Canada’s Marijuana Industry Needs Innovation to Thrive, Not Protection

Article by Frances Woolley, The Globe and Mail

cannabis plants

The Task Force on Marijuana Legalization and Regulation did not say, “create a marijuana marketing board.” Yet its recommendations would, if implemented, effectively impose a supply management system on cannabis. Suppliers would be licensed, and subject to production limits. These controls would be set so as to “align supply with likely demand.”

A marijuana marketing board would protect existing producers, and keep prices high. For the Task Force, this was precisely the point. They wanted to encourage “market diversity,” create “a space for smaller-scale production” and prevent “the development of monopolies or large conglomerates.”

The Task Force had good reasons to be concerned about small-scale growers. Producers squeezed out of the legal market might continue to produce and sell illegally, carving out a niche by offering a tax-free product and targeting underserved markets, such as youth and after-hours sales. One of the most important goals on the marijuana legalization agenda is keeping cannabis out of the hands of children and youth. Driving small producers underground could subvert that goal.

Yet, ultimately, a legal marijuana market based on small-scale production is doomed to failure. Absent severe penalties for illicit production, legal marijuana cannot compete with illegally produced weed on a price per gram basis. Legal “craft cannabis” growers will be producing essentially the same product, and using essentially the same technology, as reputable illicit dealers. Yet they will incur costs underground producers can avoid, such as payroll taxes, licensing fees, and regulatory compliance costs. What’s more, legal marijuana will be taxed. Suppliers of illicit weed will win any price war.

Legal producers can only out-compete illicit ones through the creation of high-quality, branded cannabis products. Fortunately, there is enormous scope for “upselling” and product differentiation in the marijuana industry. Cannabis differs, at a fundamental level, from drugs such as alcohol or tobacco. The various marijuana strains produce quite different “highs.” Ones with high levels of the cannabinoid CBD have analgesic, anti-inflammatory, and anti-anxiety properties, while those with more THC have stronger psychoactive effects, producing a “stoned” feeling.

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