But nothing since October 17, 2018 can be described as "easy" for the Canadian cannabis industry.
Delivery problems were a nightmare for Canadian pot stocks
Pot stocks have sold out quite a bit in the last seven months. Many of the biggest names in the industry, but especially Canadian marijuana stocks, have lost at least half of their value, if not more. Because Canada's supply bottlenecks can not be solved quickly.
First of all, Health Canada, the regulator responsible for overseeing the industry and reviewing and approving cultivation, processing and distribution licenses, could not handle more than 800 applications at the beginning of the year. While praising the Authority's thoroughness, it also ensures that growers wait many months, if not more than a year, for permission to grow or sell cannabis. Even after changes were made in the middle of the year to curb the number of applications, Health Canada is unlikely to make any progress in the foreseeable future.
Another problem in Canada is that a number of provinces have been slow to approve or review physical pharmacy licenses. Although I've used the example many times, Ontario is the most important case. Although it is a province with more than 14 million inhabitants, it has a meager 24 marijuana retail outlets. If consumers do not have enough options to buy cannabis, they will turn to the black market.
Even taxation has probably played a role. Canada's 10% excise tax seems proportionate to the tax rate applied to marijuana in selected US states, but it still makes it difficult for legal producers to compete with the black market for price.
This last point leads to what may well be described as the most frightening statistics any marijuana investor will ever see.
The scariest marijuana statistic you'll ever see
Just a few weeks ago, Statistics Canada released a compendium of data from the third quarter of the cannabis industry. These data, given in CAD, included the average price per gram for cannabis. The average price of legal cannabis for the third quarter was $ 10.23 ($ 7.82) per gram, while the price of black market marijuana was $ 5.59 ($ 4.27).
This particular data point is frightening for two reasons. First, there is a massive 45.4 percent price difference between legal and illegal marijuana, based on reported statistics per gram. This confirms the insurmountable disadvantages that legal channels have to face in their attempt to oust the black market.
Although there has always been some hope for a decline in costs when economies of scale begin, overcoming the biggest price difference ever will be extremely difficult. Maybe then it is no surprise that earlier this year Scotiabank predicted that 71% of all marijuana sales in Canada in 2019 would come from the black market.
The other component that is worrying here is the sequential quarterly decline Pro gram price for legal cannabis, from $ 10.65 in the second quarter to $ 10.23 in the third quarter. This is the first decline in legal marijuana prices since the beginning of sales in October 2018.
While it has been foreseen that legal cannabis prices will decline over time, a drop in prices for such shortages is a big mystery.
The Quebec-based producer HEXO (WKN: A2N455) has pointed to weaker national prices in the preliminary Q4 update. Apart from the slow opening of physical pharmacies and delays in the introduction of cannabis derivatives, HEXO blamed lower prices per gram for a significant decline in fourth-quarter revenue compared to previous forecasts.
How will Canadian marijuana stocks close this gap between legal and black pot?
The big question is, of course, how do pot stocks handle such a huge price difference between legal and illegal marijuana?
One option that HEXO has chosen is to fight fire with fire. On October 16, HEXO announced that it will launch a new low-cost cannabis line under the Original Stash brand in its home province of Quebec. According to the company, it can sell one ounce of Original Stash for $ 125.70 or $ 4.49 per gram, which would actually undercut much of the black market. Although this savings line could certainly increase volume and interest, there is a very real possibility that HEXO's margins will be damaged. For Original Stash to be a success, HEXO has to convert these savings buyers into its higher-margin derivatives, which is not so easy either.
Another means to combat this sales weakness is to wait. Either The Green Organic Dutchman (WKN: A2JLEE) and HEXO have announced that capacity expansion and / or extension will be discontinued in existing plants to accommodate current demand. Green Organic Dutchman, the first to make this announcement, has the potential to become a top producer in Canada. But instead of targeting peak production of 219,000 kg per year, The Green Organic Dutchman forecasts only 20,000 kg to 22,000 kg of production in 2020, with only four growrooms in the Valleyfield Campus facility in operation.
It also raises the question of what the two largest producers in the country – Canopy Growth (WKN: A140QA) and Aurora cannabis (WKN: A12GS7) – will do. Both Aurora and Canopy have a peak production potential of more than 500,000 kg per year and, despite their large international presence, are unable to export a large proportion of their products overseas until domestic demand is met. This will not happen until many of Canada's regulatory and procedural supply problems are resolved.
At the moment, Canopy Growth has more than 5 million square feet of planned acreage licensed by Health Canada. It is not known how much of this area is already produced. In the meantime, Aurora Cannabis should complete and license the Exeter Greenhouse and Aurora Sun Project in 2020. These growers will generate 105,000 kg and 230,000 kg of expected annual production respectively.
But will one of these plants be needed in the next two years? At the moment I think, rather no, but we will have this answer soon.
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This article was written by Sean Williams in English and published on 03.11.2019 on Fool.com. It has been translated so that our German readers can participate in the discussion.
The Motley Fool recommends HEXO.
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