Canada: the cannabis black market will still capture 71% of demand in 2019, and 37% in 2020

The legalizing cannabis in Canada had two main objectives: to keep minors away from cannabis, and to wipe out the black market - an objective that often proves more complex than it sounds. After six years of legalization, Uruguay has still not managed to eliminate the supply of illegal products, although the country is well on the way. As for Canada, legalization is still recent and, for the time being, the legal offer is not competitive enough to hope to replace the black market.

Obstacles facing Canada

Making new regulations is no easy task. Unanticipated undesirable effects sometimes limit the implementation of legalization. The nascent cannabis industry encounters a number of logistical hurdles, resulting in production delays that ultimately turn consumers away from legal products. From the very first days of Canadian legalization, shortages occurred which, according to analysts, are likely to last several years while the industry operates at full capacity.

These shortages have been caused by several factors among them the low quantity of producers whose products are authorized for retail sale. Yet there is no shortage of candidates: already in May 2018 Marijuana Business Daily highlighted the fact that over 500 applications had been submitted to Health Canada for a cultivation license. Here, it's the slowness of the bureaucracy that poses the problem, since it takes an average of almost a year for an application to be processed.

Another important factor: severe packaging restrictions have caused a shortage of packaging, which has delayed cannabis deliveries. These restrictions, coupled with the tax burden on the industry, have created high prices that are not at all competitive with black market prices. What's more, these prices are steadily rising. As the Statistics Canada, they have increased by 17.4% since October, widening the gap between the black and legal markets.

A study conducted by analysts at Scotiabank estimates that the black market will still control 71% of cannabis sales in 2019. This could fall to 37% in 2020 once packaging and bureaucracy issues are resolved. «There is always room for improvement,» explains Deepak Anand, Vice President of NORML Canada. «The Canadian government has been very insistent that this [legalization] is a process, not an event. The government is learning as the industry learns. In the meantime, this represents a huge shortfall for a new industry that needs to prove its worth to investors.

Lessons from Uruguay

Uruguay, too, faced similar challenges when it legalized cannabis in 2013. It allowed access to cannabis via three routes: self-cultivation from 2014, cultivation cooperatives or cannabis clubs in 2015 and legal sales in pharmacies only in July 2017. The latter, despite their very low price (around 1$30 per gram), are not the most popular option. One of the reasons for this is that only 17 pharmacies are authorized to sell legal cannabis and that they regularly encounter supply problems, as there are only two authorized growers for the whole country. Also, the THC content of the varieties was initially limited to 2%, and now to 9%.

The government nevertheless acknowledges that «The current situation is preventing the proper development of the system and the expected results, such as the reduction of illegal supply, the gradual expansion of the use of a controlled product, and the shift towards lower-risk consumption practices». For these reasons it is currently considering the granting of additional licenses.

According to a recent report from the Institute of Cannabis Regulation and Control (IRCCA), over $22 million in sales have already been diverted from the black market: 12% from pharmacy sales, 68% from consumers growing their own cannabis and 20% from clubs. For the first time, legal sales have surpassed illegal sales last July,an ambitious goal for Canada today.