Article by Sean Williams, The Motley Fool
The big day is now less than four weeks away. On June 7, Canada’s Senate will vote on bill C-45, which is better known as the Cannabis Act. This bill aims to make recreational marijuana legal for purchase by adults 18 years of age and over. If approved by the Senate, the Cannabis Act likely will move swiftly through Canada’s federal government, allowing it to become the first developed country in the world to legalize adult-use pot.
With conservatives in the minority at the moment and a two-year tax-sharing agreement in place with all but one Canadian province, everything appears to be in place for C-45 to soon become law. Recreational sales are expected to commence roughly eight to 12 weeks following approval, meaning sometime in August or September.
Most importantly, the legalization of recreational weed is expected to result in around $5 billion in added annual sales for Canadian growers, processors, distributors, and retailers. This comes on top of what’s already being generated from medical weed sales and exports. The expectation from investors — given the stratospheric valuations most pot stocks currently possess — is that this legalization will lead to big profits for Canadian marijuana stocks.
Yes, cannabis prices could decline significantly in Canada
But what if that turned out not to be the case? What if operating margins for cannabis growers come in significantly lower than expected as a result of falling per-gram marijuana prices? Don’t think it could happen given the expectation of strong demand? Think again!
Here are three good reasons why cannabis prices might plunge in Canada shortly after recreational sales commence.
1. Big growers are purposefully trying to drive out smaller players
The first reason marijuana prices might plunge is because the industry’s largest players are purposefully overproducing cannabis in an effort to drive down per-gram prices and margins. Why would a large grower overproduce cannabis on purpose? Simple: to drive out competitors that don’t have the financial means to survive in a lower-margin environment.