In this article, we will take a look at the status of recreational cannabis in Canada, how licensed producers are gearing up to meet demand, and how investors can capitalize on these trends.
Canada Readies LegalizationPrime Minister Justin Trudeau’s government introduced long-awaited legislation that would permit adults to possess, share, and purchase marijuana earlier this month. Under the new regulations, provinces and territories would make their own decisions about the distribution and sale of marijuana. Consumers living in provinces without a regulated retail framework would be able to purchase cannabis online from a federally-licensed producer with secure home delivery.
The government also continues to explore ways to enhance safety and keep the drug out of the hands of children. According to Health Canada, the country has one of the highest youth marijuana usage rates in the world. That’s why Trudeau appointed Bill Blair - a former Toronto police chief - to lead the legalization effort. Mr. Blair has made it clear that he doesn’t intend to rush the process and aims to create a safe and effective framework for legalization.
The legislation will be reviewed by Parliamentary committees, but the Liberals’ majority in the House of Commons means that it’s extremely likely to pass into law. According to senior government officials, Canadians should be able to legally smoke marijuana by July 1, 2018 after the bill passes through final regulatory steps and provinces have time to build a framework and develop specific regulations that work best with their jurisdictions.
Licensed Producers Ramp UpCanada’s legal cannabis industry could see sales of $4.9 billion to $8.7 billion after recreational legalization, according to Deloitte Canada. The consultancy based its findings on a survey of 5,000 Canadians through market research firm RIWI Corp. Deloitte Canada reckons that the market could be worth between $12.7 billion and $22.6 billion when including ancillary goods and services that support the industry - excluding tourism and paraphernalia.
Many analysts believe that the market will experience a shortfall in supply given that there are only about 40 licensed producers. For instance, PI Financial believes that licensed producers will need to cultivate a total of 610,000 kilograms of cannabis to fulfill domestic and export demand by 2019, but existing capacity could result in a 200,000 kilogram shortfall.
“The rigorous process of becoming a licensed producer of cannabis in Canada imposes significant barriers to entry and there will be a shortfall in supply in a legalized market in the short-term until production capacities catch up by 2020,” said Canaccord Genuity Group Inc. analysts in a November 2016 research note. This could create an enormous opportunity for existing licensed producers that enjoy an oligopoly over the short- to medium-term.
Investing in Licensed ProducersInvestors looking to capitalize on the Canadian cannabis industry may want to consider some of the 40+ licensed producers of medical cannabis under the Access to Cannabis for Medical Purposes Regulations, or ACMPR. These licensed producers enjoy exclusive rights to supplying the cannabis industry with a relatively high barrier to entry. Any future licensed producers must undergo a lengthy approval process that can take years to complete.
Those seeking the most established licensed producers may want to consider market leaders, like Canopy Growth Corp. (TSX: CGC) (OTC Pink: TWMJF) or Organigram Holdings Inc. (OTCQB: OGRMF) (OGI.V), although these companies have already achieved elevated market capitalizations that exceed C$1 billion in some cases. A better approach may be investing in a diversified basket of licensed producers to eliminate any risks stemming from a single licensed producer.
Some of the most promising up-and-coming licensed producers includE