Plethora of pot? Canada could hit cannabis oversupply as early as 2019, depending on edibles

Click to play video: 'Calgary lawyer breaks down impending cannabis regulation'
Calgary lawyer breaks down impending cannabis regulation
WATCH ABOVE: Lawyer David Wood explains the impact of new cannabis rules that are set to come into effect once edibles, topicals and other new products hit store shelves – Jun 16, 2019

Canada could reach an oversupply of legal pot as soon as the end of this year, depending on how the rollout of edibles and other next-generation products impacts supply, a U.S. cannabis research analyst says.

BDS Analytics’ managing director and principal analyst Tom Adams given the pattern in other markets, as well as the ability of Canada’s well-funded licensed producers to beef up capacity, “everything points to a real rapid end.”

“The point of balance will last about 10 seconds… and then we’ll be on to the competitive battle that consumers can look forward to, of course, because that means lower prices,” he said in an interview.

Adams’ comments come as the Colorado-based firm releases its latest research report, in which it forecasts legal recreational and medical cannabis spending in Canada to grow from US$570 million in 2018 to roughly US$5.2 billion by 2024.

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READ MORE: Canada’s cannabis edibles, topicals market could be worth $2.7B a year after legalization: study

BDS had previously downsized its projections from its earlier forecast of US$5.9 billion in pot spending in Canada by 2022, amid supply chain shortages and regulatory bottlenecks.

Cannabis legalization in Canada last October was met with high consumer demand as well as supply shortages which prompted some provinces to cap the number of retail licences or limit store hours.

LISTEN BELOW: Edibles are coming to a shelf near you by December

The supply situation has improved in recent months, enough for Alberta to lift its moratorium on new retail licences and Quebec to shift towards more regular cannabis store operating hours.

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But last week, the federal government announced that regulation for the second wave of cannabis products, such as edibles and topicals, would come into force on Oct. 17.

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READ MORE: Cannabis edibles expected to hit Canadian shelves mid-December

Given that federal licence holders, once the law takes effect, must give 60 days notice to Health Canada of their intent to sell the new products, the earliest they could hit the shelves would be mid-December.

Industry watchers and players have said they forsee the full rollout of these next-generation products to come in 2020.

WATCH BELOW: Ottawa is rolling out the next generation of cannabis products but they come with some strict rules. Tomasia DaSilva explains what those are.

Click to play video: 'Coming soon to a store shelf near you: edibles and other cannabis products'
Coming soon to a store shelf near you: edibles and other cannabis products

The timing of the cannabis edibles market coming online in Canada has already been baked into their forecasts, Adams said.

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While the introduction of these new cannabis products could put pressure on Canada’s pot supply, it only represents a “minority” of the market, he said.

“It’s not likely to create a demand bump that would put flower supplies in jeopardy again,” Adams said.

The latest figures from Health Canada showed that as of March 31, while monthly sales of dried cannabis amounted to 7,627 kilograms, there was 30,802 kilograms of finished inventory and 143,773 kilograms of unfinished inventory in the system.

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Adams said he expected competitive pressure to rise and prices of cannabis to start coming down “for sure, by the first half of next year.

“But it may well happen before edibles even kick in… There’s plenty of capacity and plenty of financing for more capacity to be added, and that inevitably will lead to a moment of supply balance then overabundance,” he said.

Meanwhile, BMO Capital Markets analysts Tamy Chen and Peter Sklar on Wednesday warned that some “unfinished inventory,” defined as cannabis that is not packaged, labelled or ready for sale, may not be deemed as “not competitive” for sale on the market, based on discussions with licensed producers.

The product may be dated, or may have lower potency or a smaller bud size, they added.

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“We believe this is due to the learning curve associated with growing cannabis at scale as the first few harvests in a new grow area could produce lower yields and quality than anticipated,” they said in a note to clients on Wednesday.

If this flower is not determined to be extraction-grade, “there would be a need for inventory write-downs, although it is difficult for us to quantify the magnitude of any such write-downs at this point,” the BMO analysts added.

READ MORE: Cannabis confiscated at border increased more than 60% after legalization

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