Canada’s cannabis supply issues are real, despite feds’ denial, says business professor
On Wednesday, Rod Phillips, Ontario’s minister of finance, and Doug Downey, Ontario’s attorney general, criticized a federal cannabis supply shortage when announcing Ontario will be licensing 50 new cannabis retail locations across Ontario.
Blair shot back, saying Ontario was “making excuses” and using a “non-existent supply shortage,” for their slow success in subverting the illegal cannabis market in the province.
Blair pointed to Health Canada data that showed in April alone, Canada’s overall cannabis inventory was 24 times more than total sales that month.
But Michael Armstrong, a professor at the Goodman School of Business at Brock University, said the federal government is using seemingly impressive data to skirt around the fact that there are still significant supply issues in Canada.
“They are wildly incorrect to say there’s no cannabis shortage and that there’s enough legal cannabis for those who want it,” Armstrong said in an email.
Canada’s cannabis supply
Armstrong says the majority of Canada’s cannabis inventory, more than 85 per cent of it, is unfinished — that means raw cannabis product that has not been processed, packaged and made ready to sell.
Some of that inventory may also never be ready to sell.
“Some of it, unfortunately, may not be sellable, whether that’s contamination or microbial risk or pesticides or anything of that nature,” said John Fowler, president of Supreme Cannabis and vice-chair of the Cannabis Council of Canada, a cannabis business association. “The law does not allow licensed producers to sell that product but it also doesn’t require them to immediately destroy it.”
Armstrong also criticized Blair and Health Canada for equating sales of legal cannabis with national demand.
“Sales isn’t the relevant measure of demand here, because legal sales satisfy just a fraction of total consumption; most is met by black markets,” Armstrong says.
Legal marijuana retailers are competing with illegal dealers, Armstrong says, so to use legal sales as a benchmark for demand in Canada is wrong.
“No one really knows how big the black market is and how much total consumption there is,” Armstrong said.
Nevertheless, he has estimated, using Health Canada data from a report they commissioned on estimated cannabis use in the fall, overall demand of dried cannabis, including illegal and medical sales, would land somewhere around 56,000 kilograms a month.
Health Canada has been tracking cannabis sales since legalization on their website. Numbers for April show dried cannabis sales reached just below 9,000 kilograms, leaving just over 13,000 kilograms inventory available to sell.
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If Armstrong’s numbers are correct, this would leave a 43,000 kilogram gap that may have been filled by illegal sales.
“They’re looking at sales as their consumption. Businesses often do that — they look at ‘are we keeping up with sales,’ but they’re doing that when they have a healthy industry where sales is almost equal to demand,” Armstrong said.
Blair’s team said Health Canada is holding up their end of the bargain when it comes to licensing producers.
As of March 31, 2019, Health Canada says federally licensed cultivators are reporting nearly 700,000 square metres of land under active cultivation, which can produce 1 million kilograms of cannabis per year.
“This is roughly equivalent to estimates of the total quantity of cannabis (legal and illegal) consumed in Canada, made by independent market analysts, the Parliamentary Budget Officer and federal government departments,” said Marie-Emmanuelle Cadieux, senior communications advisor for Blair.
But Armstrong maintains that the numbers show the industry is continuing to have trouble meeting demand.
Getting cannabis on the shelves
In the past, Health Canada has acknowledged that Canada’s supply issues don’t lie with the creation of the product, but rather with the production process itself.
What exactly is wrong with production is a bit of a mystery, Armstrong said. Whether it’s that producers are not growing high enough volumes of quality cannabis that can turn into dry cannabis, or they don’t have production facilities, or there are still issues with shipping, Armstrong said he can only speculate.
“Big inventories are not translating into shipments going out the door,” Armstrong said.
Armstrong said that issues with federally mandated labelling could have also slowed things down. He also guessed that certain producers focused on getting greenhouses ready for marketing purpose rather than setting up a production line that could handle orders coming in from huge markets like the Ontario Cannabis Store.
John Fowler, is chalking production issues up to growing pains of a new market.
“I think, overall, things have been working pretty well,” said Fowler. “Perhaps there was a lack of understanding of the complexity, not just regulatory complexity of license approvals, but just building the businesses and the supply chains to go from a market that literally didn’t exist on October 17th.”
Fowler said at this point, every part of the industry is being stretched. It’s taking time to get licenses for smaller growers, as well as licenses to expand growing spaces, and packaging and equipment manufacturers are also being weighed down by a huge surge in demand.
“It’s one of those things it’s not one issue that’s holding the industry back from meeting its growth objectives.”
When it comes to whether it’s a smart strategy to limit the amount of cannabis stores in Ontario because of a production issue, Armstrong says Ontario may be shooting themselves in the foot, considering provinces like Alberta and British Columbia will have booming markets with retailers ready to receive the inventory when it’s ready to sell.
But he says, they aren’t wrong in their reasoning for doing so.
“When they say that there’s not enough supply and there’s massive shortages, absolutely, that is correct.”
In the end, Fowler doesn’t believe these delays, whether to overall supply or to Ontario’s cannabis stores, will mean much to an industry that’s meant to last.
“I think cannabis stores hopefully are going to be here for the next 100 years in this province. So a little bit of a six-month delay in launch to be better for the next ninety-nine-and-a-half years. You know, I don’t think it is a bad decision.”
The Minister of Finance did not respond to a request for comment for this story.
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