The Cannabis Act, passed in 2018, allows individuals over the age of 18 to possess up to 30 grams of dried cannabis. The Act was introduced to help regulate possession by youth and protect public health alongside legalizing recreational use. Here, there are three major players to bring cannabis to market: licensed cultivators, the Canadian government, and private retailers. The government purchases cannabis from cultivators and acts as wholesalers to private retailers which sell the products to users.
Canada is the first of the G20 countries to legalize marijuana use and distribution across the entire country with its biggest market in Ontario, British Columbia, Alberta and Quebec. This is an opportunity for Canada to position itself as a global leader to source marijuana, and its derivatives, especially as more countries consider legalizing it. However, the Canadian industry is currently fraught with internal issues.
Low Profit Margins & The Illicit Market
As of this year, the cannabis market is valued as an $8 billion dollar industry. In the 2020 year alone, adult-use cannabis grew by 118% and is projected to grow by an additional 60% in the year to come. Despite this growth, major licensed providers have not reported any profitability to date. Aphria is predicted by NASDAQ to become profitable by 2022 with $0.08 in profit per share. Reasons for Aphria’s profitability will be largely attributed to its acquisition of a pharmaceutical business, not a direct cause of cannabis sales. Other companies had to resort to downsizing on facilities and personnel to better align with their profitability goals. As of currently, costs racked up by cannabis companies have been written off with investor capital. However, interest in the market – demonstrated by share prices in the sector – has started to wane because of low returns to investors.
A major factor impacting conversion to profit is that the cannabis market is currently fragmented between legal and illicit cannabis providers. A recent survey identified at least 40% of cannabis users obtain their product from the black market. Reasons impacting buy-in to the legal market includes difference in quality/THC content, and pricing per gram. To become more competitive with the illicit market, legal licensed cultivators must find methods to drive down production costs while bringing to market high quality product. This will ultimately help secure greater profit margins for all three cannabis provider segments and re-direct buyers into the legal market with better offerings.
Staying Competitive in the Field
One primary area of focus for cultivators can be to optimize current growth protocols in place. Traditional indoor and greenhouse farming of cannabis products drive up total cost and subsequently wholesale and retail prices. However, these are preferred methods when cannabis flowers are to be isolated and/or when the plant is in direct use as it is believed to give better THC content. On the other hand, outdoor cannabis farming is an economical approach for large scale production – costing $0.25 per gram – but is only used to derive CBD oil as there is variability in its THC quality. In both approaches, further investigation on creating reproducible THC content, and weather, disease, and pest resistant marijuana strains can help companies isolate higher-quality product at lower costs down the line. On the other hand, research efforts to determine products that can control marijuana-specific pests would also be beneficial to the industry.
Finding extra operational capital to do research can be difficult especially as investors are waiting for convincing returns before divulging more money into the market. However, taking a proactive approach in securing a competitive edge against their illicit competitors will be key to ensure the legal cannabis market grows while strengthening Canada as a future global cannabis provider. Another, lucrative, way to raise funds to conduct necessary research is to claim for SR&ED tax credit offered by the Canadian government. SR&ED stipulates that companies can claim for this credit if a research project is focused on resolving uncertainty in the field to which growth optimization and product testing both qualify under this category.
For more information on how your company can claim SR&ED or if you have an applicable project, contact us at This email address is being protected from spambots. You need JavaScript enabled to view it. to schedule a free consultation today!
