As we move forward into full legalization many are left to wonder what a gram of cannabis is really going to cost the consumer in Canada in the not too distant future. Will prices be so reasonable that the black markets will have no choice but to keel over, or will consumers have to pay a premium for the consistency of their favourite licensed brands?
Recent data pours in from the United States, where marijuana has been recreationally legal in some individual states for quite some time now. This data can paint a picture that we can use to predict the future landscape here in Ontario. However, there is more to forecasting price than just comparing Ontario to the United States, and as we take a closer look you can see just where these states went right, and where things got… ugly.
Between Colorado, Oregon, Washington or even California, marijuana flower prices (even on wholesale levels) have seen dramatic drop offs right after legalization, and some continue to drop well into the final quarter of 2018.
This continues to effect us Canadians because a lot of our financial analyst’s have been forecasting marijuana to sell at a price target of $6/ per gram at the absolute lowest by 2022. Therefore companies have been forecasting profits, and their own overall ability to even have a future in this business, off of these numbers… The truth is no one really knows if $6 will be the happy equilibrium we land at. In the US, pricing has declined 20%-30% a year in every state that legalized recreational marijuana. Price declines of this type in Canada could destroy many of the small businesses that are not fortunate enough to be producing cannabis at the same cheap economies of scale as our Top 2-3 producers. Those of which will soon be able to grow cannabis at sub $1 per gram. For more information on Aurora and Canopy and how they square off see our latest article
Another factor is the downward pressure from black markets, however with such a potentially cheap cost per gram from our major players, I don’t see it being profitable for our black market dealers – who make so little off the sale of each gram – to lower their prices to anywhere close to $6 while not sacrificing their already ‘questionable’ street quality…
The Bright Side
Now where is the rainbow in all of this you say? Luckily no bubbles shall burst, as you can feel much comfort in knowing this very important fact. Canada has only issued just over 120 cultivation licenses, therefor limiting risk of over supply. While in the legal US states, over 1,000-2,000 licenses were issued in states with less than HALF of the population of Ontario! Yes… Less than half! This data shocked us when we first uncovered the truth, as economics 101 classes around the world would echo the words, GREATER supply than demand equals FALLING prices! Meanwhile, here sits Colorado at the top of the list, with 1700 cultivation licenses for only a population of 5.6 million. Looks like someone got ahead of them selves.
Fortunately it seems our government has learnt from these mistakes. With a population of over 13 million in Ontario alone, we may even be at a shortage of dried cannabis flower, depending on how hectic sales get early on. This would help inflate the price and create an even healthier market while we continue our forecasts, but we could still expect to see prices slowly level off.
Legal producers in Canada are signing export agreements that will allow them to sell supply to other areas of the globe and therefore will still need to produce more without risking over supply themselves. Even the banking rules and regulations in Canada have made it easier for them to access capital, so the few companies who can produce will be at such a large advantage compared to US counter parts.
Regardless this will be no short of a bumpy ride, but it looks like the Canadian Government may have taken some precautions (whether intentionally or not) that could help cushion our seats.