Canada’s cannabis companies are growing way too much bud, this investment advisor says

With only weeks to go before recreational marijuana becomes legal in Canada, there are still a number of unknowns about how the pot industry will take shape. One thing’s for certain, though: Canada’s cannabis companies are growing way too much weed, says Wolfgang Klein of Canaccord Genuity.

The countdown is on, as across the country licensed producers big and small are now erecting greenhouses and planting marijuana crops at a furious pace. And the promised production numbers are huge. Take the two clear leaders in the space, Canopy Growth and Aurora Cannabis: both companies are building facilities covering millions of square feet each, with expected growing capacity for each company now projected into the 400,000 kg of dried cannabis range.

That’s not to mention the multitude of second-tier players like Aphria, The Hydropothecary Corporation, Cronos Group and Emerald Health Therapeutics, each of which is gunning for production numbers over and above 100,000 kg.

So, how ready will Canada’s cannabis companies be to handle the consumer demand, come legalization? Too ready, says Klein, which means that companies will be forced to compete much harder for their share of the country’s pot pie.

“The price of bud is going to go lower,” he told BNN Bloomberg. “The world will produce too much bud.”

Statistics Canada reported in January of this year that Canadians spent $5.7 billion on marijuana during 2017, most of which came from the black market. Roughly, that amounts to a 773,000 kilos of weed. Add to that an expected bump in consumer interest once marijuana is legalized (a report from Deloitte says there’ll be a 17 per cent uptick in marijuana use), and we have an eventual demand for upwards of 900,000 kg.

That’s a lot of pot, to be sure, but much less than the projected supply from the 60 or so companies across the country currently growing.

Moreover, an oversupply problem is sure to impact today’s leading public companies whose currently high valuations only make sense if their forward earnings turn out to be similarly huge.

Klein says that as far as catalysts in the industry go, the legalization date won’t be as significant as the eventual buy-in from the banks, which will really confer legitimacy upon the sector.

“The sequence to occur is profitability, I believe,” says Klein. “Yeah, there’ll probably be a little pop on legalization. I’ll tell you what will make it work is when the big banks get onboard.”

“When it’s federally legal in America and when it’s legal in Canada, then you’re going to see a whole different ballgame take place,” he says. “Mutual funds are not very long on these names, so the institutions aren’t there yet. That is a big catalyst to come, and that’s when I’d be getting pretty excited about it.”

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