Canadian Marijuana Shortages Speak to Voracious Demand in the Market

Canadian Marijuana Shortages Point to Strong Future for Pot Market
iStock.com/Liudi Hara

Ontario Marijuana Shortages

For those who thought that Canada’s legalization of cannabis would be a hiccup-free process, the Canadian marijuana shortages rampant across the country since legalization in October will dispel that notion instantly.

From the west to the east, Canadian provinces are struggling to keep up with the flood of demand, leading to measures being taken to ensure that there isn’t a total pot drought in legal storefronts and online.

The latest pot restriction comes in Ontario—Canada’s richest and most populous province—which is going to limit the number of retail pot shops to 25 when they become legal in April 2019. Currently, the only way to legally buy recreational marijuana in Ontario is online.

This is a reversal born of necessity as the provincial government had first stated that it would not limit licenses several months ago when it announced the private-sector model.

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Ontario has had a bumpier road than most on its way to legalization. Initially, cannabis storefronts were going to be run and operated by the provincial government, giving the government a monopoly on pot sales similar to alcohol (which is also sold in government-run stores, with a few exceptions).

That model was upended, however, when the Liberal government (which had planned to institute the government monopoly on marijuana) was overtaken by the Progressive Conservative (PC) party in the last election.

Typically more friendly to businesses and wary of government organizations, the PCs set about reversing the public model of marijuana to a private one.

The change in course meant that storefronts would not legally open until April 1—but with the promise that there would be no limit to the number of licenses issued.

That all changed with a statement on December 13, with the province saying that it now plans a “phased approach” to authorizing retail cannabis outlets because of “severe supply shortages” across the country. (Source: “Cannabis stores to be phased in with a lottery for licences, Ford government says,” CBC, December 13, 2018.)

The Alcohol and Gaming Commission of Ontario will implement a lottery system to decide which stores are able to open in April, with the results to be announced in January.

“Taking into consideration the required investments for a prospective Ontario private legal retailer, we cannot in good conscience issue an unlimited number of licences,” said a joint statement from Finance Minister Vic Fedeli and Attorney General Caroline Mulroney.

The PCs previously claimed that as many as 1,000 private retail pot shops could dot Ontario after legalization. While that still may come to pass (Toronto alone is a city of millions and by far Canada’s most populous city), April 1 will only see a handful of shops opening up.

The provincial government—in a move that surprises no one—blames the Canadian marijuana shortages on the federal Liberal government.

“We will continue to urge the federal government to take immediate action to ensure licensed producers ramp up production in order to meet the anticipated market demand for recreational cannabis,” read the statement from the province. (Source: Ibid.)

The online marijuana store, which has been operational since October, is itself also woefully under-supplied, with many consumers turning to illegal storefronts that have been operating in a regulatory limbo leading up marijuana legalization. (Source: “Burned by OCS, pot customers returning to illegal shops,” CBC, November 12, 2018.)

While largely ignored in the move toward legalization, the government is looking to crack down on these stores post-legalization. At the same time, however, marijuana users simply have no other options, due to the shortages online and the paucity of legal marijuana storefronts.

Canadian Marijuana Shortages

Marijuana shortages are not only in Ontario—although they represent the latest addition to the Canadian marijuana shortages saga.

National Access Cannabis Corp (OTCMKTS:NACNF, CVE:META), the country’s largest private marijuana retailer with 17 stores, has a team of five people watching at all hours of the day for new inventory from Alberta’s provincial regulator, which controls wholesale pot distribution.

“At 3:30 in the morning all of a sudden $4,000 worth of inventory is made available yet in seven minutes it’s drawn down, meaning that other big competitors are doing the same thing,” said Mark Goliger, chief executive officer of Ottawa-based NAC. (Source: “Canada’s cannabis shortage is so severe retailers watch 24/7 for chance to scoop up fresh supply,” Financial Post, November 26, 2018.)

Across the country, provinces are taking the issue into their own hands.

In Quebec, marijuana stores are only open four days a week in order to handle the shortages.

Alberta, meanwhile, has halted issuing new licenses in order to curb the supply shortage.

Overall, this is a bit of bungling by the Canadian provincial governments and the feds. That said, these Canadian marijuana shortages come as no surprise.

As we’ve seen countless times before in the U.S. when states legalized pot, there almost always is a shortage of supply.

Whether this is due to governments underestimating the number of pot consumers or whether they simply don’t have the appropriate foundations in place to handle the supply needs, it’s hard to say.

For months we covered the marijuana supply capacity expansion among the largest marijuana companies on earth like Canopy Growth Corp (NYSE:CGC) and Aurora Cannabis Inc (NYSE:ACB).

While they were increasing their supply capacity, however, they clearly were not equal to the task of supplying marijuana to the millions of hungry consumers in Canada.

This will, of course, balance out. Remember that Nevada had to institute a state of emergency in order to fill its supply needs, suspending several laws that made the shipping of marijuana more difficult and helped ease the supply deficit.

Canada will eventually emerge from this with enough marijuana to reach its millions of citizens, but it will take time.

Analyst Take

For marijuana investors, what’s the takeaway from all this?

In the short term, the lack of marijuana supply means weaker sales. Weaker sales, of course, will translate to financial reports that aren’t as strong as they should be, which will lead to a missed opportunity to make gains.

On the flip side, the Canadian marijuana shortages speak to a huge and ravenous demand for marijuana across Canada.

This demand is likely only going to grow as more products are introduced to the market like cannabis-infused beverages, medicines, pills, cannabidiol (CBD) products, and whole other slew of exciting marijuana innovations.

The long-term projection, then, is very bright. The high demand can only really be a good thing for marijuana stocks. When Canada is well-supplied with weed, we’ll see that reflected on pot stock balance sheets, which will translate to a surge in value across the board.