At this time last year, marijuana was viewed as one of the greatest growth stories of our generation. Based on various Wall Street estimates, the legal pot industry could see sales grow from $10.9 billion in 2018 to between $50 billion and $200 billion worldwide a decade from now. These aggressive growth estimates are what fueled investor interest in pot stocks, pushing many to all-time highs in either October 2018 or the first quarter of 2019.

However, the ramp up of marijuana sales hasn't exactly gone according to plan in Canada, and retail sales data released by Statistics Canada confirms this.

A dried cannabis bud and small vial of cannabinoid-rich liquid next to a small Canadian flag.

Image source: Getty Images.

Canadian pot sales hit another all-time high in August

On Tuesday, Oct. 22, Statistics Canada announced retail sales data for all of the country's industries, including cannabis stores, for the month of August. Here's a rundown of licensed cannabis store sales since recreational marijuana sales began on Oct. 17, 2018 through the end of August. Note that Statistics Canada reports in Canadian dollars (CA$), so I've included the U.S. dollar equivalency in parenthesis.

  • October: CA$53.68 million ($41 million)
  • November: CA$53.73 million ($41.03 million)
  • December: CA$57.34 million ($43.79 million)
  • January: CA$54.88 million ($41.91 million)
  • February: CA$51.66 million ($39.45 million)
  • March: CA$60.94 million ($46.54 million)
  • April: CA$74.58 million ($56.96 million)
  • May: CA$85.81 million ($65.53 million)
  • June: CA$91.46 million ($69.85 million)
  • July: CA$107.36 million ($81.99 million)
  • August: CA$127.38 million ($97.28 million)

On the bright side, the sales data shows that marijuana revenue hit an all-time high in August, marking the sixth consecutive month of record sales. Over the 10.5 months since legalizing adult-use weed sales, Canada has totaled CA$818.82 million in licensed-store revenue, or $625.3 million. 

While this probably sounds like a healthy amount of sales, given that there's no precedent to a legalized cannabis industry in any industrialized country in the world, it's turned out to be a major disappointment.

A judge's gavel next to a handful of dried cannabis buds.

Image source: Getty Images.

Regulatory issues weigh on Canada's marijuana supply

You might be wondering how it's possible for such a hyped industry to be failing so miserably. The answer has to do with an abundance of procedural and regulatory issues throughout the country.

For example, Health Canada began 2019 with a cultivation, processing, and sales license application backlog totaling more than 800. Reviewing these applications often takes weeks or months, meaning this backlog has pushed the typical review process to many months, if not longer than a year. Aphria, for instance, has been waiting well over a year to receive an answer on its cultivation-license application for its flagship Aphria Diamond facility, which'll be capable of 140,000 kilos of annual output when operating at full capacity.

To tackle this backlog, Health Canada announced cultivation-licensing application changes in May. These changes require growers to have completed their cultivation facility prior to submitting their licensing application. While this should remove some underfunded marijuana growers from the licensing queue, it's still going to take quite some time for the regulatory agency to work through its large backlog of applications.

The other problem here is that certain Canadian provinces haven't been giving cannabis stocks the opportunity to succeed. The slow approval and/or licensing process for physical dispensaries continues to drive consumers to the black market. In Ontario, a province of 14.5 million people, there are just 24 open dispensaries at the moment. That's one licensed dispensary per 604,200 adults. By comparison, the state of Oregon has a dispensary open for every roughly 5,600 residents. Though there's no magic number of how many dispensaries is the right number, it's clearly more than 24 in Ontario.

Both of these supply issues are fixable. Unfortunately, it's going to be some time before supply really begins to ramp up in dispensaries.

Potted cannabis plants growing under special lighting in an indoor grow room.

Image source: Getty Images.

Here's a potentially bigger story

However, the bigger story here isn't that Canada reported its sixth straight month of record marijuana sales -- it's that the first domino fell on the cultivation front.

Last week, on Oct. 18, The Green Organic Dutchman (OTC:TGODF) announced an updated growth strategy that involved significantly trimming its costs and pushing toward profitability. But the means by which Green Organic Dutchman plans to trim its costs is by halting capacity expansion until such time as Canadian weed market conditions improve.

Keep in mind that, earlier this year, Green Organic Dutchman increased its peak output forecast to 219,000 kilos annually, when fully operational. Now, the company is forecasting that it'll run with 12,000 kilos of annual output from its Ancaster grow farm and just four grow rooms at its flagship Valleyfield property. These four grow rooms should account for about 10,000 kilos of full-year output. In other words, in a year where Green Organic Dutchman was expected to hit its stride, the company is now focused on producing just 20,000 kilos to 22,000 kilos of annual output.

Although Green Organic Dutchman noted in its update that capacity expansion could be ramped up quickly if market conditions improve, it's highly likely that this isn't a one-off instance.

Multiple clear jars packed with dried cannabis buds.

Image source: Getty Images.

The biggest concern at the moment would be for top-tier growers that have aggressively expanded production -- namely, marijuana companies like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). Canopy has 10 grow farms likely capable of more than 500,000 kilos of annual output, whereas Aurora has 15 cultivation facilities that could approach 700,000 kilos in annual production. If there is a slight silver lining for Aurora, it's that 132,000 kilos of peak output is tied to the European market. Still, that leaves both major growers with around 500,000 kilos that they may struggle to find shelf space for.

Compounding these concerns is the fact that foreign markets aren't yet ready to accept substantial exports from growers like Canopy or Aurora. Many are still formulating their medical marijuana regulations, and the expectation all along has been that Canadian pot stocks wouldn't cater to overseas markets until domestic demand has been satisfied. Based on the regulatory and procedural issues noted, this could be numerous quarters or perhaps even years down the line.

There's a very real risk that Canadian marijuana-growing capacity could be idled as supply problems persist, which would negate these modest, incremental monthly gains in licensed cannabis store sales.