Moneybox

Canada Is Legalizing Weed This Week. But Will There Be Enough Bud to Meet Demand?

A woman inhales marijuana during the annual 4/20 rally on Parliament Hill in Ottawa, Ontario on April 20, 2018.
There might not be enough for this customer.
Lars Hagberg/Getty Images

Recreational marijuana sales are set to begin in Canada on Wednesday, which will officially make our northern neighbor the world’s second country after Uruguay to formally legalize the drug for non-medical use. But with the historic moment at hand, many are wondering: Will there be enough weed to go around?

It’s not just anxious stoners who are concerned. Cannabis producers and market analysts have have been warning for months about the possibility of shortages once legal sales get up and rolling. Growers are still scaling up their crops and production facilities, and likely aren’t ready to harvest the estimated 655,000 to 926,000 kilograms of dank, sticky green Canadians are expected to consume in the coming year. Researchers from the University of Waterloo and the C.D. Howe Institute, for instance, concluded that legal supply will meet just 30 to 60 percent of total demand early on, while the investment firm Mackie Research Capital has suggested that production won’t outstrip demand until 2020. As the CEO of cannabis producer Aphria put it on an earnings call, “Unless someone’s out there hiding 100,000 kilograms, we’re looking at a real shortfall.”

The government has mostly waved off these worries. “Based on current inventory levels and growth in production capacity, the industry is well positioned to supply product as consumers transition to the legal market,” a health ministry spokesman told Bloomberg. But it’s not just the sheer tonnage of marijuana that could be a problem; in many parts of Canada, there simply won’t be anywhere to shop for pot, at least at first. In Ontario, the country’s largest province, there will zero retail stores open as of this week. In British Columbia, there will be just one. (Anybody who has ever spent time in Vancouver will understand the absurdity of this situation; imagine if there were only one store that could legally sell bagels in New York, and you get the idea). Canadians will be able to purchase pot through government-run online stores—assuming they don’t crash—but for many customers, browsing a local dispensary won’t be an option until more storefronts can get permits to open. Those who do want a physical retail experience may need to get ready for a long line.

Canada’s new legal weed merchants could of course try to raise their prices to keep inventories from running dry. But there are some reasons that might not be an option. Retailers still need to compete with the black market, where pot is expected to keep selling for cheap, lest customers keep buying from their local dealers. And in some provinces, cannabis will only be sold through state-run shops, the same way as liquor; as Shea Coulson, a Dentons partner who specializes in marijuana law, told me, the standard pricing system those government-operated stores use won’t let them charge more for especially popular products, even to keep them from selling out. Other provinces will license private retailers, who will be permitted to mark up their marijuana however much they like. But those stores will still have to compete with whatever price the provincial government decides to sell weed for online.

Instead of expensive weed, it’s more likely Canadians could encounter bare shelves—at least in some parts of the country. “You could see product shortages differ province by province,” Coulson told me, depending on how they handle retail permitting and regulation.

If customers can’t find the product they want in stores, chances are they’re going to keep buying the illegal stuff. As Professor Anindya Sen, who co-authored the C.D. Howe study projecting shortages, pointed out, it is trivially easy for Canadians to find black market weed today. “It’s not like Breaking Bad. You don’t have to go in your alleyway. You have apps like Weed maps. It’s like TripAdviser,” he told me, bluntly. The continued use of the black market, of course, would defeat the entire point of legalization, which is meant to put it out of business. It would mean less tax revenue for the government, too.

Medical marijuana patients have also expressed concerns that shortages could make it harder for them to obtain the drug. Some patients have reported already having trouble filling their prescriptions in the leadup to legalization, and have said they’re worried producers are diverting their supplies to the recreational market. But those concerns are mostly anecdotal at this point, and the head of the Cannabis Council of Canada has denied that the issues are widespread.

The good news for Canada is that marijuana shortages seem to be reasonably common once states lift prohibition—and they tend to be short-lived. Nevada Gov. Brian Sandoval had to take emergency measures to speed up licensing and keep dispensaries properly stocked last year after the state legalized recreational use. Thanks to regulatory fumbles, the state of Washington was left with a tiny number of dispensaries when the legal market kicked off in 2014, and store-owners complained that they couldn’t get their hands on enough product; an estimate by analysts at CIBC suggested that legal weed only captured one-fifth as much of the market as illegal sales had previously done. But since then, the market has grown rapidly, and now producers are worrying about an oversupply of cannabis that’s caused prices to crash.

Something similar could easily happen in Canada, once growers finish building out their capacity. The Ottawa Citizen, for instance, reported in August that, based on their corporate statements, the 10 largest cannabis producers in the country were planning to churn out 1.8 million kilograms worth of the plant by around 2020, far more than the domestic market could ever hope to inhale or bake into brownies. There might be shortages now. But they probably won’t be chronic.