Canada’s Recreational Cannabis Market:  Everything we Know is Wrong!

Understanding the size of a coming catalyst is paramount to successfully trading it.  Canada isn’t a very large country so many have argued their historic Federal legalization of recreational cannabis will not amount to much.  With a population similar to that of the single State of California, this argument seems valid on the surface.

However, a closer examination of the numbers brings up a much different story.  First of all, Canada’s Federally legal medical cannabis market is still in its infancy with only a couple hundred thousand registered patients[1]. A recent poll by Ipsos[2] found that 34% of adult Canadians reported they are likely to consume cannabis products once legalized, up from only 12% reportedly using now. After recreational legalization July 1st, 2018 potential client base will increase exponentially.  Taking into account Canada’s adult population, these numbers could equate to a customer base of over 9 million users!

These poll numbers are up substantially from previous results before edibles and concentrates were added into the equation.  Early October the Canadian house standing committee on health voted for an amendment to ensure cannabis edibles and concentrates will be available no later than 12 months after legalization comes into force[3].  However, it still needs to be passed by the House, but prospects are good as the Canadian Government has made it clear cutting out the black market to reduce crime is top priority.

The assumption is, when a product with high demand is made illegal, it will still exist in the black market.  This may acceptable with highly addictive and dangerous drugs like heroin and cocaine, but for a non-toxic and relatively safe drug with exceptionally high demand like cannabis, the social costs of prohibition outweigh any benefits of such policy.  But I digress, let us get back to the numbers.

According to Forbes[4], “Deloitte estimates the market has a base retail value between $4.9 billion-$8.7 billion, which would rival the size of the Canadian spirits market, which is $5 billion. Vivien Azer of Cowen & Co. said in a recent report, “When you consider ancillaries such as growers, testing labs, security, etc., the economic impact could range from $12.7 to $22.6 billion. Of note, these numbers do not include the impact of tourism, business taxes, licensing fees and paraphernalia sales, which could drive the economic impact higher.”

There is no question that bringing edibles into the picture will boost the market substantially.  The only question is, by how much?