Why the Canadian cannabis market continues is a compelling buy
Many analysts have written articles lately about how miniscule the Canadian cannabis market is compared to the U.S. market. Don’t be too quick to abandon the Canadian market for greener pastures—Canada’s cannabis market is quite compelling.
Certainly, the U.S. market will be bigger, but there are major hurdles — like weed still being illegal on a federal level in America. For now, talk is just talk when it comes to the U.S. market, whereas Canada legalized recreational cannabis after a nearly 100-year prohibition run. So, despite the chatter and wishful thinking about the U.S. market, hats off to Canada’s government for actually making it happen and having the only true nationwide legitimate business model for cannabis in any industrialized nation.
Second, and perhaps most important, the Canadian cannabis industry is still ramping up. After all, recreational cannabis was only officially legal as of mid-October, and despite some of the hiccups, the industry is humming along pretty nicely.
Yes, the licensing is slow and yes, certain provinces being ultra-conservative. But when Canada’s top growers truly ramp up to peak production, it will truly be something to sit back and watch. Why? Because at peak production, it is not unreasonable to assume that Canada could produce over three million kilograms of cannabis per year.
The estimates come from Motley Fool’s Sean Williams, and they’re believable. Williams looked at Canada’s top 10 producers, some of whom have openly disclosed estimates for peak production. Others have not, but taking into account that each producer will one day cultivate on any property it owns or has leased for that purpose, it is not unreasonable to project a capacity of over three million kilograms.
Aurora, Canopy, and Everyone–Oh My!
Take Aurora Cannabis (NYSE:ACB) for example. The company has an estimated peak production of 1.2 million kilograms. Aurora has consistently projected around 570,000 kilograms per year, but that was before the company purchased significant holdings in South America, sure to more than double its production capacity with the country’s combination of outdoor acreage and indoor greenhouse space. Also, Aurora has also acquired MedReleaf, on track for a 140,000-kilogram annual production.
Next up is Canopy Growth (NYSE:CGC) with its estimated peak of more than 550,000 kilograms per year. The company has kept its production estimates close to the vest, to be sure, but the company has boasted about having 5.6 million square feet of cultivation space by the end of 2019. That’s a lot of weed. Williams assumes that Canopy can produce 100,000 kilos for every million square feet, and that estimate is still conservative. Canopy also has something that many cannabis companies don’t have – cash, and lots of it – thanks to Constellation Brands’ (NYSE:STZ) investment, so Canopy could acquire even more room to grow.
Supply Chain – Not Supply – Is the Problem
In a 2016 report from the Canada Cannabis Growers, the group used United Nations figures of over 32 million cannabis consumers in North America alone. The report estimated a Canadian recreational consumption of nearly 800,000 kilograms per year, worth $5 billion; add to that the additional $1.3 billion that stems from the medical marijuana Canadian market. After nearly 100 years of prohibition, gathering data on what the true demand is can be a challenge.
Tammy Jarbeau of Health Canada told The Growth Op that Canada’s present difficulty is not in the supply but the supply chain, and said that provinces like Ontario anticipated the issues. That is why Ontario and other provinces have limited retail licenses until the issues can be sorted out, but Jarbeau reiterated what Health Canada has said for a while now: supply exceeds sales, and the inventory is there.
Just because sales are not where Canada would like them to be, does not mean the demand for the product is lacking. Furthermore, some industry experts agree with Jarbeau and say that the harvest is there, but producers are unable to sell those harvests. For months now, Canadian cannabis industry leaders have been calling for even more cannabis growers. They need more cultivation space to meet the looming demand.
Leaders like those from the Cannabis Council of Canada, which represents 85 percent of Canada’s legal cultivation space, told The Calgary Herald that they are in daily talks with Health Canada to approve more production sites and to also try to alleviate the bottleneck and get more sales licenses approved. Currently, there are 132 producers licensed to cultivate, yet only 78 have sales permits. Health Canada has been very cautious in approving licenses; for every one that is approved three are rejected over concerns about past black market involvement and other issues. Nevertheless, the group has hired 300 people to help process applications.
So far, cultivation space has grown from two million to 13 million square feet in Canada, but it is still not enough to meet the growing domestic demand. Millions more square feet are being brought online as quickly as possible. Added to that is the fact that many of the larger Canadian producers are very likely to export to other countries around the globe.