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Canadian cannabis growers dropped their wholesale prices in tandem with falling per-gram production costs, but their large inventories show consumer demand for legal product is not keeping pace with expanding harvest sizes, calculations by New Leaf Data Services, LLC show, as the number of licensed retail stores across the country remains low and the illicit market dominates.

Data from four major licensed producers (LPs) show gains in cultivation efficiencies resulting in lower production costs were offset by sharp declines in their selling prices of cannabis. These subsequent price drops by Canada’s biggest licensed pot producers to wholesalers signal efforts to increase their market share in an industry that sees competition between LPs as well as illegal growers.

“The cost of total production dropped quarter-on-quarter by approximately 30 per cent, but those savings seemed to be pushed straight through the customer. Cannabis Benchmarks estimate that average net selling price of dry cannabis dropped by 28 per cent over the same time frame,” said Calgary-based Het Shah, managing director for New Leaf Data, which owns Cannabis Benchmarks.

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“The cannabis market fundamentals are catching up to the market, with cannabis consumption not keeping pace with the accelerated growth in supply.”

Though legal recreational cannabis was in short supply when it became legal in Canada in October, 2018, LPs have since ramped-up production, and prices have dropped as a result. Last week in their quarterly financial reports, some of the country’s biggest LPs reported a surge in production that was unmatched by sales volumes.

“From Tilray, Cronos, Aurora and Canopy reporting last week, we noted a couple of glaring issues. Most alarming though was [the] jump in total kilograms produced quarter-on-quarter, while sales volumes did not increase nearly at the same pace,” Mr. Shah said.

Meanwhile, the Canada Cannabis Spot Index (including excise) dropped to $6.47 per gram last week, down 4.3 per cent from the week prior, according to data compiled by New Leaf.

While some industry analysts consider Canada’s recreational cannabis availability to have reached an oversupply, others point to a lack of the specific products that consumers are looking for and continue to buy on the black market.

Illicit cannabis purchases still make up the bulk of Canadian sales and remain priced well below products sold in licensed retail stores.

“Both Aurora and Canopy reported producing over 40,000 kg over the three-month period. Each company currently produces enough each month to fulfill all of Canada’s current legal recreational cannabis demand – a staggering fact when Health Canada has licensed over 120 producers nationwide,” a Nov. 15 Cannabis Benchmarks report stated.

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“Both Aurora and Canopy sold approximately 30 per cent of their harvests, meaning that the rest went into inventory. As inventory levels build and age, the inventory degrades and leads to LPs writing off bad inventory.”

Newly legalized concentrated cannabis products, including edibles and vaporizers that use cannabinoids extracted from dried flower, are expected to be on store shelves in January 2020. LPs and manufacturers are preparing for many product launches in these new product categories that are expected to increase gross margins.

Meanwhile in the United States, Cannabis Benchmarks U.S. Spot Index rose to US$3.23 per gram last week, up 0.8 per cent from the week prior.

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