Canada’s Cannabis Cartel – Cannabis News, Lifestyle

Canada’s cannabis cartel is here. And they’ve always been there – big LPs like Canopy and Aurora. You are just patient and playing the waiting game. It might appear that Canada has a robust craft cannabis sector. After all, there are over 800 licensed producers in this large but sparsely populated country. And consumers prefer top quality bud over subpar brands.

But like money and banking, telecoms, oil, uranium or even maple syrup – there is no such thing as a free market. Canada is a cartel country.

legalization hype

To understand Canada’s cannabis cartel, we need to go back to 2018. On the eve of legalization. Bill C-45, the Cannabis Act, was more hype than substance.

Legalization was a public health initiative taken to protect children and keep profits from organized crime. Not a word about freedom or ownership of your body. Nothing about the immoral and catastrophic blunders of the drug war. The same people who were against cannabis all these years were now able to regulate its legality.

Investors rushed into the cannabis space on C-45’s heels. Some companies received billions in valuations. Before cannabis was even legal, these companies hired thousands of people.

Take Aurora for example. On the eve of legalization, they had a market cap of $2 billion. Aurora Cannabis began as a licensed producer under Stephen Harper’s now-unconstitutional Medical Cannabis Rules. With recreational legalization, they were in the right place at the right time.

They sold investors with a vision of a 75,000-square-foot greenhouse called Aurora Sky. When completed, it would be the world’s largest indoor cannabis facility.

And they weren’t the only ones. Cannabis in Canada was more about investing in pipe dreams than the reality of Canadian cannabis. And that was the point. Increase the potential for a later payout.

How Health Canada regulations created Canada’s cannabis cartel

Health Canada regulations helped create the Canadian cannabis cartel. Despite the shift from medicinal to recreational use, Canadian cannabis regulations still require LPs to produce pharmaceutical cannabis. That is, irradiated cannabis that has been stripped of moisture and flavor. Add to that the cost of wasteful plastics and government taxes, and Health Canada’s strict zero-tolerance on marketing. And what you have is a Soviet style cannabis industry in Canada.

With no legal advertising, LPs have had to rely on THC percentages to differentiate themselves from the competition. Aurora did so initially, but as other LPs and craft producers improved their yields, Aurora’s market share (in early 2022) has fallen to 3 percent.

And that’s at the heart of what’s happening in Canada, why Canada’s cannabis cartel is already here, just biding its time.

How it happened

LPs began inflating the potential of the cannabis market. Before legalization, it was obvious that demand in the Canadian market alone was not enough. Because of this, exports of BC Bud to the US were routine. There was a supply gap in the underground market.

But that didn’t stop LPs from forecasting record numbers. Canada’s top LPs like Canopy and Aurora said sales were more than three times what the government had forecast. Aurora claimed it grew a third of Canada’s cannabis. And despite the gap in supply in the legacy market, Aurora continued to build greenhouses.

But was it simply a mistake to overestimate the cannabis market? Was this a case of LPs getting high on their own stash?

When the first sales proceeds were published after legalization, investors withdrew. Canadian pot stocks fell in the spring of 2019, and Aurora reported $26.6 million in losses.

The pandemic may have resulted in a jump in sales, but overall the effect was negligible. Given the industry’s original estimate of how much cannabis Canadians would buy and consume.

How Canada’s cannabis cartel is inevitable

You can blame the excise tax on how Canada’s cannabis cartel formed.

The government claims its moral authority over free people and considers certain actions to be immoral and therefore subject to taxation. If that sounds like something a secular liberal democracy shouldn’t do, join the club.

Nonetheless, Canada’s cannabis excise taxes remove $1 per gram from wholesale flowers. And that regardless of the production costs or the sales price. So if your wholesale price is $8 per gram and your competitor produces cannabis at $4 per gram, they are essentially paying a higher tax because they are more productive.

Big companies like Aurora can absorb excise taxes more than smaller craft shops. And so the cannabis cartel is born. They know they can only sell cannabis at a gross margin loss and wait for their craft competitors to starve. That’s exactly what’s happening.

It may seem like 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 is the tax breaks and “flexibility” offered by the 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 of the big ones have negative cash flow.

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 have overestimated market size, aggressively bought out competitors, and gobbled up greenhouse companies and manufacturers.

The LPs had too much capital and used it as quickly as possible in as many industries as possible. They rushed in, made their money, and then made out like bandits.

And the result? A struggling craft industry that is 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 made up of the big LPs that have been able to sell at a loss while waiting for the smaller guys.

Was that the plan from the start? Or just an inevitable result of too much government intervention in the market? Another example of government regulators causing what they claim to protect consumers from?

Cannabis in Canada: A Missed Opportunity

All the government had to do was remove cannabis from the penal code. That’s it. Canada was already the world’s largest cannabis producer. All the infrastructure and knowledge was there, especially in British Columbia where their “BC Bud” cannabis was world famous for its quality and potency.

All the government had to do was legalize this $5 billion underground market.

But Health Canada regulations set the stage for a cannabis cartel. Far from “protecting” consumers, Health Canada’s regulations merely increased the cost of doing business.

In order 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 they could start growing. Many have waited over a year.

No BC underground farmer would go without a year of production and incur unnecessary expenses, including tax forms and government applications over 1,000 pages long.

Canada’s cannabis cartel was inevitable. Even if that wasn’t the intention of the regulations, that was the consequence. Legal cannabis was only accessible to those with deep pockets.

Or, as a former senior Aurora employee put it on conditions of anonymity, “You [Aurora] didn’t sell cannabis – they only ever sold stocks.”