The classic argument against legalized medical and recreational marijuana is based on fear. Will it contribute to increasing rates of drug abuse and Black-Market criminal activity? But if we look North for examples of the legalization of marijuana at the federal level, Canada has not experienced many of those problems since medical and recreational marijuana became legal in 2018. But it has a new problem with dry cannabis flower.
In states where cannabis has become legalized, we see a trend of intense consumer interest immediately after statewide medical or recreational marijuana is legalized. Patients rush to become certified and start exploring cannabis as a treatment option, under the supervision of a practitioner. Cannabis sales go up in the state for the first year or two and then begin to stabilize, as more producers and retailers enter the market.
While states like Illinois have shortages of dried whole flowers, Canada has the opposite problem; they have too much cannabis. Good problem to have right? Until you have it. In August of 2019, Canadian federal regulators shared that the inventory of cannabis reached a high of 400 tonnes. That’s enough cannabis in reserve to provide for every patient’s need across the country, for two years.
Oversupply and Home-Grown Competition: How Low Can Cannabis Prices Go in Canada?
The big problem is storage tolerance. The THC component of cannabis has a shelf life of fewer than two years for optimum potency. While THC is slow to degrade, the dried flower does not retain scent or flavor over time. That can make it less marketable to consumers who prefer fresh whole flower.
When there is an oversupply of cannabis inventory, retailers’ lower costs and start “blowing out” quality cannabis at discounted prices. Much to the joy of consumers, and detriment of the industry. When licensed dispensary prices go up, consumers turn to the Black Market for unlicensed products. Or they start growing their own plants at home for personal use. Then they stop buying retail cannabis.
Competing for Dry Cannabis Flower Sales with the Black Market
Statistics Canada estimates that 79% of Canadian consumers are still purchasing cannabis on the Black Market. This was influenced by a lack of sufficient supply for cannabis, as Canada reported national marijuana production shortages in 2017.
The problem is serious for the cultivation and retail cannabis business sectors in Canada. Providers like HEXO have started to sell premium raw flowers for $4.49 per gram, or about 50% less than the normal price of quality weed. HEXO is an award-winning cannabis producer with some innovative products like the Elixir 1:1 CBD and THC oral spray.
The cost of production for dry cannabis flower doesn’t change for cannabis producers. Price variances can be detrimental to business owners. When supply exceeds demand for cannabis, it can be enough of market influence to put them out of business. Especially when they can barely break even, let alone generate a profit. That’s also a problem for the Canadian federal government, who saw $32 million dollars in tax revenue from March 2019 to April 2020.
Will More Retail Dispensaries Solve the Problem?
Cannabis industry analysts feel that there are still not enough dispensaries distributed across each province. For both medical and recreational cannabis demand. Comparing the number of retail cannabis locations in Colorado (over 550) to Canada which has just over 300 dispensaries nationwide, the ratio is currently 0.2 dispensaries per 100,000 people. Colorado has 10 cannabis dispensaries for every 100,000 residents.
The largest populations in Canada reside in Ontario and Quebec. However, in 2019 there were only 24 licensed dispensaries in Ontario, serving 14,566,547 residents.
Lowering the prices of retail cannabis in response to oversupply may help licensed dispensaries compete with Black Market prices. That could be a good thing. It could push unregulated raw cannabis out of the market.