Canopy Growth, Organic Green Farms: Canadian and Californian cannabis oligopolies

As the Canadian cannabis industry is preparing for the launch of the recreational market, mergers and acquisitions are in full swing. The current phase of consolidation is giving rise to an oligopoly, with super-companies now largely dominating the market. Speculation and investment are also rampant, enabling companies to inject capital amounting to several million dollars.

The procurement contracts are primarily aimed at farmers, retail chains, and extraction plants, enabling large corporations to gain control over the entire value chain of the product, from production to distribution. As a result, these companies are increasing their market share, which, according to a report by the Canadian Imperial Bank of Commerce, could reach 4.2 billion euros as early as next year.

Faced with this "green gold" rush, food and beverage brands such as Constellation Brand and Starbucks are already planning to enter the market.

The Creation of a Canadian Oligopoly

The Canadian cannabis giant Canopy Growth recently acquired its rival, Hiku Brands, for $205 million, a strategic contract that grants it access to the retail license for Hiku in Manitoba and the brand's established reputation. Despite some losses, investors are flocking to Canopy Growth and the company continues to grow on the stock market. It is converting some of its vegetable farms into cannabis operations for millions and has already managed to establish a presence in nearly every province through a multitude of acquisitions, thereby achieving considerable production capacity.

Another notable industry giant, Aurora Cannabis, has made 14 acquisitions over the past two years, including the most expensive in cannabis history when it purchased a company for $2.5 billion the producer MedReleaf. The company is now the market leader in production.

Since January 2018, more than 145 mergers and acquisitions have been recorded—double the number for the same period in 2017. Industry pioneers are gradually selling their companies to these conglomerates for very attractive prices. These acquisitions create the illusion of choice with a variety of brands that are, in reality, owned by just a few giant corporations.

The stakes extend beyond the Canadian domestic market; these groups aim to become global leaders. They are counting on a «snowball effect» and are expanding their partnerships and acquisitions in Europe, South America, and the United States, riding the wave of medical cannabis legalization. Canopy Growth is already listed on Wall Street and has just moved to Denmark, which is expected to to test medical cannabis for four years.

In California, a similar situation

Originally, the Bill 64 was structured to benefit small and medium-sized producers, as it allowed only one license per farmer and set a size limit of 22,000 m² for farms through 2022. The law was intended to prevent large companies from monopolizing the market, but the text was amended and the restriction on access to licenses was removed. It is therefore possible to hold multiple production licenses, which facilitates the emergence of a monopoly.

Le site Marijuana Business Daily estimates that, at present, only 12 companies hold 20% production licenses: 10 license holders possess 646 licenses, for an average of 65 licenses per holder. The firm Organic Green Farms holds, for example, 147 licenses, which is equivalent to approximately 1.5 million square meters of mining area.

However, it appears that small producers are struggling to obtain licenses, while large corporations enjoy easier access. The California Producers Association has denounced this unfair situation and has filed a lawsuit against the California Department of Food and Agriculture.

Since the regulations are not yet in place, the Cannabis Control Bureau can still change the current situation by amending the text to limit the accumulation of licenses. The size limits on operations, guaranteed by the licenses, were intended to prevent the immediate emergence of massive operations, but the removal of the limit on the number of licenses a single entity can hold contradicts these objectives and calls into question the consistency of the approach.

Limits on Monopolization

In the United States, Each state has its own market and its own regulations, the expansion of large corporations is limited by regional requirements. In Colorado, for example, the price of cannabis is falling, and production companies are struggling to turn a profit.

In Canada, speculation is rampant, but will the industry be able to adapt to market realities and demand? Since distribution is controlled by provincial governments, which source their supplies exclusively from a handful of licensed growers, the supply is likely to be undiversified and similar across both the public and private sectors. It is possible, however, that local production—more diverse and reputed to be of higher quality—will emerge, much like the beer market.

Another issue related to the cannabis industry is the lack of transparency regarding the source of certain investments. According to a survey by the Journal de Montréal, 40%: Approved producers receive offshore financing, with all the risks that entails.