Licensed cannabis producers destroyed a record amount of unsold product last year, underscoring the industry’s problem with producing more than it can sell.
Data provided by Health Canada shows that over 425 million grams of unpackaged dried cannabis was destroyed between January and December 2021. This represents 26% of the total dried cannabis produced.
The federal agency, which regulates cannabis production, also found that more than seven million units of packaged cannabis, including extracts, edibles, topicals and dried cannabis, were destroyed during the same period.
“This threatens the survival of a number of cannabis companies in this country. There’s no doubt about it,” said David Hyde, co-founder of CannaNavigators Inc., a cannabis licensing and regulatory consultancy.
An inability to move product may be enough to break the bank for some licensees, especially those already strapped for funds, given the state of the industry, Hyde said.
The amount of unpackaged products destroyed has increased since Canada legalized recreational marijuana use in October 2018. For comparison, about 280 million grams were destroyed in 2020, while about 156 million grams were destroyed the previous year.
The amount of unpackaged edible cannabis destroyed increased from 27 million grams in 2020 to 98 million grams in 2021. Packaged products destroyed were also on track to exceed 2020 levels, with more than three million units destroyed in May 2022 against 4.6 million units in total. of 2020, according to figures from Health Canada.
“This threatens the survival of a number of cannabis companies in this country.”
Brad Poulos, who teaches a course on the cannabis business at Toronto Metropolitan University, said the excess production is a consequence of the “irrational exuberance” that has surrounded the launch of the legalized cannabis industry.
The term, first used to describe the dotcom bubble of the 1990s, refers to investor enthusiasm, often overconfidence, that can lead to a market or sector becoming grossly overvalued.
Polous said the cannabis industry was fundamentally “forced” to deploy the huge capital it saw when the market became legal. Now it’s sitting on way too much inventory.
“They just built too much and it’s been that way for three or four years,” he said.
In addition to bulk stocks of dried goods, the industry has also seen a growing number of product returns after items fail to sell in stores, Hyde said, noting that’s one of the main reasons. of this magnitude of destruction. He said these yields are often linked to the overproduction of low-quality or low-potency products that consumers simply don’t care about.
Some producers also tried to get ahead of the production curve by stockpiling different products, only to find them undesirable to consumers and unsaleable in stores when the hobby market rolled out, he added.
Another factor has been the slow rollout of retail stores after legalization. Hyde said many licensees in 2019 and 2020 expected hundreds more stores to sell their products at the time, producing huge amounts of cannabis that has since sat in their coffers over the years. years and are only now destroyed.
“Each kilogram of cannabis destroyed has great value. It costs a lot of money…to get this product to its final form and now it’s destroyed,” Hyde said. “There’s no way it’s going to be sustainable.”
Meanwhile, some industry analysts said it was difficult to determine the depth of the decline needed to fully balance supply and demand. Indeed, Health Canada’s production data does not segment production by THC potency, BMO Capital Markets analyst Tamy Chen said in a note to clients in April.
“Overall, these data points show that the Canadian cannabis industry is gradually moving towards a more rational competitive landscape,” Chen said.
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