Canada Archives - Green Market Report

As the Covid 19 quarantine measure continue, President Trump tweeted, “We will be, by mutual consent, temporarily closing our northern border with Canada.” He said trade would not be affected. However, many cannabis companies have operations in both countries.

Ryan G. Smith, CEO, and Co-founder of LeafLink said, “The connection between the US and Canadian cannabis communities is strong; however, the reality is that the two markets have been running independently for years due to federal and international restrictions on cannabis trade. This border closure is bound to impact companies with a presence in both, but many teams, like LeafLink, already have provisions in place that allow them to operate remotely and to manage their supply chains virtually. One of the things that makes cannabis unique is our resilience. This global health crisis may be one of the biggest obstacles we’ve faced yet, but if there’s any industry that can get through this, it’s ours.”

Yet many Canadian companies work with financial firms in the U.S. and numerous domestic cannabis companies work with Canadian financial firms. Last year, many cannabis company executives that crossed the border as a normal course of operation found themselves losing those privileges. At the time the U.S. Customs and Border Protection Office released a statement saying, “Consequently, crossing the border or arriving at a U.S. port of entry in violation of this law may result in denied admission, seizure, fines, and apprehension.” This caused many executives to apply for waivers.

Certainly, many of these executives could conduct business via Zoom meetings and by phone. Yet, it still adds another layer of complexity to an already complicated business structure for many.

Cy Scott, a Co-founder at cannabis analytics firm Headset said, “As an organization in the cannabis space with a footprint in both the U.S. and Canada the latest news of the border closure is unsurprising given the current climate and what we’re seeing happening globally. With Headset being an analytics company in the technology space, we’re able to operate relatively effectively with the new limitations, although it will almost certainly impact our partners and customers who are close to the overall supply chain for the industry. With additional closures beyond borders, including shelter in place rules starting to take effect in different regions, we hope the rest of the world follows San Francisco’s lead and allows cannabis retailers and dispensaries to remain open voluntarily lessening overall disruption for patients and consumers.”

Last week there was a major strategic transaction between TerrAscend Corp., a cannabis company with operations in both Canada and the U.S. (OTCQX: TRSSF) and Canopy Growth Corporation (NYSE:CGC) in which Canopy entered into a $59.0 million, senior-secured loan with TerrAscend. Luckily this was planned and transacted prior to the quarantine. Imagine if the company was trying to do this deal now? These types of large deals require many in-person meetings with numerous documents to review and sign. Of course, electronic signatures can be obtained, but there is little doubt that many deals will be postponed until life begins to return to some type of normality.

Shortages of Canadian marijuana appeared immediately after recreational sales of cannabis starting from October 2018.  Hence, there is a typical Canadian refrain almost lately.  Because of little inventory remaining, many stores are closed three days a week, and provincial distributors are blaming federal regulations and producers. Some of the giant retailer’s licenses have also frozen and some are limited to 25 stores on the state level.

The shortfall concern for medicinal cannabis has appeared even earlier. Also, some regular users have shown interest that cultivators and manufacturers are prioritizing lucrative recreational products more for overseas markets. In response to the concerns raised by the stakeholders, the federal regulation authority has been pointed out to increase the number of producer’s licenses and industry inventories. While producers are blaming regulatory restrictions and new industry red tapes. Moreover, some of the growing industry analysts have criticized provincial licensing limits as implementing mandatory restrictions.

After all the blame game, the question arises that how can Canada have massive cannabis supplies seemingly yet facing a widespread shortage? Let’s take some critical findings from cannabis sales and inventory data released by Health Canada below.

Market Insight

Last year, cannabis producers already expanded their stockpiles to a greater extent before legalization. In 2018, between January and September, the dry cannabis inventories for month-end analysis for both leaves and flowers were noted as more than doubled yield that was 40 to 100 tons in weight. Moreover, supplies of cannabis-infused oils were reported as tripled yields as of 14 to 48-kiloliters.

Hence, as the recreational began in October 2018, the inventory growth slowdown. The official noted that there as a tremendous amount of cannabis available overall. However, the availability cannot make sure there is no shortage. When we talk about medicinal cannabis, the sales of oil per registered client were increased by 18% between April 2017 and September 2018. Also, dry marijuana sales plunged 53% from 11gm per client to 5gm per client. Due to this reason, dry cannabis sales decline has to reflect a gradual shift to medicinal oils. Instead, that fact cannot be denied that shortages are still contributing to the supply shift curve.

Meanwhile, November’s oil sales were above September, that is 18%, and dry cannabis soared 103% in the same period.  The post-legalization sales then somehow increasingly support the demand and supply curve theory. Hence, medicinal clients refilled their dry supplies with its after legalization and made transfer through prescriptions easier.

High demand and short supply

Considering market insights, cannabis oil recreational sales 2 kiloliters in November compared to October’s influential figures that were 1.8 kiloliters due to the shortage of oils. Hence, this clearly shows that potential demand for recreational cannabis is around 3.8 kiloliters every month while the sales of medicinal cannabis hit 5.9 kiloliters monthly.

The good news is, on November 2018, distributors close sales in good shape and doubled the inventory to 7.6 kiloliters. The stock is enough to fulfill two months of recreational medicinal demand for two months satisfactory.

Producers get to the stock mark of 26 kiloliters ready to ship oil, and that is nearly three months of combined medicinal and recreational demands. Furthermore, an increase in outbound shipping rates suggests high user demand.

When we talk about dry cannabis, the situation is the opposite. An inventory of 9.5 tons with the need of 13.5 tons clearly indicates insufficient stocks with significantly high demand. This implies that the shortage will continue to worsen.

Challenges

“Several theories explain the existing shortfall of dry cannabis despite having huge inventories,” says Jordan, a financial analyst at Premium Jackets. One of the possible reasons is that 80% of the dry stock is unfinished at the producer’s end and unavailable for sales. The possible unfinished processing point outs packaging bottlenecks as well.

The second possible challenge is the data add up inventories at distribution level as a single provincial distributor serves every recreational client. This is why 50% of the customers have to get disappointed seeing empty shelves during a shortfall. Also, the demand and supply gap is much harder to balance for individual products when compared to overall categories.

Investments

“There are a number of times when buyers and sellers have experienced many mismatches in cannabis demand and supply. This keeps medical patients at risk because many clients treating conditions like epilepsy and seizures can be affected in their therapy dosages. As a substitution product cannot cure them, they are bound to take a specific formulation for treatment” Elaborated by Clark Anderson, Stock Analyst at Australian Master.

Another factor that is critical to investors is cannabis exports. They have only averaged 2.5% of monthly production as an export product. That’s a significantly small value which is affecting domestic availability as well. Some experts blame the growth of cannabis for this impact. There are piles of crude dried stocks at producers. Hence, there is a pressing need to keep the harvesting aligned with processing.

Future predictions

Currently, the cannabis industry is facing a massive challenge to overcome the demand and supply gap. The estimate of demand may vary widely; however, Health Canada estimates the need for both oil cannabis and dry cannabis that may work out well is about 77 tons monthly.

Hence, the legal cannabis suppliers are providing better availability to the user with a specific formulation for their therapies. Also, they are serving every recreational and medicinal user. Although investing in such cultivation is strongly needed to match the capacity of growth. Lastly, dealing with the black market is the most stand over a hurdle that the federal market has to deal with.

Early insights reveal out-of-stocks remain elevated in Canada’s first 3 weeks of legalization

An analysis of the e-commerce platforms of Alberta, British Columbia, New Brunswick, and Newfoundland & Labrador, represented approximately 65% of the Canadian population, shows that Canadians are taking full advantage of the products available from their provincial retailers.  

The report released by Cowen & Co.’s  Vivien Azer focused on the issue of out-of-stock rates as Canada falls deeper into its market shortage following legalization on October 17 while providing an up-to-date profile on the who and what of legal cannabis from Health Canada.  

The Out-of-Stock Issue

Out-of-stock levels across suppliers show that the product shortage is nothing to scoff at, as supply fell far short of the demand for Canadians accessing legal cannabis immediately after legalization took effect.

Overall, out-of-stock levels remain flat from the prior week at 57%. For Canopy Growth (NYSE: CGC), out-of-stock rates fell to 54% from 65% in the prior week. Tilray’s (TLRY) out-of-stock rates remained flat. Aphria (APHA), which is still recovering from dips in its inventory levels, continues to see out-of-stock rates climb.

Canopy and Tilray Rate an Outperform

Canopy Growth, which had the second highest number of products offered (169 SKUs), rated an outperform with an C$82 price target.

Tilray’s product SKU data was not able to be obtained because the company doesn’t have supply agreements with three of the four analyzed provinces. Tilray also rated an outperform at a C$172 price target.

Market Leading Products

Azer notes that in the provinces examined, loose leaf cannabis is making up 80% SKUs noting that this is likely due to the unavailability of other products like concentrates on the legal market. High-THC flower, made of 20% THC or higher, and oil-based products measured at 20 mg/ml, are proving to be popular products for both offerings and consumer take up. While the purchase of flower (i.e. bud) is most common, pre-rolls are also proving popular with the out-of-stock levels increasing for these particular products; out-of-stock rates for pre-rolls outweigh those of flower.

With the rise in popularity of CBD, out-of-stocks for these products rose to 100%; CBD-focused and CBD-balanced products were sold out at 67% and 61% respectively.

The report noted that oils and capsules make up only 8% of SKUs on the market with these out-of-stock rates climbing faster than other categories.

Capsules carry the highest out of stock rates 75%, but this data is based on a small sample.

The Price Factor

Azer notes that 70% of flower SKUs are priced at $11, while the data is showing that people are willing to pay more for premium pre-rolls, at the equivalent of $10 per gram. Products in the higher end price range (up to $20/pre-roll) are proving to be bigger sellers than those of a lower price category (as low as $12/pre-roll).

As Canada adjusts through its growing pains, we can expect firms like Cowen & Co. to keep a close eye on the who, what, and how much of Canadian cannabis.

Profile of Canadian Cannabis Users

Azer’s report revealed some interesting statistics from Health Canada about cannabis use amongst Canadians. It’s showing a decline in use among 15-19-year-olds by 7%, while use among 20-24 and 25+ is increasing. At the same time, alcohol use among these latter two groups is decreasing.

Females are trailing men at 11% in reporting instances of cannabis use, in comparison to 18% of men, but that gap is beginning to close as more women turn to cannabis. Interestingly, alcohol use among women is on the increase along with a reported increase in women using cannabis.

More incidences of cannabis use were reported in British Columbia over any province; with Ontario falling slightly under the provincial average, and Quebec reporting the lowest incidences of cannabis use in the country.