The Economic Engine Powered by Cannabis

Despite the slowing of the public cannabis marketplace, the economic power of pot is still on full display.

A recent StatsCan report detailed how the cannabis industry as a whole has added over $8 billion to Canada’s Gross Domestic Product since fall 2018. The numbers from early October show that the cannabis industry added $8.259 billion to the economy from the point in time when the products became legal in October 2018, with estimates to the end of July 2020.

The figures also show that Canada’s legal cannabis industry has grown by a whopping 185 percent during the captured time period.

The numbers are particularly poignant as the country transitions into the second year of recreational legalization and Cannabis 2.0. With the upcoming milestone, a host of new products will also come online, creams and topical products, as well as cannabis edibles and beverages, and concentrates — like those used with vapes — will all be added to the list of approved products.

StatsCan also estimates that the unregulated black market holds a wide majority of customers, estimating that legal sales only make up 21 percent of the entire Canadian cannabis market.

But the post-legalization feeding frenzy has turned into more of a hunger strike. Over the past seven months, cannabis stocks have been blasted. Many of the largest names in the industry have lost at least half of their value, if not more. And that's because Canada's supply issues still have no immediate remedy.

To begin with, Health Canada – tasked with overseeing the industry and reviewing and approving cultivation, processing, and sales licenses – has been unable to contend with a backlog of applications that closed in on a thousand at the beginning of the year. While the agency's diligence can be commended, it's also ensuring that cultivators are waiting many months, if not longer than a year, for the approval to grow or sell their product. Even with changes implemented midyear to curb the number of cultivation applications the agency receives, Health Canada is unlikely to make a significant dent in its licensing application backlog anytime soon.

Another problem is that a number of provinces have been exceptionally slow to approve or review licenses for physical dispensaries, with Ontario the most front-and-center case. Despite being a province of more than 14 million people, it has a meager 24 marijuana retail storefronts to date. If consumers don't have ample avenues to purchase cannabis, evidence shows they’re going to turn to the black market rather than online government pot store delivery.

Even taxation has, arguably, played a role. Canada's 10 percent excise tax does seem reasonable relative to the tax rate being applied in select U.S. states on cannabis, but it still makes life difficult for legal producers to compete with the black market on price.

One possibility, which is the route giant producer HEXO Corp(TSX: HEXO, NYSE: HEXO, Forum) has chosen to go, is to fight fire with fire. On October 16th, HEXO announced that it would introduce a new line of ‘value cannabis’ under the Original Stash brand name in Quebec. According to the company, it can sell one ounce of Original Stash for $125.70, or $4.49 a gram, which would actually undercut much of the black marketeers’ pricing.

Cannabis legalization is sweeping over North America – now, 10 states plus Washington, D.C., have all legalized adult-use pot over the last few years. And more countries around the globe are moving towards one form of cannabis legalization or another.

Many can and should learn the lessons of Canada’s first year in business. Millions of investors already have.


FULL DISCLOSURE: HEXO Corp. is a client of Stockhouse Publishing.