A new Health Canada document seems to open the door to the outdoor cultivation of marijuana, but GMP Securities analyst Martin Landry thinks the chances of that happening are low.
Earlier this week, Health Canada released a report called “Consultation on the Proposed Approach to the Regulation of Cannabis” that is intended to solicit public feedback ahead of the Canadian government bringing the proposed Cannabis Act into force no later than July 2018. Canada is expected to become the first G20 nation to legalize access to cannabis for recreational purposes.
“The proposed Cannabis Act would create a strict national framework for controlling the production, distribution, sale and possession of cannabis in Canada,” the document begins. “As part of this framework, Health Canada would be responsible for regulating production and setting standards for health and safety. The provinces and territories would oversee the distribution and sale of cannabis, subject to minimum federal conditions”.
Landry, in a research report Wednesday, said some of the proposals outlined in the paper were expected, such as plain packaging that limits the use of colours and fonts, and relaxed security requirements that implies cannabis will no longer be required to be stored in a high security vault.
But the analyst says the biggest surprise was the includion of proposed regulations around outdoor cultivation, a development he says could ultimately pressure prices because the capital expenditure requirements around growing outside are much lower. That said, the regards the chances of outdoor cultivation making it to the final cut as low.
“The proposed regulations contain some changes which could have a drastic impact on the industry such as outdoor growing and CBD extracts from hemp,” the analyst explains. “However, the potential for outdoor growing to make it into the final document is low, in our view, given the difficulties and feasibility of implementing the current rules (security and quality) to outdoor growing. However, relaxed regulations on hemp farming could have a significant impact on prices of CBD extracts, a potential negative for all Canadian LPs.”
Landry says outdoor growing becoming approved is unlikely for three major reasons. First, he says securing outdoor sites could be challenging. Second, meeting the current stringent quality requirement under the Access to Cannabis for Medical Purposes Regulations act would be difficult, and lastly, there are huge potential hurdles with municipalities.
On the off chance that outdoor cultivation is allowed, Landry says existing LPs would still have a product quality advantage.
“Cultivating cannabis outdoors in Canada typically generates a lower quality dried flower product as compared to indoor production,” he notes. “This is due to the inability in an outdoor grow to effectively control the environment, one of the most important determinants of product quality. Hence in a scenario where outdoor production increases dried flower supplies, we believe resulting pricing pressure would likely be concentrated at the low-end of the dried flower product quality spectrum.”