Canada's Illegal Cannabis Market Is Still Strong but on the Decline
Last month, Statistics Canada released the national economic accounts from the fourth quarter of 2018, the first full quarter in which legal adult use cannabis was available for sale in Canada.
This latest release is the first set of national economic accounts which endeavors to describe the scale of economic activity in the country that is directly related to the production and use of legal and illegal cannabis.
Illegal cannabis sales down following legalization
While the illegal cannabis market remains strong in Canada, it is on the decline. This is thought to be because the legal market is drawing recreational consumers away from the illegal market and into the regulated dispensaries and retail cannabis stores.
Cannabis-related expenditures are defined as the sum of household spending plus changes in the inventories of cannabis producers, plus cannabis exports, minus any imports. Together, these expenditures accounted for $2.2 billion CAD (approx. $1.645 billion USD), or 0.4 percent of GDP for the fourth quarter. Of this, illegal cannabis was estimated to be responsible for $1.4 billion CAD (65 percent), with legal cannabis making up the remaining $770 million CAD.
But despite this apparent dominance of illegal cannabis in Canada, a closer look at the individual statistics that make up the total economic activity reveal some interesting trends. Figures stated for household final expenditure on cannabis products put spending on illegal cannabis products at $1.2 billion CAD, compared with $307 million CAD in legal sales; and while this does mean that illegal cannabis represents approximately 79 percent of the nation’s cannabis market at current prices, this is a marked decrease from the 90 percent market share that illegal cannabis had in the third quarter.
Statistics Canada also calculated that the cannabis inventories of licensed producers and distributors increased by an estimated $461 million CAD over the fourth quarter, based on current cannabis prices.
Supply issues plague early Canadian market
Despite legal cannabis making up over $300 million CAD worth of household expenditure in its first full financial quarter, there are some who might be disappointed by these figures. Indeed, early projections for the future of Canada’s cannabis industry predicting a future worth of roughly $8 billion by 2021 are already being revised in light of the slow and bumpy rollout that recreational cannabis got in Canada.
The nation is currently in the throes of a widespread cannabis shortage as supply problems have left cannabis companies unable to meet consumer demand. Cannabis companies in some regions have been forced into temporary closure or to constrain their opening hours as a result of the shortage. This kind of supply issue will have had a knock-on effect on the economic figures reported and could have led to the introduction of legal cannabis having a lessened impact on the illegal market if consumers were having trouble accessing legal products.
In troubling news, it looks like the shortage could drag on for years as new types of cannabis product hit the market. Canada is expected to legalize edible cannabis products later in 2019, and industry experts fear this could exacerbate the current problem.
"If it was just the current product set, I'd say [the shortage would last] a year to 18 months," said Chuck Rifici, CEO of the Toronto-based cannabis company Auxly, in an interview with CBC. "But because we have edibles and a bunch of new product types coming in October, I think it'll be the better part of three years before we have true equilibrium and oversupply in the space.”
High cannabis prices might encourage illegal market
On average, the Statistics Canada report appears to indicate that the aggregate price of cannabis increased by 1.5 percent in the fourth quarter compared to the previous quarter. However, this increase is thought to mostly reflect the introduction of legal cannabis products into the market.
Through the data crowdsourcing website StatsCannabis, Statistics Canada was able to collect data on the average market price paid for cannabis flower. They found that the average price being paid for legal cannabis flower was around $9.70 per gram. The price paid by legal consumers includes any excise duty or sales tax that would be applied to the product, and in the instance of online sales may also include any associated delivery fees. Reports of illegal cannabis purchases carried an average cost of $6.51 per gram, a 32.9 percent decrease in price compared to the legal cannabis. As these data were anonymously self-reported and not collected from a randomized sample, Statistics Canada did preface its results with a disclaimer of caution.
However, this apparent large price difference, taken together with the product shortage problems affecting legal cannabis supplies, may explain why the legalization of cannabis has yet to have a dramatic impact on the illegal drug market in Canada, and by extension, why the market has failed to live up to its past economic hype.