Too many investors in the cannabis industry are waiting for the illegal marijuana market to disappear, but it seems that this will not happen at the moment
Illegal marijuana market: the reasons why it doesn’t disappear in Canada. The illegal marijuana system is very complex and has been offering consumers high quality products for more than 40 years, says Donald MacPherson, executive director of the Canadian Drug Policy Coalition. The old consumer scheme, the trusted provider and quality marijuana at a cheaper price than the legal market offers, remains very attractive to black market consumers.
When the dry law ended, the illegal sale of alcoholic beverages also ended. This happened because the big businesses enjoyed what is called “economies of scale”. Making your alcoholic beverages is something that takes much work and, above all, the ingredients you need are quite expensive. Everybody can make his/her beer or wine at home but the expenses are higher than buying the same bottle with the tax in a liquor shop.
However, with a small investment, anyone can grow the best marijuana without moving from home and, in addition, produce large quantities.
What would happen if anyone could produce at home a bottle of the best whiskey for a few cents when it costs 25 dollars at the liquor store? That would be the bankruptcy of the alcoholic beverage industry.
For this reason it is so difficult for marijuana growers to reach a point of corporate profitability after paying salaries, licenses, greenhouses and everything that comes with the legal marijuana market.
During the first quarter of 2019, one of the main producers in Canada managed to reduce production costs to achieve a gross cost of each gram of marijuana for C $ 1.42. Even with this enormous effort, the company lost 158 million dollars.
The law and its compliance
Once marijuana has been legalized in a country, no democratic government could prohibit the cultivation of cannabis plants in your own home or garden. In addition, it is fairly easy for any marijuana grower to obtain permission to become what the law calls a registered caregiver to treat a limited number of patients. It happened in the United States after the legalization of medical marijuana. Many small growers without a criminal record became licensed caregivers.
For many years, the caregivers had the possibility of selling the surplus of their production to the supply centers. Because, although at least in theory, all products related to marijuana must have been purchased from producers who have a state license. However, the reality is that the supply centers keep the marijuana and the products derived from it, for as long as necessary, waiting for the right moment. In fact, there is a lot of marijuana that is kept for a long time. It is enough for the client to sign a document stating that they know that the marijuana they buy is probably not licensed.
For example, in the United States, it is normal to find so-called “compassion clubs,” which are practically the same as small caregivers, but with the difference that these clubs have a store and many patients.
The legal situation of the compassion clubs and the caregivers is not clear. For politicians, it is more complicated to limit the right of citizens to buy their medical marijuana than to allow illegal businesses to continue operating.
Production and consumers
Canada, as a nation, keeps ten percent of sales of marijuana and other cannabis products. But also, each state and each municipality put their own taxes. The result is that there are many potential customers who do not have the financial means to buy at those prices.
Statistics confirm that almost seventy percent of adult Americans drink alcohol and that almost 40 percent admit to drinking too much by the standards of good health. Alcohol is quite addictive, which does not happen to marijuana. And, on the other hand, most of the respondents consider that alcohol is the best way to encourage any party; what does not happen with marijuana. The habitual consumer of marijuana does not smoke by being more animated than normal and losing the shame. Abusive alcohol users do drink to have fun and lose the notion of shame and even to forget their problems.
On the contrary, in a country like Canada, only 6% admit that they consume marijuana daily, according to a recent study. If we compare that 70% with this 6%, we see that cannabis has a niche market that is much lower than alcohol. While both tobacco and alcohol are very addictive, marijuana is not. It is very easy to become a habitual consumer of tobacco or alcohol but it is not so common to become a daily consumer of marijuana. For example, the tobacco consumer, in most cases, cannot stay a whole day without smoking a cigarette. The marijuana consumer can.
On the other hand, in Canada the marijuana grown in its huge greenhouses by the two great producers of medical marijuana does not have the strength that most patients who need to take daily medication want. The Health Canada organization has very strict rules regarding its products derived from cannabis, such as oil or extractions. These companies have products whose strength is lower than what the customer finds in the illegal market.
The future in the industry
It is true that national demand remains stable although exports are still not significant for Canada. One of the largest producers has built 5.6 million square feet of greenhouses for cultivation. With such logistics, 100% of the demand for legal cannabis in Canada can be met. For its part, the second largest producer is also trying to create the necessary logistics to satisfy 100% of the current demand for legal cannabis. And, at the very least, there are at least a hundred other minor producers, but with great production capacity, who want their share of the pie.
Excess production is not a good formula for any type of business. In fact, it is the best way to fail. If these countries do not manage to export much more than they currently export, that excess of marijuana will be a disaster.