Canadian Marijuana Shortage: How It’s Impacting Pot Stocks and Wh…

Canadian Marijuana Shortage

One of the biggest stories post-Canadian marijuana legalization is the supply shortage. The Canadian marijuana shortage has stolen headlines, hurt sales, and put a slight damper on what was otherwise a very successful rollout for pot in Canada.

Pot stocks, as a result, have taken a bit of a hit, but this is a temporary problem with a solution well in sight. While there is an undeniable marijuana supply shortage in Canada, that has much more to do with regulation than thesh growers themselves.

Health Canada projects that marijuana consumption will hit 926,000 kilograms a year for both the recreational markets and the medical markets. (Source: “Canada’s cannabis shortage could be over quicker than we thought, researcher says,” Financial Post, February 1, 2019.)

Compared to the production capacity of some of the industry’s top producers—like Aurora Cannabis Inc (NYSE:ACB), which has stated that it can produce up to 500,000 kilograms per year when all its facilities are up and running—that’s a paltry amount.

Combined, marijuana companies are more than equal to the task of providing enough marijuana to satisfy the demand. And that demand is high.

7,252 kilograms of dried cannabis was sold in December 2018 alone, as well as 7,127 liters of oil sold in both the recreational and medical markets. However, medical patients bought far more oil than recreational consumers. (Source: Ibid.)

Despite all the readily available supply (or at least soon to be readily available), we’re still seeing the Canadian marijuana industry stumble a bit out of the gate.

In Ontario, for instance, they have yet to open a single retail location. The first ones won’t pop up until April, and even then, there will only 25 to start, servicing the most populous and richest province in the country.

Other measures have been taken to combat the Canadian marijuana shortage, like Quebec (the second-most-populous province) limiting the number of days that its government-run store is open to help counteract the lack of supply.

Newfoundland, meanwhile, has seen a permanent closure due to its lack of supply at one of its six privately owned storefronts. (Source: “Cannabis store in Newfoundland closes, blames lack of supply,” Global News, January 30, 2019.)

This raises the question: with so many marijuana producers able to provide cannabis products for consumers, how did we get this shortage?

Marijuana Supply Shortage Impacts Pot Stocks

Frankly, much of the problem was on the bureaucratic side of things.

For instance, in the weeks leading up to legalization, producers aired their complaints regarding packaging and labeling. They claimed they were having trouble keeping pace with the schedule due to a compulsory excise stamp that had to be delivered by the Canada Revenue Agency and applied to each individual product.

The supplier of the stamps fell behind and the stamps themselves came without glue, necessitating the manual application of each stamp.

These types of silly oversights are unfortunate, but also not unexpected when a country takes on a big overhaul of its marijuana laws.

But those weren’t the only holdups. As is usually the case, politics played a big part in the rollout of Canadian marijuana legalization.

In Ontario, for instance, the provincial Liberal government was supplanted by the Progressive Conservative Party just a few short months before the legalization of marijuana.

The shift in government preceded a shift in marijuana policy that ended up delaying Ontario marijuana storefronts.

Under the Ontario Liberal Party, the province was meant to have a government monopoly on physical retail spaces for marijuana—at least to start. This is typical for the province, which already maintains a government-run monopoly on alcohol sales (although that monopoly has been loosening lately).

Ontario’s Progressive Conservative Party, tending to be the more business-friendly party, rolled back that plan and released its own plan to license private retailers. The shift, however, came too late and too close to legalization, leading to the delay.

While these are all, in the grand scheme of thing, minor hiccups, they have had consequences for marijuana stocks.

Take a look at the performances of three marijuana industry leaders in the months following legalization, Canopy Growth Corp (NYSE:CGC) in black, Aurora Cannabis Inc in blue, and Cronos Group Inc (NASDAQ:CRON) in red:

Chart courtesy of StockCharts.com

Brightfield Group, LLC, a cannabis research firm, downgraded its Canadian marijuana market projections, which briefly sent many pot stocks into the gutter.

Brightfield reassessed the Canadian market to be worth $5.0 billion by 2021 due to weaker-than-expected sales so far in Canada. (Source: “Cannabis industry to be worth just $5 billion by 2021 amid flat rollout, high costs,” Financial Post, February 6, 2019.)

From Canadian recreational marijuana legalization in October to the end of 2018, total cannabis sales (including medical) totaled about $210.0 million, which forced the research group to pare down its projection to $5.0 billion from $8.0 billion.

Bethany Gomez, managing director of Brightfield Group, explained:

To give you some context, in Colorado, with a population of four million, they sell about a billion dollars worth of cannabis in a year. When the recreational market was announced here in Canada, there was so much hype and hope that the rollout was going to be strong. We didn’t see that.

(Source: Ibid.)

This situation was influenced heavily by the Canadian marijuana shortage, as well as Canadians still relying on cheaper black market cannabis versus the higher-cost legal pot.

How Marijuana Stocks Can Profit

But it’s not all doom and gloom. In fact, the Canadian marijuana shortage may be a blessing in disguise.

You see, marijuana sales are naturally going to spike following legalization—look no further than the OrganiGram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI) stock surge that took place following its latest quarterly report.

But due to the Canadian marijuana shortage, we’re seeing a slower start to sales than expected. The flip side is that the numbers are still strong enough to spur growth, with the added bonus that they’ll only get bigger once the industry finds its footing with its supply.

This gives us a nice runway to have increasingly impressive sales numbers that will ramp up with each successive financial report, leading to strong gains for months to come.

Analyst Take

Ultimately, the Canadian marijuana shortage is a blip on the radar. While it may impact sales now, it is being dealt with and should be a thing of the past within the next six months to a year.

As the nascent recreational marijuana market matures, expect to see efficiency and sales grow in tandem. In the meantime, look out for strong financial reports to help spur growth among pot stocks.