Outdoor pot growing will further commodify cannabis, Canaccord Genuity says

In a move that will have implications for Canada’s nascent marijuana industry, this week the federal government is expected to announce new regulations for the production of legalized cannabis which will allow outdoor pot growing by companies. The move will likely put pricing pressure on growers and further the commodification of cannabis, says analyst Neil Maruoka of investment bankers Canaccord Genuity.

Up until now, regulations for growing medical use cannabis — and, come the October 17 start date, for the production of recreational use bud — have required that licensed producers grow in greenhouses or other indoor facilities. But the new rules will allow for outdoor cultivation.

“Our decision to allow outdoor grow under strict rules is the result of extensive consultations and will contribute to creating a diverse and competitive legal cannabis industry with the ultimate goal of displacing the illegal market,” said Thierry Bélair, a spokesman for Health Minister Ginette Petitpas Taylor.

That stipulation has been campaigned against by industry representatives, including the Cannabis Canada Council, which has stated that outdoor growing will hinder the government’s stated aim of taking cannabis out of the black market.

Last month, Cannabis Canada Council executive director Allan Rewak told a Senate standing committee that along with increasing the likelihood of theft, outdoor growing will impact the quality of cannabis crops and potentially lead to “cross pollination and contamination.” Rewak said that he’s also concerned about “the danger of unintentional exposure to agricultural pesticides.’

Allowing outdoor cultivation will also put downward pressure on a legalized market that was already headed towards cash crop status, says Maruoka.

“Although several greenhouse producers in Canada have already achieved <$1.00 per gram cash costs, the inclusion of outdoor grow in Canada could see production costs decline substantially lower,” says Maruoka in an industry update on Tuesday. “Although a lower cost base could help pad margins in the short-term, we believe the addition of outdoor grow in Canada is more likely to expedite commoditization of the flower and could put substantial pressure on pricing.”

Maruoka says that even with the October start date decided, there are still a number of issues to work out and that the rec cannabis roll-out is likely to be bumpy at first, considering the challenges for cultivation and distribution that lie ahead.

“Although logistical hurdles remain, we believe positive industry catalysts are still on the horizon,” he says. “This includes major provinces such as Ontario, Alberta and BC still to announce initial tender allotments for product and the legislation of more recreational friendly products, such as vape pens, edibles and other derivative cannabis products that will become increasingly important for producers as the cultivation of cannabis is expected to become largely commoditized.”

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