What Cannabis Shortage? Analyst Warns Oversupply Could Become a Problem in Mere Months

Article by Vanmala Subramaniam, Financial Post

What cannabis shortage? Analyst warns oversupply could become a problem in mere months 'The data is undeniable … by January, we are going to be swimming in dried cannabis biomass' By one analyst's calculations, there is enough to supply 617 retail stores with an average of 20 kg of dried cannabis a week. But, he says, the number of stores that will be approved and operational by Q4 will be 400 at most.Ian Kucerak / Postmedia Vanmala Subramaniam

In Alberta, a moratorium on new cannabis retail store licences was just lifted. In Quebec, government-run pot stores have returned to normal hours. In Ontario, there are rumblings that a second tranche of retail licences may be on the way, perhaps as soon as the end of the month.

These incremental but significant signs are leading a growing number of analysts and industry observers to speculate that Canada’s cannabis shortage, a problem that has plagued the industry since legalization, may be coming to an end. Some are even starting to contemplate an entirely new problem that could emerge, as early as next year.

“I’m forecasting an oversupply in dried cannabis by January 2020,” said Chris Damas, an industry analyst who authors The BCMI Cannabis Report and has spent years documenting the growth of the domestic cannabis industry.

Based on an analysis of reported harvests of 18 of the biggest licensed producers in the country, Damas has calculated that 76,112 kilograms of dried cannabis were produced in the first quarter of 2019. He projects that by the fourth quarter, this number will soar to almost 150,000 kg. It is just an estimate, because some licensed producers, for example Cronos Group, do not reveal production numbers.

By his calculations, that’s enough to supply 617 retail stores with an average of 20 kilograms of dried cannabis a week. But, he says, the number of stores that will be approved and operational by the beginning of Q4 will be 400 at most.

“There will be appreciable excess saleable dried cannabis in the market by Q3. There will not be enough extraction lab capacity to absorb this excess dried cannabis, which will have to be stored or destroyed,” he said.

Damas is not the only analyst who is starting to consider the ramifications of an oversupplied cannabis industry.

A recent Scotiabank report, written by cannabis analyst Oliver Rowe, reached a similar conclusion, albeit with a slightly longer time horizon. ”Announced domestic capacity from Canopy, Aphria and Aurora alone is enough to supply our estimated legal market,” Rowe wrote, forecasting an oversupply scenario in the “medium to long term.”

“Based on published data for February 2019, the aggregate run-rate annual production for the LPs is almost 220 tonnes. This is not a theoretical production number, based on what producers say they can do; rather, it is based on what they have already done. Based on a recent tour of several production facilities, we think this figure is substantially understated.”

In 2018, legal demand for medical and recreational cannabis was approximately 63,000 kilograms, according to the Scotiabank report, which relied on official Health Canada and Statistics Canada data. The bank forecasts that demand could quadruple to 259,000 kilograms by the end of 2019, based on the assumption that a substantial portion of the illegal demand turns legal.

Read the full article here.

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