Canadian Pot Supply: Why Temporary Glut Can Be Expected To Vanish

• Build-up of cannabis inventories in Canada is 100% due to the failure of the provinces to provide sufficient retail access to consumers
• Ontario (Canada’s largest province) more than doubled provincial sales in one month (145% increase) with only “a handful of stores”
• In Alberta, lack of supply has delayed additional store openings
• Inventories can be expected to decline as new retail store openings ease bottleneck for consumers 

Pot inventories are building up among Canadian LP’s. For investors who want to understand what is happening (and how this impacts the cannabis sector) it’s best to steer well clear of mainstream media sources like BNN Bloomberg.

It mutilated the truth with a recent headline.
 

Surplus of unsold cannabis may lead to industry-wide writedowns: BMO

First the actual facts.
 

As of March there were more than 150,000 kilograms [330,000 pounds] of unfinished inventory – defined by regulators as cannabis that is not packaged, labelled or ready for sale – held by Canadian pot companies, according to the most recent Health Canada figures. That’s up from about 101,000 kilograms on Oct. 17, 2018, the first day of legalization.

Let’s put these numbers into context, something BNN Bloomberg made no effort to do. Here’s what a real oversupply problem looks like in the cannabis industry, via recent reporting from TSI.
 

Oregon has roughly 1/10th the population of Canada, but half of those potential consumers “get their weed for free”. Yet the state is sitting on four times as much unsold pot as all of Canada.

That’s 40 times as much unsold weed on a per capita basis, with half as much per capita demand. That’s 80 times as bad as Canada’s “supply problem”.

Why are inventories of cannabis building up in Canada at all? Here BNN Bloomberg and its experts profess complete ignorance.
 

“What remains unclear is why the planting of recently licensed grow rooms has not been meaningfully offset by the conversion of prior months’ unfinished inventory into finished products for sale to provincial distributors given the apparent supply shortage in retail channels,” the analysts wrote.

Here’s a suggestion to help the BMO “analysts”. Open your eyes.

It’s perfectly clear why retail cannabis sales in Canada have fallen short of expectations in the opening months of national legalization: provincial incompetence. Canadian pot inventories would almost certainly have fallen, not risen if Canada’s provinces had rolled out legal cannabis more effectively.

This can be shown with (you guessed it) more facts. A quick look at the best and worst province in rolling out legal cannabis illustrates this point.

The province of Alberta (population 4.1 million) leads the way in cannabis legalization. The provincial government has set a first-year goal of licensing 250 cannabis retail outlets. Roughly 100 have already been opened, and new dispensaries are sprouting up each week.

Then there is Ontario, Canada’s largest province, with a population of 14+ million. It took the provincial government 6 months from legalization (April 1, 2019) to open its first legal dispensary. As of today, there are only 11 in the entire province.

New numbers just released show how badly the failure of just this one provincial government has impacted the legal cannabis industry in Canada. TSI has already crunched these numbers.

In the month of April, with only “a few stores” open to sell cannabis across the entire province, retail sales more than doubled in a single month from >CAD$8 million to CAD$19.6 million, a month-over-month increase of 145%.

(Ontario cannabis consumers flock to new dispensary on opening day)

What would those monthly sales numbers look like in Ontario if the province had 100 legal cannabis dispensaries open for business rather than a mere 11? It would be overly simplistic to do a straight-line projection and suggest that Ontario would already be registering $200 million per month in cannabis sales ($2.4 billion per annum).

Clearly, however, if the government of Ontario had even approached the efficiency of Alberta, then Ontario’s monthly cannabis revenues today would be much closer to $200 million per month than the roughly $20 million recorded in April.

Apparently, this dynamic is not only invisible to BNN Bloomberg (and its “experts”), it’s something that is not remotely understood. TSI has educated investors on this in a previous article.
 

Consider the impact on the cannabis inventories of Canadian LP’s if current cannabis sales in Ontario were well in excess of CAD$100 million per month as opposed to less than CAD$20 million.

If we assume an average selling price of roughly CAD $15 per gram, Ontario’s legal cannabis dispensaries would be selling an extra 5,000+ kilograms per month of cannabis. That would have taken a large bite out of the 150,000 kilograms in total inventories.

Put another way, if Ontario had fully opened up the province to cannabis commerce on Day 1 of national legalization, by itself that could have accounted for the entire build-up in Canadian inventories from the initial 100,000 kilograms for sale last October.

Indeed, if all Canadian provinces had rolled out legal cannabis retail stores promptly and efficiently last October, Canadian cannabis inventories would have been expected to fall substantially. This was the consensus projection before legalization.

Ironically, this was published by Bloomberg in October 2018.
 

Canada Is Facing a Shortage of Legal Weed

Why should Canadian cannabis companies (and Canadian cannabis investors) expect “industry-wide writedowns” due to a temporary surge in cannabis inventories?

The BMO analysts cite anonymous “producers” and claim that a “sizable amount” of this inventory may “fall short of quality requirements”. No specifics are offered. No evidence is offered.

Yellow journalism.

Even if there were any legitimate numbers behind the insinuations published by BNN Bloomberg, as noted above, the supply/demand picture varies widely in Canada province to province. Alberta LP’s are selling their cannabis as fast as they can grow it – thanks to an efficient roll-out by that province’s government. There would be even more cannabis stores open in Alberta today if not for a “supply shortage”.

Why should Alberta growers expect write-downs on inventories that don’t exist?

There is no reason why any competent media entity should be engaging in such irresponsible business reporting. This is especially true given that this temporary glut is entirely due to administrative and regulatory failure and is in no way a reflection of supply/demand fundamentals.

Thanks to the abject failure of Ontario’s government and similar failures in other Canadian provinces, in 2019 it’s estimated that 72% of recreational cannabis sales will continue to take place on the black market. This is despite the fact that “displacing the illicit market” is (supposedly) one of the top priorities of the Canadian government.

How do you “displace” the black market for cannabis when there is practically no place for consumers to shop for legal cannabis? You don’t.

British Columbia is another provincial government that has failed on this front. There is only one legal dispensary to service the entire downtown Vancouver area (Metro Vancouver population: 2.5 million).

Canadians want legal cannabis. Canadian cannabis companies are trying to sell this cannabis to them.

Standing in the way are Canada’s provincial governments (at least most of them). As these bumbling governments get out of the way, cannabis sales from legal dispensaries can be expected to skyrocket – as we’ve now seen in Ontario.

That’s the real story for cannabis investors today. And it reads much better than the anti-cannabis fairy tales from BNN Bloomberg.