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Michael Armstrong is an associate professor in the Goodman School of Business at Brock University.

On Thursday, Health Canada released data showing strong growth in cannabis sales in May, and it appears the legal industry is finally seeing consistent increases in retail volumes. But mushrooming inventories of unfinished dry cannabis and finished cannabis oils raise questions. And surprises such as CannTrust’s unlicensed crops and Quebec’s potential restrictions on some edible products add further volatility to the sector.

Sales of medical and recreational cannabis in May totalled 19,268 kilograms. That’s 2,192 kg above sales in April, which were 1,531 kg above the March total. That long-awaited upward trend likely gave licensed producers (LPs) about 25 per cent of the Canadian marijuana market in May.

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The sales growth apparently was countrywide, as shown by the corresponding Statistics Canada retail report of a week ago. Sales particularly increased in provinces with expanding store counts (British Columbia, Alberta, Saskatchewan and Ontario) or store hours (Quebec).

(Be skeptical, however, of the apparent 26-per-cent sales jump in Quebec. Statscan underestimated sales there by one-sixth in 2018′s fourth quarter and overestimated them by one-sixth in the following quarter. The agency has since pledged to improve its accuracy.)

Sales volumes of dry cannabis rose 7 per cent to 9,495 kg thanks to strong results from the recreational market; the legal industry captured perhaps one-sixth of that key segment.

More impressively, May’s estimated processing of net finished goods soared to 18,093 kg. That’s 93 per cent higher than in April, although only 19 per cent above March. (Processing apparently slumped in April; otherwise, May sales might’ve been stronger still.) The strong but irregular growth suggests LPs have improved their operational capacity but still lack consistency.

The surge in production of dry products pumped up finished inventories by 32 per cent at producers and 24 per cent at distributors. That should enable even stronger sales growth in June.

For oil products, sales rose 19 per cent to 9,773 litres, giving legal suppliers perhaps 46 per cent of that segment. Interestingly, May was the second month of robust recreational growth for a traditionally medical product. This might indicate increasing consumer interest in “wellness” products.

Meanwhile, the processing of finished oil grew 25 per cent to 22,994 litres. That led to the seventh straight monthly increase in finished-oil stockpiles. They’re now enough for almost nine months of sales.

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That expanding supply could trigger contracting prices – good news for consumers but less so for LPs and distributors struggling to break even.

Conversely, unfinished oil inventories fell 11 per cent. That’s curious for an industry preparing for drinks, topicals and vapable oil production this fall.

Meanwhile, already overflowing dry inventories mushroomed another 22 per cent. What proportions of those will translate into high-value dry products, versus lower-value oils or valueless scrap?

More recent events further complicate cannabis supply and demand.

One industry example is CannTrust’s apparently unlicensed production. Quantitatively, its impact is significant but not critical. The company quarantined 7,500 kg of product, Health Canada impounded 5,200 kg and distributors have set aside more.

But the qualitative implications are more concerning. Cannabis is a complex substance that neither scientists nor marketers fully understand. That makes successful product design very challenging. How should cannabis drinks taste or lotions smell? What’s the best mix of the cannabinoids tetrahydrocannabinol (THC) and cannabidiol (CBD) for each market segment? What’s a high-quality high?

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By contrast, the conformance and compliance side of cannabis production is relatively simple. (Sometimes bureaucratic, frustrating and expensive – but simple.) Health Canada sets the rules; LPs must follow them.

So, if firms such as CannTrust, Agrima and Bonify apparently can’t handle simple process conformance, how can investors believe they’ll succeed at complex designs of consumer products?

Another sudden surprise for the sector came from Quebec, where the government is considering a ban on cannabis candies and lotions. While it will understandably upset the province’s cannabis producers and consumers, the ban might, ironically, help balance national supply and demand. When those products become legal this fall, there will undoubtedly be shortages. By taking its consumers out of the picture, Quebec indirectly leaves more of those products for other provinces, such as Ontario.

A similar dynamic played out last fall and winter, when Ontario’s delayed retail rollout crippled legal cannabis sales there. That unintentionally left more of the scarce dry cannabis and oil products for other jurisdictions, such as Quebec.

Who knew that cannabis legalization would enhance Canada’s co-operative federalism?

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