Cannabis Act: The morning after comes with supply anxiety
Markets responded favorably this morning to the passing of Bill C-45 by the Canadian Senate.
Recreational marijuana use will soon be legal in Canada after the Senate passed a “historic” bill on Tuesday with a vote of 52-29. Canada (is) will be the first G7 nation to implement legislation to permit a nationwide marijuana market and the second nation to legalize recreational cannabis. Uruguay was the first country to legalize marijuana’s production, sale and consumption in December 2013.
To the south nine US states and the District of Columbia now allow for recreational marijuana use, and 30 allow for medical use but Attorney General Jeff Sessions is enforcing federal prohibitionist rules, which causes no end of troubles to producers.
Canada’s Bill C-45 (The Cannabis Act) will become law once it receives Royal Ascent, an administrative hurdle within the next few days as yesterday’s Senate passage of the bill was the final hurdle that could delay Canada’s legalization.
But the cannabis landscape is shifting even before the Cannabis Act is officially in place. Cannabis companies are moving toward vertical integration of various revenue streams as a measure to gain long-term sustainability.
Bob Dylan would say “The Times they are A-changing“. Two years ago, a Canadian license under the ACMPR regime was the pinnacle of the industry. This is why Canadian stocks of licensed producers enjoyed such stellar status among investors.
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But cannabis oil and dry cannabis, which are the raw forms of cannabis are on an inexorable path to commoditization. Behind the scenes, licensed producers are trading raw cannabis forms in preparation for the implementation of the Cannabis Act.
Market size assessment vary but are in the order of 1,000,000 kg of dry cannabis equivalent per annum with gross retail proceeds in the order of C$10M.
The laws of economics are at play. Supply is still growing, demand is still growing but we don’t know where we will end up. It is axiomatic that the market pricing of cannabis will shrink as more producers come online and the law of demand and supply comes into play.
One would assume that eventually, the farmgate pricing of cannabis is going to decline like any other commodity such as steel, aluminum, which will lead to intense competition.
U.S. President Donald Trump’s tariffs on steel, aluminum and now Chinese imports have prompted retaliatory measures from China, Europe, Canada and even India, bringing much of the world to the brink of a trade war.
But we may be a long way, most certainly months, before Canadian supply exceeds demand as licensed producers are ramping up. In fact, Canadian licensed producers have been going gangbuster to ramp up production ever since Justin Trudeau was elected in October 19, 2015 with the electoral promise to legalize cannabis.
I surmise that some if not a great deal of the current production capacity is months away from being effective and their result products market-ready.
There is long period of supply anxiety ahead of us.
Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>