Canadian cannabis producers move too fast amid dwindling demand

Cannabis growers and producers in Canada are accumulating a huge inventory of the herb that is currently not needed by consumers.

According to the Financial Post, there is an incomprehensible 328,000 kilograms of stored cannabis that is surplus to requirements.

The amount of cannabis is currently at a wholesale value of around $1,600 per pound, which equals to almost one billion dollars’ worth of stock.

“If a large proportion of that 328,000 kilograms is dried bud, that’s going to be big problem for the LP’s,” said Matt Bottomley, a cannabis analyst at Canaccord Genuity Corp, a week before a slew of earnings reports were expected from producers including Canopy Growth Corp, Tilray Inc and Aurora Cannabis Inc.

“I suspect it’ll be a race to the bottom with price because everyone now has more than enough supply,” he added.

The logical next step would be a decline in the price of cannabis as supply will heavily outweigh demand, thus forcing sellers and merchants to compete in order to enjoy a market share.

Exorbitant profit

After expecting to rake in an exorbitant profit before legalisation even began, the two main market leaders in the cannabis industry – Canopy Growth and Aurora Cannabis – both built costly facilities across millions of acres of land, and have continued to increase the space used for the cultivation of cannabis leading to the stock build up.

Such companies, along with many other weed businesses, did not predict that customers would continue to purchase from the black market due to high prices of the product in government-operated stores.

Another driver of black market sales is that illegal dealers are not stifled by the costly prices of licences needed to open a legal store and the lengthy process of acquiring regulatory approval.

Not so long ago several provinces were recording sales shortages with the blame being firmly put on the lack of supply not meeting customer demand, now a few months later production corporations have overestimated the supply needed and allowed inventory to pile up in a pricey turn of events.

The build-up of product is classed as ‘unfinished inventory’ which is defined by Health Canada as the amount of cannabis held in stock by a “cultivator or processor that is not packaged, labelled and ready for sale”.

The amount of product classed as dried bud is not verified, and while dried bud doesn’t necessarily have a use by date in which it would develop negative effects, depending on how it is being stored there is the chance that the product could lose its potency and thus lose even more money for the companies stockpiling it.

Potential Solutions

Last month, the Leaf Desk reported on Canada’s second wave of cannabis legalisation, which saw the likes of edibles and concentrates being legalised for recreational use.

If these cannabis producers want to maximise profits and avoid a sharp decline in price, it may be a wise idea to create new lines of edibles that would be aimed towards the regular retail market who may still be unconvinced by the legalisation of cannabis.

The method of ingesting a brownie or gummy bear is far less severe than smoking a joint, which often comes with a pungent scent and a hazy cloud.

This will be a key vehicle in driving mainstream adoption of cannabis across all legal ages, especially the older generation who may still have a tainted view from Richard Nixon’s war on drugs and who may benefit from the medicinal effects of the plant.

An obvious move to lessen the burden weed companies are now facing would be to lower the prices for customers, which would entice many back from the black market towards the higher quality cannabis obtained from legal stores.

One business has already started the transition, with Hexo Corp introducing a new line of product – Original Stash – which is priced at an affordable $4.49 per gram, which equates to 50 per cent lower than the average price per gram previously recorded. 

The company also announced plans to shut down one of their greenhouses and the subsequent suspension of 200,000 square foot of cannabis cultivation space, putting a stop to the flow of excess product that may end up going to potential waste.

Another issue hindering the sale of cannabis is the limited amount of retail channels, mainly due to the stringent and costly process of opening a cannabis store along with rules enabling mostly government owned stores to flourish and pushing out smaller owned businesses.

In provinces such as Ontario, only 25 stores managed to get a hold of the correct licences to sell cannabis at the beginning of the year along with New Brunswick, where one company runs all the government authorised retailers of recreational cannabis.

Cheapening the process of opening bricks and mortar weed retail stores and loosened rules on who can get a foot into the industry would ease the barriers for entry and allow for a smoother running industry in the leading cannabis country.

A long-shot remedy would be if neighbouring country America were to legalise cannabis federally, enabling the entire industry to mutually flourish with more investors and joint ventures, strengthening the marketing to customers and share exports of product to become a more stable industry.

Investors remaining cautious

The fear that excess supply of cannabis could cause prices to fall and subsequently encourage producers to cease production of retail grade product could eventually crash the stock price of the main cannabis companies.

Investors may be put off by moves such as Canopy Growth’s recent $8 million revenue adjustment as a result of returns on their oil and gel-based products that had not been selling well.

The unpredictability of what exactly the consumers desire and the predicted sales would undoubtedly cause many to lose interest in the fluctuating industry, with Mark Goliger, CEO of Meta Growth confirming that “there is no consistency at the moment, so it becomes very hard for us to forecast and plan because of the inconsistency of the availability of SKUs (stock keeping units)”.

A remedy needs to be found rapidly in order to save a cannabis industry crisis where a fresh start may be the only option left, if market predictions are so far off the mark and consumer behaviour cannot be adequately forecasted.