Part of cannabis and investing
One day soon, you’ll be able to walk into a store and legally buy recreational pot for the very first time. Just for fun, let’s take a moment to imagine what that day will look like.
Let’s wade past the people who camped outside the Ontario Cannabis Store the night before and dodge the news crews interviewing a cool grandma type about to try her first joint. Now we’re inside, and despite the hoopla, it’s a bit of a disappointment: The store is austere and dull. There are no pot-infused gummi bears, no trays of warm cookies baked with cannabutter, no glowing high-tech vape pens—just piles of plastic envelopes containing dried cannabis flowers and oils, each emblazoned with a government health-and-safety warning.
The price is no bargain, either: a gram of weed costs about $9 ($1 of that is excise taxes), a little more than it was selling for on the black market before legalization. Yet despite the drawbacks, the sheer novelty will draw crowds to the stores for a while.
Of course, you’ll have to find one first. In Ontario, there are just 40 outlets to serve the whole province. Many smaller towns don’t have an outlet at all, and some Canadians have to drive for hours to get to one. Fear not, though—the crowds thin out considerably once the stores run out of stock, which happens within the first week or so, thanks to logistics and supply issues.
After a month or two, the distribution issues are resolved, and things settle into a groove. Most people who didn’t enjoy pot before go back to not enjoying it, and those who do like pot continue to smoke it. Many quickly give up on the government-run stores and return to their black-market suppliers, which continue to offer a broader selection at lower prices. The police do little to shut them down.
Meanwhile, the big, licensed producers—think of them as the Molsons and Labatts of pot—quickly discover they’re in danger of flooding the market: A report by the Marijuana Policy Group has estimated that legal sales in Canada will reach 900,000 kilograms in the first year, but producers will be capable of supplying almost two million kilograms a year by 2020. Cannabis isn’t hard to grow—they don’t call it weed for nothing—and it won’t be nearly as profitable as most people seem to think.
The government will make out fine, but with only about half of every dollar spent on pot going to the growers, their margins will be tight. The only thing preventing prices from crashing through the floor will be continued consolidation, government regulation and restrictions on issuing new growing permits.
Eventually, craft growers, producing strains with colourful names such as Purple Monkey Balls, Zombie Killer OG and Plunkbottom Diesel, will be allowed to join the market, and we’ll reach a kind of equilibrium. The government price will be adjusted downward, and regulations will be loosened to help the legal outlets take on the black market. The pot stores will eventually succeed, and visiting one will be about as thrilling as a trip to the beer store is now.
There will be some excitement, though: Many of those who invested in the producers will get slaughtered. As the insightful analysis in Report on Business magazine’s cannabis feature “Bull run” concludes, once the reality of the new market sets in, producers’ sky-high valuations will come crashing down to Earth, taking investors with them.
At least there will be a balm to numb the pain, and it will be reasonably priced, plentiful and perfectly legal. Pass me that spliff, will ya?