Canada’s cannabis shortage could be over quicker than we thought, researcher says
While some have suggested shortages in the sector could last for years, Brock University professor Michael Armstrong argues that barring any unforeseen circumstances that supply concerns will be resolved much more quickly than that.
Total legal production of cannabis began drastically increasing about six months before legalization, Armstrong notes, as evidenced by how quickly cannabis inventories were growing.
“If you look at the data from 2017, and you compare it to pace of production right now, you can see how licensed producers were stockpiling cannabis at a hectic rate,” Armstrong said. “Not only were they adding more to inventories each month, the amount they were adding was greater each month. If that continues, supply should catch up to demand by the end of this year.”
Health Canada’s demand forecast for both recreational and medical consumption is 926,000 kilograms a year.
In April 2018, government data shows there were approximately 50,000 kilograms of dried cannabis in vaults across the country, but by December, that number had risen to 130,000 kilograms.
Inventory numbers kept increasing post-legalization, but at a slower pace, as demand from the recreational market started eating into existing supply.
Armstrong’s predictions were echoed by C.D. Howe economist Rosalie Wyonch, who projects that dried cannabis and oil inventory levels as of December 2018, are enough to satisfy “about 3 months of domestic demand.”
“I have to say, compared to my original projections before legalization, production rates, the number of new producers and inventory have all increased faster than I expected,” Wyonch told the Financial Post. “If they maintain the current pace of expansion, it is highly likely there will be enough supply to satisfy demand in all of Canada very soon.”
Those projections also appear to be in line with government messaging regarding cannabis supply.
Bill Blair, Minister of Border Security and Organized Crime Reduction recently tweeted that based on Health Canada’s most recent data, there is “sufficient supply to meet and exceed existing demand.”
In December alone, 7,252 kilograms of dried cannabis were sold, and 7,127 litres of oil were sold in both the recreational and medical markets, although far more oil was bought by medical patients than recreational consumers.
Total finished inventory that month — the amount of product packed, labelled and ready to be sold — stood at 19,085 kg of dried cannabis, and 38,829 litres of cannabis oil. That suggests, as of Dec. 31, almost 20,000 kg of dried bud was available on the legal market, almost triple what was sold that month.
But still, provincial retailers are pointing towards significant shortages — Ontario has only committed to opening 25 retail stores by April 1 citing supply issues, while Quebec has limited the number of days its province-run store will open. In Newfoundland, one of the only private retailers announced it was closing down for good, largely due to supply shortages.
“It’s puzzling to me. Something is causing a hold-up between cannabis supply being there and ready to be sold and it not getting to the consumer. That is a friction we really need to understand,” Wyonch said.
In the weeks leading up to legalization, many licensed producers complained that they were having trouble packaging and labelling finished products on schedule because of a compulsory excise stamp that had to be delivered by the Canada Revenue Agency and then glued onto every single product. Delivery was slow because of a single CRA supplier, and the stamps came without glue, requiring manual application.
The stamp issue, however, has been ironed out, according to multiple licensed producers the Financial Post has spoken to over the last couple of months, including Aurora Cannabis and Canopy Growth Corp.
“It seems to me, sheerly based on official government data, that the flow out of the door is smaller than the amount of raw cannabis supply they have,” said Armstrong.
“But I think perhaps this is unsurprising given that up until October 2018, the industry was medical, so they were sending out tiny packages of product through Canada Post and suddenly have to deliver truckloads of cannabis,” Armstrong added.
The latest financials from both Canopy and Aurora, two of the biggest licensed producers in Canada, say that they are currently each achieving an annual “run-rate” of up to 70,000 kg of cannabis.
Aurora has stated that when all its production facilities are fully-licensed and growing at capacity, it will have the potential of scaling up to 500,000 kg. Canopy doesn’t provide a total estimate of production capacity based on quantity, but it is currently only utilizing one-fifth of its total production space on a square footage basis, based on an analysis of its latest financial statements.
Aphria Inc, another large grower, says that it will be able to reach a capacity of 255,000 kg by the end of 2019, while Quebec-based Hexo Corp. has projected an annual run-rate of 108,000 kilograms by the end of the year.
If those target numbers are actually met, meeting domestic recreational and medical demand will most certainly not be a problem, if one were to base demand on Health Canada’s projections.
“Something’s definitely going on with getting supply to consumers, that’s one of the possibilities, but I’m pretty sure this will all eventually get resolved,” Armstrong said.
“But I don’t think the problem is with licensed producers not ramping up. It appears to be somewhere else in the supply chain,” he concluded.
Published at Fri, 01 Feb 2019 12:24:50 +0000