Why Canada’s Cannabis Bubble Burst

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Why Canada’s Cannabis Bubble Burst

More than a year ago, Canada made recreational cannabis legal. So why are people still buying it on the black market?

When Canada legalised marijuana just over a year ago, it seemed like anyone who was anyone wanted to break into the market.

The media nicknamed the frenzy Canada’s “green rush”, as investors like Snoop Dogg and the former head of Toronto’s police force clamoured to get a slice of the multi-billion-dollar-pie.

But like the gold rush of the 1850s, the lustre would soon fade, leaving prospectors in the dust.

“It didn’t take a rocket scientist to recognise that these stocks were trading on fantasy and not on fundamentals,” says Jonathan Rubin, CEO of New Leaf Data Services.

With decades of experience in the energy commodities markets, Mr Rubin saw the legalisation of cannabis in states like Colorado and California in the US (and later Canada) as a “once in a lifetime” opportunity to get in on the ground floor of a brand-new commodity.

“I had this epiphany that this is going to be a commodity just like any other commodity,” he told the BBC.

What that meant was that like the price of wheat or pork, the wholesale price of cannabis was going to fluctuate with the market. So instead of investing in the cannabis itself, Mr Rubin started New Leaf to track the price of cannabis in states where it was legal. Investors and others in the industry pay for access to this data.

This business model has given Mr Rubin an interesting vantage point of how the market has unfolded.

In Canada, he says, the rollout has been disappointing.

“They haven’t had the growth in sales and earnings that they’ve envisioned,” he said. “I don’t want to say it’s a failure, but there’s definitely frustrations.”

Wholesale prices have dropped by about 17% since New Leaf started tracking data, which has kept profit margins tight for producers.

Sales have also slowed, according to Statistics Canada.

It’s led to a rollercoaster ride for the stock prices of publicly traded cannabis companies.

In May 2018, Canadian producer Canopy Growth made headlines when it became the first marijuana company to list on the New York Stock Exchange.

Six months later, the stock price about doubled when it hit a high of $52.03 (£39.77) a share.

Now, the stock price is back to where it was, and their competitors have suffered similarly drastic losses.

Growing pains

There were early signs of trouble.

When cannabis became legal on 17 October 2018, there wasn’t enough supply to meet the demand.

Long lines and backlogs of online orders plagued consumers. Producers weren’t sure what strains would be most popular where, and kinks in the distribution chain were still being ironed out.

“Trying to understand what strains we should grow, in what formats and what quantities – we did a great job but we didn’t nail everything,” says Canopy president Rade Kovacevic.

A patchwork of provincial laws have also made it harder to get products to consumers. While it’s easy to buy cannabis in some places, in others brick-and-mortar shops are few and far between.

This is especially true in Ontario, Canada’s most populous province. Red tape and a cap on the number of cannabis retail outlets have made rollout slow. Retail licenses were awarded by lottery, and the province held the number of licenses at 24, to serve a population of 14.5m.

Where there was once a shortage, now producers have too much product, in part because of the lack of retail.

In September, Canadians bought 11,707 kilograms (25,809 lbs) of dried cannabis flower in Canada. But producers had a total of about 165,000 kilograms of finished and unfinished products ready for sale, or more than enough to meet the demand for an entire year.

Mr Kovacevic blames the lack of retail in Ontario on a lot of his company’s woes.

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“I think that lack of continuity of points of purchase across the country slowed the transition from the black market to the legal market,” he said. “It was a challenge.”

Black market still thriving

When the government announced its decision to legalise cannabis, one of its principal reasons was to reduce the black market.

https://www.bbc.com

But Statistics Canada estimates that about 75% of cannabis users still use illegal cannabis.

“There’s a very strong resistance to the legal stores in the sense that a) it’s more expensive and b) there aren’t enough of them. They’re not close to them, so they just deal with their local guy like they always have,” says Robin Ellis, co-founder of Toronto retailer The Friendly Stranger and a long-time activist for cannabis legalisation.

Why Canada’s Cannabis Bubble Burst

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