More Than 500 Tons Destroyed: Canadian LPs In ‘Blissfully Ignorant Denial’ About Oversupply
When MJ Biz Daily’s Matt Lamers broke the news last week that Canadian cannabis producers had destroyed at least half a million kilograms of product between 2018 and 2020—more than they sold on the recreational market during that time—the numbers were a shock to many, but the news itself, less so.
The numbers are indeed shocking: the biggest is the 447,118 kilograms of unpackaged dry flower destroyed between 2018 and 2020—but that doesn’t even include the weight of 6 million total packages of dried cannabis (3,783,397), extracts (1,500,396), edibles (714,491), and topicals (943) between 2019 and 2020.
Even more alarming: the percentage of production being destroyed is trending upward. Between October and December 2018, producers destroyed 10 percent of their unpackaged dried cannabis. A year later, that number had risen to 15 percent, and in 2020, producers destroyed nearly 20 percent of their overall production.
These figures are sobering, but more than unsurprising, they’re what many industry players and analysts have been warning against for years.
‘Funded Capacity’ to Blame for Oversupply Issues, Destroyed Cannabis
Breeder Ryan Lee of Chimera Genetics is among those who have been warning about overproduction for some time. He recalls the heady days of licensed producers touting “funded capacity”—the amount of potential growing capacity they had received funding to build.
“We’ve been in blissfully ignorant denial, but we all knew even in 2015,” Lee says, recalling how industry analysts the Cannalysts “were talking all the time back then about how the funded capacity we had hit [nationally] well exceeded demand—in 2015!”
The Cannalyst Andrew Udell (who works under the pseudonym Mollytime) doesn’t sound vindicated that his predictions have come to pass: he sounds sad, and he expects things to get worse.
“Even if we assumed we had an instantaneous flip from all-illicit [sales] to [all legal sales], there may have been a point of equilibrium—in December of 2018 or January of 2019,” he says. “Since then, it’s really just a winnowing from here. Two things will happen: either there’ll be continuous improvement from organizations and they’ll be able to achieve that desired quality at a price, or they’ll be in attrition. A CEO said to me, ‘We just need a lot of these bastards to go bankrupt,’ which is a coarse way of saying something that’s probably not too far from the truth.”
Lee speculates many publicly held corporations likely even realized before they put shovels in the ground that their enormous planned production facilities—such as Aurora’s shuttered mega-greenhouse Aurora Sun in Medicine Hat—represented far more production space than they needed.
“It’s inevitable when you produce vastly more than the market can hold, you’re going to have excess inventory,” Lee says. That would even be true if the product was the highest possible quality. “Even if we imagine every producer was producing quadruple-A quality flower, would that many more people really have bought cannabis? Could it have changed the numbers that much?”
Has the Market Hit a Saturation Point?
Lee worries too many growers have a pre-legalization mindset that if they grow weed, there will always be someone to buy it, with price being the only fluctuating factor. Because Canada’s approach to legalization seemed almost to encourage overproduction, Lee says the Canadian market has “hit a complete saturation point.”
“A lot of LPs are chasing a dream,” Lee says. “They’re not listening to the market data they need to be. If your inventory is piling up on the shelves, why are you still spending money producing? It doesn’t make sense. You’d think a company trying to stay lean would scale their production to match their output—not overproduce hoping that something is going to change and the weed will magically sell. That’s just making things worse!”
For Udell, the failures of quality are also a major consideration in accounting for destroyed inventory. Acknowledging the relative scarcity of retail data on these subjects, he cites, for example, the widespread desirability of flower with greater than 20 percent THC.
“Anything north of 20 percent is what’s moving on the wholesale markets,” Udell says. “It’s a trope that’s been repeated a lot, but it comes down to aroma and potency. When it comes to the consumer, there’s a reason Lucky Lager controls so much of the beer business: it’s not that great, and not a premium brand, but people want value.”
This is far from the only measure of quality, but THC potency is a yardstick that serves as a rough measure of consumer desirability for the moment. Udell warns that far too many licensed cannabis facilities are incapable of producing flower at 20 percent THC or higher.
“That’s a function of the facility, but also a function of genetics,” Udell says. “Getting something consistently north of 20 percent, you need the right genetics, and that pool is very thin right now. Most of these LPs are like ducks: calm on the surface, and below they’re paddling like hell. They haven’t had much appetite for breeding programs because R&D is very expensive. Over the next ten years, I suspect as the gene pool opens up, we’ll start to see something more robust.”
Another measure of quality is freshness, which Lee says many LPs botched by adopting a first-in-first-out approach to inventory. “They were always trying to sell their oldest weed,” he says, “and in the process [degrading] their fresh weed, putting it in line behind the old stuff. Really, they need to just take the hit and sell the fresh stuff.”
Microcultivators Could Be Hit Hardest by Oversupply Issues
These issues might normally favour micro growers, with more attention to their plants and genetics, if there weren’t so many of them. Roughly 310 microcultivators have been licensed to date, and Udell points out, “not only do we have oversupply, but we also have little fellows fighting for a finite amount of shelf space. It’s simply down to a war of attrition. It’s going to take time and there’s going to be more losers than winners in the long-term. I wish everybody out there the best of luck, because an oversupply situation is not good for anybody.”
Lee concurs, saying the facility-closures and bankruptcies that have rocked the world of larger LPs will be coming shortly for smaller players.
“A lot of micros figured they’d always be able to sell their 110 kilos, but there are all these barriers to entry with [provincial wholesalers]. It’s really not just a matter of having top-quality flower: it has to come in at the right price point, and it might well be the price-point offered by some of these [provincial wholesalers] is below the production price for some of these micros. Unfortunately, I think it’s really denial that’s keeping people in the game—that hope the business will turn around.”
To make matters worse, Lee notes, Health Canada continues to license new producers every week.
“And we’re still watching new licensees stumbling into the gate, new entrants entering a bloodbath in the coliseum.”
The question for Lee remains how much LPs will be willing to cut back on production, especially when it’s not making them any money.
“On the whole, we’re still going down that path toward waste,” he says. “Individual companies are starting to realize there’s no point in spending more money to produce flowers we can’t sell, so let’s dial facilities back.”
That’s a good idea in theory, but it’s one the Cannalysts and many other industry watchers have been suggesting for years. It will remain up to companies themselves to decide whether it’s an idea whose time has come.