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Canada Risks Popping Marijuana Bubble As Prices Dive Before Legalization

 

Canada Risks Popping Marijuana Bubble As Prices Dive Before Legalization

Courtesy of Zero Hedge

A recent Statistics Canada report confirms price deflation has hit the marijuana industry in an even more significant way than expected, as a downward slide in prices puts a squeeze on profits for producers in the soon-to-be-legal market.

According to data published last Thursday by Statistics Canada, the annual change in the average cost per gram declined 7.7 percent in 2017 verse the prior year, this is the most significant decline in more than a decade, as the Trudeau administration prepares for legalization as soon as July.

Bloomberg believes the decline in prices is not a force of demand, but more on the oversupplied side.

It’s not a lack of demand that’s driving prices lower. Spending on the drug has climbed by 6 percent a year on average since 1961, the Ottawa-based agency said in its most detailed portrait yet of the industry, as it gears up to include legal marijuana in its estimates of the economy’s gross domestic product.

“Falling marijuana prices will indeed pose a challenge” to producers, said Bloomberg Intelligence analyst Kenneth Shea. Companies can adapt by creating strong brands and other services such as helping customers choose the right strain.

“In Colorado, they have learned to diversify and add more value to the equation,” he added.

Statistics Canada found that prices have declined to CAD$7.43 per gram, after topping at CAD$12 in 1989. For the math whizzes, prices have dropped 38 percent in almost three decades.

Producers are flooding the market with cheap marijuana contributing to the bearish sentiment around price. As producers ramp up output, the large amounts of marijuana will continue to drag prices down further inducing a steady decline in prices for the next several years.

The Canadian Broadcasting Corporation referenced a Canaccord Genuity report specifying that the long-term trend in per gram prices are projected to be lower for the next eight to ten years.

“Estimates average prices for the total legal market (medical and recreational) will stay steady around $8 per gram until 2019 or 2020, with illicit prices remaining slightly higher, between $8 and $9 per gram. Post-legalization demand could exceed supply and keep prices stable for a time, wrote Canacord Genuity analysts Matt Bottomley and Neil Maruoka. That’s because Health Canada is relatively slow to approve licences for new producers, they said, and it takes a long time to set up a fully operational growing facility. After legal production catches up to demand, they wrote, “the average price per gram of bud will begin to slowly decline.”

The Trudeau administration has said it over and over: marijuana legalization seeks to displace the illicit cannabis market and keep the profits out of the criminals hands and into the government coffers. By doing so, Trudeau is attempting to create a safer market with more reasonable access to marijuana for Canadians, but at the same time, his administration continues the deflationary trend in prices. Could the decline in prices be the spark which pops the Candian marijuana bubble.


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