The past two-plus decades have yielded some incredible change in the cannabis landscape. Back in 1995, not a single U.S. state allowed marijuana to be used for medicinal or recreational purposes. Fast-forward to today, 29 states have passed broad-based medical cannabis laws. Furthermore, nine also allow adults to consume marijuana. In this span, favorability toward legalizing weed has grown from 25% in 1995 to 64% as of October 2017, according to Gallup.
And it's not just the U.S. that's seen an about-face in perception toward cannabis. More than two dozen countries around the world have legalized medical cannabis for select ailments, including Mexico in June 2017. But there's arguably no legalization that stands out as more profound than Canada's Parliament giving the green light to Bill C-45, which is better known as the Cannabis Act.
Here's when Canadians can legally buy cannabis
On June 19, Canada's Senate voted overwhelmingly to approve the Cannabis Act (52 votes in favor, 29 opposed, and two abstentions), sending the bill to royal assent, which is essentially a formality of the Canadian legal system. Long story short, adult-use marijuana in Canada is going to be legal, making our neighbor to the north the first developed country in the world to pass such a law.
Throughout the long debate and amendment process in Canada's Senate, there wasn't much doubt that Parliament would ultimately pass the Cannabis Act. The writing had been on the wall given that conservatives made up a minority in the Senate and could not therefore stop this legislation from advancing. Also, the introduction of proposed excise tax rates in October 2017, and the forging of a two-year tax-sharing agreement with all provinces except Manitoba in December, appeared to seal the deal that legalization was soon to be a reality.
The big question has simply been, "When?" On Wednesday, June 20, we received that answer. According to Prime Minister Justin Trudeau, Canadians over the age of 18 (or 19, as dictated by certain provinces) will be able to legally purchase cannabis on Oct. 17, 2018.
Why such a delay? Canadian Health Minister Ginette Petitpas Taylor announced in February that even if C-45 makes its way to royal assent, it would take approximately 8 to 12 weeks after the final vote before purchasing marijuana becomes legal for adults. This is due to the need to move cannabis from grow farms into dispensaries, as well as the time needed to get each provinces' regulatory infrastructure in place. Of course, Oct. 17 is even a bit beyond the 12-week time frame that's on the high end of Taylor's estimate, likely to ensure that provinces have taken every measure necessary to be prepared when the proverbial green flag waves.
Consumers could be in for an initial sticker shock...
So, what can Canadians expect when the green rush officially sweeps across their country? Though no one knows with any certainty given that no developed country has ever legalized recreational pot before (Uruguay is the only other country in the world to have legalized adult-use cannabis), my suspicion is that per-gram prices will be pretty high for the first few months, or perhaps even the first year.
An analysis by Health Canada has estimated that initial demand could hit 1 million kilograms per year. However, initial supply by growers won't be anywhere near these levels. Though it's looked very likely that the Cannabis Act would pass since the fourth quarter of last year, it hasn't always been that way. This caused growers to hold off on major capacity expansion projects until recently. As a result, most of these projects won't be complete until sometime between this summer and the end of 2020. These staggered project completions likely means a shortage in 2018 and perhaps early 2019 that buoys, or even drives up, per-gram cannabis prices.
... but it won't last long
Over the longer term, we're liable to see a reversal of this trend, as has been the case in each and every U.S. state that's authorized the sale of recreational marijuana. Given the desire to secure as many long-term supply deals as possible, as well as significant market share, many of these Canadian growers are expanding capacity with little thought toward domestic demand. That and many of these growers expect to ship their oversupply to foreign markets where medical weed is legal.
To be clear, the supply outlook for the Canadian marijuana industry has been incredibly fluid and difficult to predict. No matter how many times I've provided a glimpse of peak production estimates for the top seven or eight growers, the list becomes obsolete within a matter of days due to partnerships, acquisitions, and/or organic build announcements.
As things stand now, the top eight Canadian cannabis growers (or seven, if the MedReleaf acquisition goes through) are expected to produce in the neighborhood of 1.8 million kilograms of marijuana annually by 2020. Of these growers, the big three could generate more than 1.3 million kilograms per year, collectively. Aurora Cannabis (NYSE:ACB), which is the grower acquiring MedReleaf in a $2.5 billion, all-share deal, should produce 570,000 kilograms a year. Meanwhile, Canopy Growth Corporation and Aphria have the potential to deliver around 500,000 and 255,000 kilograms of cannabis, respectively.
These big three growers are liable to produce more than the domestic Canadian market will demand by 2020. But that in no way is slowing the desire of Aurora Cannabis and its peers to make deals. Since the beginning of the year, Aurora Cannabis has partnered with Alfred Pederson & Son in Denmark to retrofit a 1.2-million-square-foot facility to grow cannabis, announced its intent to build a 1-million-square-foot facility in Medicine Hat, Alberta, acquired CanniMed Therapeutics, and announced the largest pot deal in history -- the noted $2.5 billion deal to buy Ontario-based MedReleaf.
With the very real possibility of more than 1 million kilograms of oversupply by 2020, it's going to depend on how successful growers are at moving oversupply to foreign markets where medical pot is legal. If fully successful, per-gram cannabis prices may not fall much as the product becomes commoditized. However, if there are any hiccups in growers' efforts to reduce their oversupply, marijuana prices on a per-gram basis could plunge. That's good news for consumers, but not such great news for investors in the green rush.
Only time will tell what's next for the Canadian pot industry.