by CALEB MCMILLAN || MAY 12, 2022
Canada’s cannabis cartel is here. And they’ve always been here – big LPs like Canopy and Aurora. They’re just being patient, playing the waiting game. It may appear as if Canada has a robust craft cannabis sector. After all, there are over 800 licensed producers in this large but thinly populated country. And consumers prefer top-quality buds to subpar discounted brands.
But like with money and banks, telecommunications, oil, uranium, or even maple syrup – there is no free market. Canada is cartel country.
To understand Canada’s cannabis cartel, we have to return to 2018. To the eve of legalization. Bill C-45, the Cannabis Act, was more hype than substance.
Legalization was a public health initiative taken to keep kids safe and profits out of the hands of organized crime. No word on liberty or ownership of your body. Nothing about the immoral and disastrous failings of the drug war. The same people who opposed cannabis all these years were now in a position to regulate its legality.
On the heels of C-45, investors rushed into the cannabis space. Some companies received billion-dollar valuations. Before cannabis was even legal, these companies were hiring thousands of employees.
Take Aurora, for example. On the eve of legalization, they had a $2-billion market cap. Aurora Cannabis began as a licensed producer under Stephen Harper’s now unconstitutional medical cannabis regulations. With recreational legalization, they were in the right place at the right time.
They sold investors with a vision of a 75,000-square-meter greenhouse called Aurora Sky. If completed, it would be the world’s largest indoor cannabis facility.
And they weren’t the only ones. Cannabis in Canada became more about investing in pipe dreams rather than the reality of Canadian cannabis. And that was precisely the point. Inflate the potential for a later payoff.
How Health Canada Regulations Created Canada’s Cannabis Cartel
Health Canada regulations helped create Canada’s cannabis cartel. Despite moving from medical to recreational, Canada’s cannabis regulations still demand LPs produce pharmaceutical cannabis. That is, irradiated cannabis is deprived of moisture and flavor. Then, throw in the cost of wasteful plastics and government taxes, and Health Canada’s strict zero-tolerance on marketing. And what you’ve got is a Soviet-style cannabis industry in Canada.
LPs have had to rely on THC percentages to distinguish themselves from the competition with no legal advertising. Aurora did this initially, but as other LPs and craft producers have improved their yields, Aurora’s share of the market (at the beginning of 2022) has dropped to 3 percent.
And that gets the crux of what’s happening in Canada, why Canada’s cannabis cartel is already here and just biding its time.
How It Happened
LPs began by inflating the potential of the cannabis market. Before legalization, it was apparent there wasn’t enough demand in the Canadian market alone. That’s why exports of BC Bud to the US were routine. There was a supply gut in the underground market.
But that didn’t stop LPs from forecasting record numbers. Canada’s top LPs, like Canopy and Aurora, indicated sales more than triple what the government was predicting. Aurora claimed it would grow a third of Canada’s cannabis. And despite the supply gut in the legacy market, Aurora kept building greenhouses.
But was it simply a mistake to overestimate the cannabis market? Was this a case of LPs getting high off their own supply?
When the first post-legalization sales earnings were made public, investors pulled out. Canadian pot stocks dropped in the spring of 2019, and Aurora reported losses of $26.6 million.
The pandemic may have led to a spike in sales, but overall the effect has been negligible. Given the industry’s original estimation of how much cannabis they expected Canadians to buy and consume
How Canada’s Cannabis Cartel is Inevitable
You can blame the excise tax if you want to know how Canada’s cannabis cartel is forming.
The government claims its moral authority over free people and deems specific actions immoral, thus subject to taxation. If this sounds like something a secular liberal democracy shouldn’t be doing, join the club.
Nevertheless, Canada’s cannabis excise taxes take $1 per gram off wholesale flower. And that’s regardless of the production costs or the retail price. So if your wholesale price is $8 per gram, and your competitor is producing cannabis at $4 per gram, he’s essentially paying a higher tax for being more productive.
Large companies like Aurora can absorb excise taxes more than smaller craft companies. And that is how the cannabis cartel is forming. They know all they have to do is sell cannabis at a gross margin loss and wait for the craft competitors to starve. That is what is happening right now.
It may appear as if small craft growers are increasing their market share. They are, but they don’t have the volume to increase their margins. The group Stand for Craft says the only thing keeping the craft industry alive are the tax breaks and “flexibility” offered by Canada Revenue Agency.
The Canadian Cannabis LP Index has lost 88 percent of its value since legalization in 2018. Very few companies are profitable, and all the large ones are cash-flow negative.
The legacy market still accounts for 35 percent of cannabis consumed in Canada.
Canada’s Cannabis Cartel: An Inevitability?
Was this all on purpose? Harper’s medical LPs were in the right place at the right time. They over predicated the market size, aggressively bought competitors, and gobbled up greenhouse companies and manufacturers.
The LPs had too much capital and applied it as quickly as possible in as many sectors as possible. They came in fast, made their money, then made out like bandits.
And the result? A struggling craft industry unlikely to survive beyond this decade. Especially if the US legalizes and cross-border trade becomes a thing.
The result will be a cannabis cartel in Canada consisting of the large LPs who were able to sell at a loss while waiting out the smaller guys.
Was this the plan from the beginning? Or just an inevitable result of too much government interference in the marketplace? Another example of government regulators causing what they claim to protect consumers from?
Cannabis in Canada: A Lost Opportunity
All the government had to do was remove cannabis from the criminal code. That’s it. Canada was already the world’s top cannabis producer. All the infrastructure and knowledge existed, especially in British Columbia, where their “BC Bud” cannabis was world-renowned for its quality and potency.
All the government needed to do was legalize this $5-billion underground market.
But Health Canada’s regulations created the conditions for a cannabis cartel. Far from “protecting” consumers, all Health Canada’s rules did was increase the costs of doing business.
To become a licensed producer, individuals had to form a company. And then, this company had to build a grow facility and wait for approval before it could begin growing. Many waited over a year.
No underground BC farmer would forgo a year of production and take on unnecessary costs, including tax forms and government applications running over 1,000 pages.
Canada’s cannabis cartel was inevitable. Even if that wasn’t the regulations’ intention, that was the consequence. Legal cannabis was accessible to only those with deep pockets.
Or, as one former senior Aurora employee put it, on conditions of anonymity, “They [Aurora] weren’t selling cannabis – they were always just selling equity.”