High prices and low quality are the hallmarks of price fixing, but the shortcomings of today's Canadian cannabis market are not indicative of a conspiracy.

I've seen some people commenting that the cannabis industry is creating an artificial shortage in order to inflate prices. I was unable to find an article concisely refuting this assertion, so I thought I would have a go at writing one myself.

With accusations of nefarious, deliberate supply constraints, the Health Canada report on Cannabis Supply and Demand is often cited as evidence. This report is a relatively new phenomenon, and there are some complexities to it that, I believe, have led to it being misunderstood.

There are a few reasons that make it unlikely that License Holders are price fixing.

Firstly, brand impact will never be greater. All License Holders want to be the big name in cannabis, and the way to get there is to sell your product. If people can never find your product because you're hoarding it all to inflate prices, they will never recognise your brand.

Secondly, the product will never be fresher. Nobody wants a jar of bone-dry shake. The sooner you can deliver your product, the better your customers' experience will be, and the more your brand will be associated with quality product.

Finally, and most importantly, the prices of legal cannabis will never be higher than the current prices, so it makes sense to sell as much of it now as possible. The market is new and finding its legs, and once the market stabilises towards an equilibrium of supply and demand, cannabis will come down in price. License Holders shouldn't want the price to be any higher, as it would then be more difficult to convert consumers who are used to buying black- or grey-market cannabis.

The CTLS Report

The Cannabis Licensing and Tracking System was introduced by Health Canada with the Cannabis Regulations, in October 2018. Health Canada produce a report, often cited as evidence of price fixing, on Cannabis Supply and Demand, which they update every month. I'll try to give some insight on what it really means, below.

Unfinished

Let's look at the unfinished dried cannabis. This is a snapshot of the last day of the month, when License Holders report any dried cannabis that is not yet "packaged, labelled, and ready for sale".

The amount of unfinished dried inventory held by License Holders (so far) has been:

  • October 2018 - 95,975 kg
  • November 2018 - 98,640 kg
  • December 2018 - 110,729 kg
  • January 2019 - 114,628 kg

Some of the product is in the middle of its journey into the joints of consumers; which means packaging and labelling it. With all the Child-Resistant packaging, excessive labelling, and excise stamping, converting this product to "finished" is a labour intensive task. Naturally, you would expect to find a bottleneck here, and thus a large amount of product waiting to be packaged.

Some of this product will be delivered to consumers in a different form. Perhaps it is dried cannabis in a form that is not aesthetically pleasing. We have all seen photos of shake that some consumers have been unfortunate enough to exchange their hard-earned cash for, thinking that they are buying AAAA bud. There is a lot more where that came from, and responsible License Holders don't sell it as dry bud, but hold it to be processed. Currently, that means processing into oils, or pre-rolls. In October of 2019, we expect legislation that will allow the sale of vapes, edibles, and beverages. Producers want to get ahead in these segments, and to do so they need to have some cannabis that they can process into these form factors. Since we don't currently have any finalised legislation for edibles, vapes, concentrates, and beverages, the producers can't start processing this product yet. It would be far too great a risk to process it until you know how you will be allowed to process it.

Before product can be "packaged, labelled, and ready for sale" the License Holder must:

a) know what the THC and CBD percentages of that product are

b) have proof that it doesn't contain banned pesticides

c) have proof that it doesn't contain dangerous mould, heavy metals (no not that kind), or other contaminants

All of this means lab tests, necessitating the product will stay in this stage of production, at least in terms of this report, for several weeks.

Finally, the report doesn't account for License Holders who haven't yet received their License for Sale. Getting this license takes a long time, potentially up to a year with the current workload for Health Canada inspectors. A producer in this situation can't sell their product to consumers, even if they wanted to!

Finished

So now the finished product, which means product that is "packaged, labelled, and ready for sale". The amount of inventory held by License Holders at the end of the month has been:

  • October 2018 - 11,975 kg
  • November 2018 - 10,228 kg
  • December 2018- 8,739 kg
  • January 2019 - 10,174 kg

When you look at the sales data, you'll see that the sales for each month are around 75-80% of the finished product held by License Holders at the end of the previous month. Since the numbers on the report represent the inventory at the end of the month, I would suggest that most of this inventory is in the hands of the provincial distributors and retailers by the next month.

What are they doing with the rest of it?

Most of today's License Holders had their license transferred from the ACMPR (Access to Cannabis for Medical Purposes Regulations). This means they were providing medical cannabis to patients, and probably still are. These License Holders sell packaged product directly to patients, and they have a responsibility to make sure that their patients can access the medicine they need. Different strains have different medical uses, due to their differing cannabinoid profiles and the entourage effect of terpenes. When a patient finds a strain that works for them, they need consistent access to that strain. Some License Holders only grow one strain at a time, so it can be many months before they're able to replenish inventory of all of their strains. License Holders, therefore, should hold enough stock of a strain to be able to supply medicine to their patients until that point, which can mean a lot of medical inventory, even with low medical sales (compared to rec).

As I mentioned earlier, the report also doesn't account for License Holders who haven't yet received their License for Sale. To get a License for Sale you need to prove that you can produce finished cannabis (packaged, labelled, and ready for sale) safely and consistently. All the License Holders who are applying to be allowed to sell product should have finished product on hand.