Canadian pot producers have just been given something else to cheer about.
A new study, reported on by CP24 and Bloomberg, claims that legal supply of marijuana in Canada is set to meet only 30% to 60% of consumer demand. Researchers from the C.D. Howe Institute, a Toronto-based think-thank, and the University of Waterloo estimate that legal supply will rise from about 146.13 tonnes to roughly 210 tonnes a year after Canada legalizes marijuana. Demand, meanwhile, is expected to hover around 610.6 tonnes.
“There will not be enough legal supply, especially during the first half of the year following legalization, primarily because of the slow rate of licensing producers,” Anindya Sen at the University of Waterloo and Rosalie Wyonch at C.D. Howe said in the report, which is due to be published next week.
The authors of the report added that they expect a shortfall of legal producers to persist until late 2019. They predict there will be 97 licensed producers by the fourth quarter of 2018, up from 45 during the first quarter, but much less than the 144 expected by the third quarter of 2019.
This temporary lack of competition could represent a huge opportunity for the biggest Canadian marijuana growers, including Canopy Growth Corp. (CGC), Aurora Cannabis Inc. (ACB), Aphria Inc. (APH), MedReleaf Corp. (LEAF) and The Green Organic Dutchman Holdings Ltd. (TGOD). Should these companies find a way to capitalize on legal supply shortfalls, the Horizons Marijuana Life Sciences Index ETF (HMMJ), which tracks the North American Medical Marijuana Index, also stands to benefit. (See also: A Marijuana ETF Just Crossed $1B in Assets.)
Black Market Competition
Alternatively, the authors of the report pointed out that demand could be met from the illegal black market.
"There is also a possibility of legal supply meeting legal demand simply because many consumers choose the black market as their source of supply," the report said. "Our results show that both pricing and supply shortages will contribute to maintaining the black market. Resulting in lost tax revenues and a continued need to spend significant resources on law enforcement activities related to the market."
Canada is set to legalize cannabis for recreational use Oct. 17. The total market in the country, including medical, illegal as well as legal recreational products is expected to generate up to $7.17 billion in total sales in 2019, according to Deloitte. Legal sales are expected to contribute more than half, up to $4.34 billion, in the first year. (See also: 5 Marijuana Stock Picks: Cowen.)