What does this good news actually mean for the industry and Canada’s marijuana stocks?
This article will answer some of the most common questions pertaining to Canada’s legal recreational market.
1. Does this mean recreational cannabis in Canada is now legal?
The technical answer to this is, “No;” however, it will be legal in the very near future. With the cooperation and agreement between Canada’s Senate and House in passing Bill C-45, legal purchase of recreational marijuana is only weeks away.
2. When will cannabis be available for recreational purposes?
Gauging from Health Minister Petitpas Taylor’s comments in February, recreational sales of pot will not begin until 8 to 12 weeks after receiving royal assent. The 8 to 12 weeks following the law’s adoption, according to Taylor, are needed for Canada’s provinces to make all the necessary preparations to implement sales, from LPs to distributors to retailers. That said, the country’s government recently declared Oct. 17th to be the official day legal sales of adult-use marijuana would begin.
3. Under the Cannabis Act, what is and is not legal in regards to recreational marijuana?
The bill allows adults, age 18 and above, to purchase cannabis; they may also be in possession of a maximum of 30 grams of dried weed for their own consumption. As of now, there have been no decisions made on the regulation of edible marijuana. However, recent debates in the Senate included amendments aimed at ensuring the federal government’s future regulation of edible forms of marijuana.
As for what’s not legal, the sale of marijuana to minors involves harsh punishments. Anyone convicted of selling marijuana to a minor may face jail time of up to 14 years.
However, much of the legislation has yet to be resolved. Specifically, lawmakers are working on legislation to authorize law enforcement to test drivers suspected of impairment.
4. Will legalization look the same across Canadian provinces?
The brief answer is “No.” Similar to what played out in the U.S. in states which opted to legalize cannabis, regulating their own dispensaries and terms of legality, so will provinces have the authority to regulate cannabis as they think is best. For example, while the Cannabis Act permits legal sales of cannabis to adults over 18 years, Alberta is the only province to adhere to this age. The others have chosen 19 years as the minimum set legal age. Another example is that of approved retailers and types of sales. Saskatchewan has opted to allow only online sales and private retailers, while the majority of provinces will allow retail operations which are government-operated, in addition to online sales.
5. What will taxes look like for consumers on purchases of legal cannabis?
Legal cannabis will likely be taxed CA$1 for each gram of cannabis is priced up to CA$10 per gram. For more pricey strains of cannabis, consumers will pay a flat tax rate of 10%. When comparing the tax rate of cannabis in Canada to the country’s alcohol tax – roughly 50% for beer and up to 80% for liquor – the industry and its consumers are getting a deal.
6. How will taxation be handled between the government and provinces?
Last December, a two-year tax-sharing agreement was worked out between the Canadian federal government and each of its provinces with the exception of Manitoba. Per the agreement, 75% of the excise tax revenue collected will be returned to individual provinces; the 25% remaining will be sent to the federal government, to a maximum of CA$100 million each year. Should the collected tax revenue exceed the cap, 100% will go back to the provinces, which makes sense given the provinces are responsible for policing the regulation of cannabis in their areas.
7. What is the expected domestic demand for recreational marijuana?
Seeing as how Canada will be the first developed country to legalize adult-use marijuana, estimations for demand are a total guessing game. Early reports estimated Canada’s annual demand would be around 800,000 kilograms; however, Health Canada more recently estimated this amount could be 1 million kilograms annually.
8. Will the industry in Canada experience an oversupply or undersupply of cannabis?
The general consensus is Canada will face an initial shortage of supply. In spite of the efforts of most growers to rapidly expand their capacities, the reality is most of these key projects will not be completed until up to two years after the legal recreational market opens.
This is likely to change, however, once these growers are operating at full capacity, somewhere in 2020. Estimates of production capacity are fluid, but, as of now, the top eight producers seem to be on track to produce a combined annual 1.8 million kilograms by 2020. Adding in Canada’s smaller LPs, the country may be looking at an annual supply of 2.4 to 2.5 million kilograms of marijuana.
9. How are Canadian growers planning to adjust for the potential oversupply?
To distribute what may be well over 1 million kilograms of additional supply, growers are looking overseas. Worldwide, there are several dozen markets for legal medical marijuana. One of the largest, Germany, leans heavily on Canada to supply its MMJ industry through exports.
10. Is dried cannabis the only focus in the legal recreational market?
This may come as a surprise, but, the answer is “No.” Part of the strategy of savvy growers, in preparing for legalization, is diversification of their product offerings. Studying the examples of states which legalized adult-use marijuana in the U.S., there has been a trend of plunging prices in the initial few years following marijuana’s commoditization. The expectation is Canada will have a similar experience which is why some growers are turning their focus on niche products, such as extracts and oils. These items come with higher profit margins and higher price points and are less likely to fluctuate with the economy.
11. Are any marijuana stocks now considered value stocks?
Always bearing in mind the term “value” is relative to the investor, a handful of cannabis stocks in Canada are notably cheaper than their competitors. One example is CannTrust Holdings (NASDAQOTH:CNTTF), a company which managed to turn out a fiscal Q3 with more than 50% of its sales generated from cannabis oils. The company’s current value is a mere 26 times forward earnings (with a PEG ratio likely far below 1, considered a good value) and the potential to continue its sales growth into the triple digits this year and next.
(For more news on Canada’s legalization, read Good News for Marijuana Stocks: Canada Passes The Cannabis Act (There’s a Catch, Of Course…))