Canadian Cannabis producers and extractors are Sitting on a massive stash of unfinished inventory that is growing so quickly that some analysis are concerned it could precipitate a price crash in the burgeoning industry. Since January 2019, the amount of unfinished inventory of dried cannabis has nearly tripled, reaching a staggering 328,000 kilograms at the end of August. That compares to roughly 118,000 kilograms eight months earlier, according to Health Canada data.
Health Canada defines unfinished inventory as the amount of cannabis held in stock by a “cultivate that is not packaged, labelled and ready for sale. ” it defines finished inventory, a figure pegged at 60,872 kilograms at the end of August, as product ready for sale that is held in a warehouse of provincial wholesalers and licensed producers. With sales of dried flower reaching just 13,000 kilograms in August, that means total inventory tracked by Health Canada was nearly 30 times monthly sales rate.
“If a large proportion of that 328,000 kilograms is dried bud, that’s going to be a big problem for the LPs,” said Matt Bottomly, a cannabis analysis at Canaccord Genuity Group, a week before a slew of earnings reports were expected from producers including Canopy Growth Corp., Tilray Inc and Aurora Cannabis Inc.
The inventory buildup marks a sharp turn for an industry that struggled with a shortage of product in the early days of legalization, just a year ago. A limited retail network and the exponential increase in the amount of cultivation space use across the country here allowed stockpiles to balloon rapidly.
Producers have already started lowering prices, a move that is bound to effect the margins of retailers as well. HEXO Corp began selling a new product line called Original Stash, prices at just $4.49 per gram, roughly t0% lower than the average per gram price on the legal market.
HEXO also announced it was shutting down its Nigeria greenhouse and suspending 200,000 square foot of licensed space for cultivation, firing 200 employees in the process. “If you look historically, licensed producers typically get about 60 % wholesale pricing, so a gram of bud will go for $10 retail, but LP’s will get about $6.50 at the high end before paying excise taxes. That’s going to go down to 50-50 very soon,” Bottomly said.
Finished inventory held held by provincial distributors and retailers (excluding products in the vaults of licensed producers) decreased by 2.3% in August. On average, this inventory was 2.5 times sales for the month, a figure that is typical for the retail business. “I’d rather know that I have two-and-a-half months of product available than nothing at all,” said Mark Goliger, CEO of Meta Growth (formerly National Accra Cannabis Inc), one of the largest cannabis retail chains in the country.
Complicating the situation for both producers and retailers is that they have my quite pinned down what producta and brands consumers like. Some of the larger producers, such as Canopy Growth, Aurora, and Organigram, successfully filled the market with product in the early months of legalization.
Licensed producers will have to adjust their product SKUs accordingly, which could mean revenue headwinds for the next few quarters. “There is no consistency at the moment, so it becomes very hard for us to forecast a plan because of the inconsistency of the availability of Sky’s,” said Goliger.
“The Skis as they came into the provincial boards from rotating crops may have different characteristics than they did the last round , so something that might have been 18% THC may only be 14% THC. That’s a difficult challenge for us,” he added.
One encouraging sign in Health Canada’s figures, according to Cannacord’s Bottomly, was that sales numbers continues to increase in monthly sales.
“I don’t think there is too much cannabis in inventory that the illicit market demand couldn’t absorb,” he said. “I think the issue is we don’t have enough proper retail infrastructure and product forms online that are going to bring in people from illegal channels.”