If a recreational marijuana shortage materializes in Canada come 2019 – as most industry observers predict – don’t blame Health Canada, which more than doubled the number of production licenses it granted in 2017.
Instead, look to regional supply imbalances – possibly in provinces that opt to sell adult-use cannabis through government-run retail outlets – and producers who fail to live up to their cultivation targets.
On paper, at least, the Canadian marijuana industry has plenty of paid-for production capacity to meet demand by mid-2019.
Companies, in short, have been spending hundreds of millions of dollars to boost production to meet demand starting this summer.
The Marijuana Policy Group (MPG) – a Denver company that provides analysis and policy advice to private and government clients – and a Marijuana Business Daily analysis have found that Canada’s publicly traded licensed producers have already bankrolled (or mostly bankrolled) capacity to produce over 1.25 million kilograms (1,370 tons) of cannabis slated to come online between this year and 2019.
That’s about three times more than MPG believes will be needed to serve the legal cannabis market in the first year. (The consultancy serves as an adviser to Health Canada, but this batch of data wasn’t compiled for a particular government.)
Two key questions will help determine Canada’s supply-and-demand situation in the months ahead:
- How much of the black market – estimated at more than 900,000 kilograms (992 tons) – can Canada expect to bring into the regulated fold in that time?
- How successful will licensed producers be in actually meeting their disclosed cultivation targets?
MPG reckons Canada will corral approximately 40% of the black market for recreational cannabis, meaning LPs would be expected to produce around 360,000 kilograms of marijuana in Year One.
The producers have to hit only 35% of their disclosed cultivation capacity to meet market demand in the first year, MPG estimates.
“Licensed producers are well capitalized in Canada, making it easier for them to ramp up production in the first year. Supply may be limited initially but should ramp up sharply after a few months,” said Miles Light, a co-founder and partner with MPG.
“Remember, legal demand won’t be 100% of the market. Some portion of that will be supplied by home growing, and some is going to be supplied by the same black market that exists today. Then you have what’s being already supplied in the medical market.”
Canada’s licensed medical cannabis production currently sits at about 75,000 kilograms a year, according to Daniel Pearlstein, an analyst with Eight Capital in Toronto.
Where shortages may occur
MPG sees any shortage of cannabis as the result of market distortions on the retail and wholesale end of the supply chain, after the marijuana is produced.
“You’re unlikely to have a systematic shortage or bottleneck in cultivation, but there may be bottlenecks further down the supply chain, especially in distribution and retailing,” Light said.
Those two provinces, for example, account for almost two-thirds of Canada’s population and will have around 70 adult-use marijuana outlets in 2019 – far less than their combined 1,066 government-run liquor stores — and the current crop of approximately 250 illegal marijuana dispensaries.
Market imbalances might be seen regionally, with some places having too much marijuana and other places not enough.