regulation regime, which inherently applies a barrier to entry.”
READ MORE: Aurora Cannabis to buy MedReleaf in all stock deal worth $3.2 billion
Tantalus Labs is a small-batch producer, which grows unique strains and only harvests about 100 plants at a time, he said.
Sutton is counting on recreational consumers to pay more for a higher quality product, which could mean unique strains, cannabis with a “farm to table” story or organic cannabis that has been meticulously cared for.
“In Oregon, while there are massive over-supplies of commodity-grade quick and easily grown cannabis, there are still cannabis products that sell for $15 or $20 a gram at the dispensary level,” Sutton said.
“All cannabis is not the same.”
"with smaller-scale producers that have higher production costs exiting the market and larger-scale producers being able to survive the roller-coaster because they work in economies of scale."
this is what they have all backasswards here
but they wouldnt know it unless...
its time to teach Cannada how it is to grow your BEST !! all small like
this is what they have all backasswards here
but they wouldnt know it unless...
its time to teach Cannada how it is to grow your BEST !! all small like
The Looming Canadian Cannabis Shortage
May 20, 2018 at 6:29 pm
Exclusive article by Alan Brochstein, CFA
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If all goes as planned, the first legal sales of cannabis in Canada outside of its federal medical program could commence as soon as three months from now. The Senate is scheduled to vote on C-45, The Cannabis Act, on or before June 7th in the Third Reading, where it could be approved as-is or amended. If the Senate passes it with amendments, the more likely scenario, then the bill will go back to the House of Commons, with the two chambers needing to agree upon the final text. Upon agreement, C-45 will become law, and the government has suggested that legal sales could begin within a few months.
While many Canadians are ready to make legal cannabis purchases, it appears that the industry will be slow to ramp up. A new distribution network that won’t be fully ready and limited inventory in the vaults of the producers suggests that there will be a large initial imbalance between supply and demand. Of course, no one expects that the legal market will be able to fully replace the black market on day 1, and this can’t be the case in any event since legal cannabis suppliers won’t be able to sell products in the popular categories of edibles and vape pens.
Complex Distribution
While medical cannabis patients can purchase via the internet or phone from any of the approved licensed producers, sales of non-medical cannabis will be restricted to physical stores or province-specific government-run websites. Each province is responsible for overseeing distribution, and some will permit e-commerce, but consumers will not be able to buy directly from producers.
The provinces are pursuing different systems of distribution, ranging from a single government-run entity to schemes that include private retailers. Canada has a population of about 36.7 million, according to Statistics Canada, with the four largest provinces representing 31.7 million, or 86% of the population. Here are those top 4 provinces, ranked by population:
Insufficient Inventory
While there are likely to be few stores open in the provinces, the bigger issue is that the supply of cannabis is likely to fall short of demand. With the exception of Canopy Growth, most LPs have very limited inventory, and recent levels of production suggest that inventories are likely to not grow substantially over the next few months, especially as some LPs meet medical patient and export demand. Aphria announced in April that it is shutting down its wholesaling to support inventory growth ahead of legalization.
In March, Health Canada reported inventories held by LPs as of 12/31 at almost 39 million grams of dried flower and just over 11 million grams in oils (measured on an equivalency basis), for a total of 50 million grams. To put that in perspective, assuming 0.3 grams per joint, this would effectively amount to about four joints per Canadian per year.
May 20, 2018 at 6:29 pm
Exclusive article by Alan Brochstein, CFA
FacebookTwitterLinkedInReddit
If all goes as planned, the first legal sales of cannabis in Canada outside of its federal medical program could commence as soon as three months from now. The Senate is scheduled to vote on C-45, The Cannabis Act, on or before June 7th in the Third Reading, where it could be approved as-is or amended. If the Senate passes it with amendments, the more likely scenario, then the bill will go back to the House of Commons, with the two chambers needing to agree upon the final text. Upon agreement, C-45 will become law, and the government has suggested that legal sales could begin within a few months.
While many Canadians are ready to make legal cannabis purchases, it appears that the industry will be slow to ramp up. A new distribution network that won’t be fully ready and limited inventory in the vaults of the producers suggests that there will be a large initial imbalance between supply and demand. Of course, no one expects that the legal market will be able to fully replace the black market on day 1, and this can’t be the case in any event since legal cannabis suppliers won’t be able to sell products in the popular categories of edibles and vape pens.
Complex Distribution
While medical cannabis patients can purchase via the internet or phone from any of the approved licensed producers, sales of non-medical cannabis will be restricted to physical stores or province-specific government-run websites. Each province is responsible for overseeing distribution, and some will permit e-commerce, but consumers will not be able to buy directly from producers.
The provinces are pursuing different systems of distribution, ranging from a single government-run entity to schemes that include private retailers. Canada has a population of about 36.7 million, according to Statistics Canada, with the four largest provinces representing 31.7 million, or 86% of the population. Here are those top 4 provinces, ranked by population:
- Ontario (14.2 million): Employing a government monopoly, with plans to have 80 Ontario Cannabis Stores open by July 1, 2019 and permitting online purchases for delivery within the province. No supply agreements announced yet.
- Quebec (8.4 million): Employing a government monopoly, with supply agreements with six producerstotaling 62 million grams in the first year, including Aphria, Aurora Cannabis, Canopy Growth, Hydropothecary, MedReleaf and Tilray.
- British Columbia (4.8 million): Employing a hybrid distribution system, with government-run and private stores. No supply agreements have been announced, and licensed producers will not be able to sell their own product in their own stores
- Alberta (4.3 million): Employing private distribution through liquor stores overseen by the Alberta Gaming and Liquor Commission, with in-province e-commerce operated directly by the AGLC. Licenses haven’t yet been awarded.
- Manitoba (1.3 million): 4 master licenses held by private sector companies
- New Brunswick (759K): Government-run stores operated by NB Liquor, with supply agreements awarded to three LPs, including Canopy Growth, Organigram and Zenabis.
- Newfoundland and Labrador (529K): Private stores with no licenses yet awarded and a government-run online store, with Canopy Growth supplying 8 million grams in the first year
- Northwest Territories (44K): No announcement yet beyond distribution through private liquor stores
- Nova Scotia (954K): 9 government stores initially, with online purchasing available (no details on suppliers)
- Nunavut (38K): Undecided
- Prince Edward Island (152K): 4 government-run stores supplied by Canada’s Island Garden, Canopy Growth and Organigram for 1 million grams each, with online purchasing available
- Saskatchewan (1.2 million): Private retailers not yet announced (1500 applications received for about 51 stores) and no supply agreements yet announced with local producers
- Yukon (39K): Government-run stores, with supply agreements with Canopy Growth and Tilray
Insufficient Inventory
While there are likely to be few stores open in the provinces, the bigger issue is that the supply of cannabis is likely to fall short of demand. With the exception of Canopy Growth, most LPs have very limited inventory, and recent levels of production suggest that inventories are likely to not grow substantially over the next few months, especially as some LPs meet medical patient and export demand. Aphria announced in April that it is shutting down its wholesaling to support inventory growth ahead of legalization.
In March, Health Canada reported inventories held by LPs as of 12/31 at almost 39 million grams of dried flower and just over 11 million grams in oils (measured on an equivalency basis), for a total of 50 million grams. To put that in perspective, assuming 0.3 grams per joint, this would effectively amount to about four joints per Canadian per year.
Of course, there will be a range of consumption, with a very small proportion consuming more than a gram per day, every single day, and a larger population consuming less and less frequently. If one assumes the demand among 6% of the population to be 1 gram per day, another 6% consumes 5 grams per month and 15% consume just a gram per month, the annual demand based on 36 million residents would amount to 982 million grams in a mature market. This back-of-the-envelope calculation jibes with forecasts others have made, most recently New Frontier, which sees year-end 2018 demand at $1.7 billion for the legal market (presumably about 170 million grams) and $8.7 billion for the overall market (about 870 million grams).
Because most of the large LPs are publicly-traded, with the exception of Tilray, we can see who has inventory to meet the initial demand. Leading the pack by a wide distance is Canopy Growth, which reported overall inventory value, including accessories and supplies, as of 12/31 at $93.2 million, up over 100% from March 2017. Canopy Growth will be providing an update at the end of June, when it reports its fiscal year ending March 31, and there will be another update in mid-August for the quarter ending June 30.
Assuming $3.50 per gram based on its last quarter’s financials, the reported inventory would amount to about 26 million grams, or about half of all the inventory in the system. To put this in perspective, just the Quebec supply agreement calls for 62 million grams, which exceeds the year-end level reported by Health Canada.
The table below includes the most recent levels of dried cannabis inventory in grams, when available, and the total cannabis inventory in dollars for the largest publicly-traded LPs:
Unfortunately, not all of the LPs are reporting the size of their inventories in grams, with the three largest LPs in terms of the dollar amount of inventory silent on the issue. Given the projection of Canopy Growth representing likely 50% of all inventory, a reasonable guess is that there is likely that an updated estimate as of March 31st would suggest no more than 65 million grams or so of inventory across all the LPs, substantially below the overall likely initial market demand, especially considering how demand could be exceptionally high on the first day of legalization within a province. Given the large size of its supply agreement with Quebec, the low carrying value of inventory at Hydropothecary is particularly concerning.
Cannabis supply will be increasing as producers continue to scale up and add new facilities and as additional applicants become licensed. While Canada may look like Colorado back in 2014 when it moved beyond medical-only, it’s important to remember that there are relatively few large-scale cannabis producers in Canada today, and it will likely take time for even these to fully ramp up their production. Investors should monitor the upcoming reports from Canopy Growth, Hydropothecary and MedReleaf in June to reassess the near-term outlook for available cannabis, but it seems clear that Canadian cannabis stores will likely struggle initially with stocking levels.
This article was adapted from one I posted originally for subscribers at 420 Investor in the May edition of the monthly newsletter. Subscribe to 420 Investor to gain an edge staying on top of the most promising publicly-traded cannabis stocks.
Before this cannabis stock news is here, it’s published to subscribers on 420 Investor.
Because most of the large LPs are publicly-traded, with the exception of Tilray, we can see who has inventory to meet the initial demand. Leading the pack by a wide distance is Canopy Growth, which reported overall inventory value, including accessories and supplies, as of 12/31 at $93.2 million, up over 100% from March 2017. Canopy Growth will be providing an update at the end of June, when it reports its fiscal year ending March 31, and there will be another update in mid-August for the quarter ending June 30.
Assuming $3.50 per gram based on its last quarter’s financials, the reported inventory would amount to about 26 million grams, or about half of all the inventory in the system. To put this in perspective, just the Quebec supply agreement calls for 62 million grams, which exceeds the year-end level reported by Health Canada.
The table below includes the most recent levels of dried cannabis inventory in grams, when available, and the total cannabis inventory in dollars for the largest publicly-traded LPs:
Unfortunately, not all of the LPs are reporting the size of their inventories in grams, with the three largest LPs in terms of the dollar amount of inventory silent on the issue. Given the projection of Canopy Growth representing likely 50% of all inventory, a reasonable guess is that there is likely that an updated estimate as of March 31st would suggest no more than 65 million grams or so of inventory across all the LPs, substantially below the overall likely initial market demand, especially considering how demand could be exceptionally high on the first day of legalization within a province. Given the large size of its supply agreement with Quebec, the low carrying value of inventory at Hydropothecary is particularly concerning.
Cannabis supply will be increasing as producers continue to scale up and add new facilities and as additional applicants become licensed. While Canada may look like Colorado back in 2014 when it moved beyond medical-only, it’s important to remember that there are relatively few large-scale cannabis producers in Canada today, and it will likely take time for even these to fully ramp up their production. Investors should monitor the upcoming reports from Canopy Growth, Hydropothecary and MedReleaf in June to reassess the near-term outlook for available cannabis, but it seems clear that Canadian cannabis stores will likely struggle initially with stocking levels.
This article was adapted from one I posted originally for subscribers at 420 Investor in the May edition of the monthly newsletter. Subscribe to 420 Investor to gain an edge staying on top of the most promising publicly-traded cannabis stocks.
Before this cannabis stock news is here, it’s published to subscribers on 420 Investor.
TheRealDman
Well-Known Member
Sorry...oils don’t count! No LP’s will be selling Rec oil until sometime next year at the earliest.
zoic
Well-Known Member
To me it reads like LP's will not be selling any rec directly to consumers.
BEEN YAPPIN ABOUT THIS ONE FOR A long long TIME..years HAHAHAHAH
WATCH WHAT HAPPENS WHEN THE FARMERS GET AHOLD OF IT....
Eh Bob....did ya hear about this there here marrheewanas? Stuffs like 5 bucks a GRAM wholesale ,,,,
theres no controlling
a really good thing
Last edited:
flawlesscrew
Well-Known Member
50 cent? Can’t even give the shit away these days lol