Tag Archives: TWMJF

Canadian Cannabis Oil Exports Quadrupled in 2017

Few industries have investors seeing green quite like legal marijuana. According to cannabis research firm ArcView, in partnership with BDS Analytics, the North American legal weed market grew by 33% in 2017 to $9.7 billion. A decade from now, we could be looking at more than $47 billion in annual North American sales.

While expansion at the state level in the U.S. is expected to play a role in boosting these sales figures, all eyes in the interim are on Canada, which is expected to become the first developed country in the world to legalize recreational cannabis this summer. Bill C-45, which is better known as the Cannabis Act, is set for vote in Canada’s Senate on June 7, and could swiftly be moved through its federal government to be signed into law shortly thereafter. Legalizing adult-use weed could lead to $5 billion in sales being added annually to Canada’s pot industry.

In anticipation of this highly-expected legalization, Canadian growers have been angling to expand their growing capacity as quickly as their balance sheets will allow. Though capacity has remained exceptionally fluid as a result of partnerships, dealmaking, and acquisitions, there are now seven growers that appear to have a pathway to 100,000 or more kilograms of dried cannabis-equivalent production by 2020 or 2021.

Vials of cannabidiol oil lined up.

Image source: Getty Images.

Cannabis oils may be the secret to investor success in the marijuana space

Yet, gross production capacity doesn’t adequately tell the tale of which cannabis growers are best positioned to succeed. Instead, I’ve opined that marijuana growers thatfocus more of their efforts on cannabis oil as opposed to cannabis flowers are more likely to see beefier margins and have a greater chance at significant profits.

If you think about it, dried cannabis has become somewhat of a commoditized market in Canada. As the number of growers and export licenses has grown, and the supply of dried cannabis has increased, prices have generally fallen over time. Even with what little data we have on this, we’ve witnessed a pretty steady decline in wholesale marijuana prices on a per-gram and per-pound basis in U.S. states like Washington, Colorado, and Oregon over time.

By comparison, cannabis oil prices have held up exceptionally well. Cannabis oil is focused on niche market customers and is considerably easier to transport or export relative to dried cannabis. Not to mention, of the more than two dozen countries that have legalized medical weed in some capacity, not all have laws that allow dried cannabis to be prescribed, as of yet. Oils, on the other hand, are more broadly accepted and tend to be preferred by physicians since the product doesn’t need to be smoked.

A vial of cannabis oil next to a cannabis leaf.

Image source: Getty Images.

Canadian cannabis oil exports are growing like a weed

Just how impressive has cannabis oil demand been? According to an April-published report from Marijuana Business Daily, Canadian cannabis oil exports grew from zero in 2015, when the Canadian parliament was run by conservative lawmakers, to 100.8 kilograms in 2016. Last year, they essentially quadrupled to 400.4 kilograms, with 114 company-based export applications on record as of 2017, up from 64 in 2016.

Where is all of this cannabis oil going? As Marijuana Business Daily’s data shows, Germany and Australia accounted for 168.7 kilograms and 145.4 kilograms, respectively. The remaining 86 kilograms was divided between Croatia (36.8 kilograms), the Cayman Islands (24.3 kilograms), and five other countries (24.8 kilograms). Considering that Canada and the Netherlands are the only two countries actively exporting any cannabis products at the moment, Canadian growers are expected to have quite the competitive advantage over any new entrants.

In cannabis oils these growers trust

Though all cannabis growers appear to be making a concerted effort to devote at least some of their production to oils, some have made significant strides to incorporate oils and extracts as a significant component of total sales.

Various legal Canadian cannabis products on display.

Image source: Getty Images.

For example, Canopy Growth Corp. (NASDAQOTH:TWMJF), which also happens to be the industry’s kingpin, reported in February that its most recent quarterly results included the sale of 2,132 liters of cannabis oil (roughly equivalent to 262 kilograms). These 2,132 liters accounted for 23% of Canopy Growth’s total sales in the third quarter, up from just 13% of total sales in the prior-year quarter. Canopy Growth is clearly focusing on its softgel capsules domestically and overseas, which should have a positive impact on the company’s average selling price on a per-gram basis, as well as its overall margin.

Another cannabis grower that’s taken the potential top- and bottom-line benefits of oils and extracts to heart is Ontario-based MedReleaf (NASDAQOTH:MEDFF). The company’s third-quarter operating results showed that MedReleaf now generates 21% of its total revenue from the sale of extracts, up from just 3% in the year-ago quarter. With extracts expected to be a key growth driver domestically and overseas, MedReleaf’s management appears to have set the company up for long-term success.

Of course, investors should also understand that nosebleed valuations and share dilution run rampant throughout the industry. With little access to traditional fundraising, Canadian cannabis companies have turned to bought-deal offerings to raise capital that can be used to expand their growing capacity and product lines. This dilution may wind up weighing down profits on a per-share basis, even if oils provide a nice boost to operating margins.

In short, cannabis oils will likely play an important role if pot stocks are to succeed, but they’re in no way a golden ticket to profits.

3 Reasons Canadian Marijuana Prices May Plunge

The big day is now less than four weeks away. On June 7, Canada’s Senate will vote on bill C-45, which is better known as the Cannabis Act. This bill aims to make recreational marijuana legal for purchase by adults 18 years of age and over. If approved by the Senate, the Cannabis Act likely will move swiftly through Canada’s federal government, allowing it to become the first developed country in the world to legalize adult-use pot.

With conservatives in the minority at the moment and a two-year tax-sharing agreement in place with all but one Canadian province, everything appears to be in place for C-45 to soon become law. Recreational sales are expected to commence roughly eight to 12 weeks following approval, meaning sometime in August or September.

Most importantly, the legalization of recreational weed is expected to result in around $5 billion in added annual sales for Canadian growers, processors, distributors, and retailers. This comes on top of what’s already being generated from medical weed sales and exports. The expectation from investors — given the stratospheric valuations most pot stocks currently possess — is that this legalization will lead to big profits for Canadian marijuana stocks.

Cannabis buds next to a piece of paper that says yes, and lying atop miniature Canadian flags.

Image source: Getty Images.

Yes, cannabis prices could decline significantly in Canada

But what if that turned out not to be the case? What if operating margins for cannabis growers come in significantly lower than expected as a result of falling per-gram marijuana prices? Don’t think it could happen given the expectation of strong demand? Think again!

Here are three good reasons why cannabis prices might plunge in Canada shortly after recreational sales commence.

1. Big growers are purposefully trying to drive out smaller players

The first reason marijuana prices might plunge is because the industry’s largest players are purposefully overproducing cannabis in an effort to drive down per-gram prices and margins. Why would a large grower overproduce cannabis on purpose? Simple: to drive out competitors that don’t have the financial means to survive in a lower-margin environment.

Smaller pot growers don’t have the same access to capital as large players like Aurora Cannabis (NASDAQOTH:ACBFF) or Canopy Growth Corp. (NASDAQOTH:TWMJF). Aurora and Canopy Growth have a respective $333 million and $311 million in cash and cash equivalents on hand and are expected to produce in the neighborhood of 430,000 kilograms and 500,000 kilograms of cannabis annually when at full capacity. Virtually nothing is stopping them from ramping up capacity, burying Canada in supply, driving down margins, and putting smaller players that won’t benefit from economies of scale out of business. If this all sounds somewhat familiar, it’s because this is pretty much what Walmarthas been doing to mom-and-pop stores for decades.

A bottle of dried cannabis tipped over onto a small pile of cash.

Image source: Getty Images.

2. No one has any clue how much consumer demand to expect

Secondly, since no other developed country has ever legalized recreational marijuana before, it’s difficult for growers to get an idea of what consumer demand might look like when the proverbial green flag waves this summer. In plain English, they’re flying blind, producing as much as they can, crossing their fingers, and hoping everything works out.

In some ways, this approach has its merits. For example, growers with a lot of upfront production by this coming summer probably have the greatest chance of securing lucrative long-term supply deals with provinces and retailers, as well as forming emotional attachments with consumers. Growers that won’t complete their ramp ups until next year or 2020 could miss out on these easy-money opportunities. Therefore, blindly pumping out as much production as possible from the get-go appears to be a good idea on the surface.

The issue is that, without understanding underlying demand trends, the industry runs the risk of dramatically oversupplying the domestic market. Most reports have suggested that Canadians will demand around 800,000 kilograms a year by 2020. However, with giants like Aurora Cannabis and Canopy Growth probably producing more than 900,000 kilograms between them, it’s not hard to see how aggregate production across the industry could top 2 million kilograms by 2020 with ease.

While exports may resolve some of this excess supply, there’s no guarantee that they will offset all of it. This ignorance to demand could cause per-gram cannabis prices to plunge.

A man smelling the leaves of a potted cannabis plant.

Image source: Getty Images.

3. Euphoria wears off, leading to a lull in demand

Finally, it’s not uncommon for consumer demand, vis-a-vis euphoria and tourism, to taper off a few months after legalization, resulting in oversupply that drives down cannabis prices.

When Colorado and Washington state legalized recreational marijuana in November 2012 and began selling to adults in 2014, cannabis prices on a per-gram basis were very high. Not long thereafter, though, prices fell dramatically. In Washington state, per-gram prices fell from nearly $25 in August 2014, the month after adult-use sales commenced in the state, to just $6 per gram by October 2016.

Understandably, Colorado and Washington don’t offer a market the size of Canada, so things could go differently for our neighbor to the north. However, in practically every instance of recreational legalization in U.S. states, we’ve witnessed a subsequent drop-off in per-gram prices within a matter of a few months to a year following legalization. The odds would seem to favor a drop in cannabis prices shortly following legalization.

What does all this mean? Ultimately, I think it serves as a warning that Canadian pot stock profits and margins could disappoint investors. With this industry already commanding quite the premium, investors can ill afford any surprises.

3 Reasons Canadian Marijuana Prices May Plunge

The big day is now less than four weeks away. On June 7, Canada’s Senate will vote on bill C-45, which is better known as the Cannabis Act. This bill aims to make recreational marijuana legal for purchase by adults 18 years of age and over. If approved by the Senate, the Cannabis Act likely will move swiftly through Canada’s federal government, allowing it to become the first developed country in the world to legalize adult-use pot.

With conservatives in the minority at the moment and a two-year tax-sharing agreement in place with all but one Canadian province, everything appears to be in place for C-45 to soon become law. Recreational sales are expected to commence roughly eight to 12 weeks following approval, meaning sometime in August or September.

Most importantly, the legalization of recreational weed is expected to result in around $5 billion in added annual sales for Canadian growers, processors, distributors, and retailers. This comes on top of what’s already being generated from medical weed sales and exports. The expectation from investors — given the stratospheric valuations most pot stocks currently possess — is that this legalization will lead to big profits for Canadian marijuana stocks.

Cannabis buds next to a piece of paper that says yes, and lying atop miniature Canadian flags.

Image source: Getty Images.

Yes, cannabis prices could decline significantly in Canada

But what if that turned out not to be the case? What if operating margins for cannabis growers come in significantly lower than expected as a result of falling per-gram marijuana prices? Don’t think it could happen given the expectation of strong demand? Think again!

Here are three good reasons why cannabis prices might plunge in Canada shortly after recreational sales commence.

1. Big growers are purposefully trying to drive out smaller players

The first reason marijuana prices might plunge is because the industry’s largest players are purposefully overproducing cannabis in an effort to drive down per-gram prices and margins. Why would a large grower overproduce cannabis on purpose? Simple: to drive out competitors that don’t have the financial means to survive in a lower-margin environment.

Smaller pot growers don’t have the same access to capital as large players like Aurora Cannabis (NASDAQOTH:ACBFF) or Canopy Growth Corp. (NASDAQOTH:TWMJF). Aurora and Canopy Growth have a respective $333 million and $311 million in cash and cash equivalents on hand and are expected to produce in the neighborhood of 430,000 kilograms and 500,000 kilograms of cannabis annually when at full capacity. Virtually nothing is stopping them from ramping up capacity, burying Canada in supply, driving down margins, and putting smaller players that won’t benefit from economies of scale out of business. If this all sounds somewhat familiar, it’s because this is pretty much what Walmarthas been doing to mom-and-pop stores for decades.

A bottle of dried cannabis tipped over onto a small pile of cash.

Image source: Getty Images.

2. No one has any clue how much consumer demand to expect

Secondly, since no other developed country has ever legalized recreational marijuana before, it’s difficult for growers to get an idea of what consumer demand might look like when the proverbial green flag waves this summer. In plain English, they’re flying blind, producing as much as they can, crossing their fingers, and hoping everything works out.

In some ways, this approach has its merits. For example, growers with a lot of upfront production by this coming summer probably have the greatest chance of securing lucrative long-term supply deals with provinces and retailers, as well as forming emotional attachments with consumers. Growers that won’t complete their ramp ups until next year or 2020 could miss out on these easy-money opportunities. Therefore, blindly pumping out as much production as possible from the get-go appears to be a good idea on the surface.

The issue is that, without understanding underlying demand trends, the industry runs the risk of dramatically oversupplying the domestic market. Most reports have suggested that Canadians will demand around 800,000 kilograms a year by 2020. However, with giants like Aurora Cannabis and Canopy Growth probably producing more than 900,000 kilograms between them, it’s not hard to see how aggregate production across the industry could top 2 million kilograms by 2020 with ease.

While exports may resolve some of this excess supply, there’s no guarantee that they will offset all of it. This ignorance to demand could cause per-gram cannabis prices to plunge.

A man smelling the leaves of a potted cannabis plant.

Image source: Getty Images.

3. Euphoria wears off, leading to a lull in demand

Finally, it’s not uncommon for consumer demand, vis-a-vis euphoria and tourism, to taper off a few months after legalization, resulting in oversupply that drives down cannabis prices.

When Colorado and Washington state legalized recreational marijuana in November 2012 and began selling to adults in 2014, cannabis prices on a per-gram basis were very high. Not long thereafter, though, prices fell dramatically. In Washington state, per-gram prices fell from nearly $25 in August 2014, the month after adult-use sales commenced in the state, to just $6 per gram by October 2016.

Understandably, Colorado and Washington don’t offer a market the size of Canada, so things could go differently for our neighbor to the north. However, in practically every instance of recreational legalization in U.S. states, we’ve witnessed a subsequent drop-off in per-gram prices within a matter of a few months to a year following legalization. The odds would seem to favor a drop in cannabis prices shortly following legalization.

What does all this mean? Ultimately, I think it serves as a warning that Canadian pot stock profits and margins could disappoint investors. With this industry already commanding quite the premium, investors can ill afford any surprises.