Canada could face marijuana shortages for next decade

The marijuana industry has apparently broken down the barriers at every turn in 2018. Just to give you a glimpse, investors have so far found:

• On October 17, Canada became the first industrialized country in the world to legalize cannabis for recreational purposes, opening the door to additional annual sales of $ 5 billion.
• Vermont becomes the first US state to fully legalize the pot for adult use through the legislative process.
• The US Food and Drug Administration approves a drug derived from cannabis.
• A Canadian company paves the way for the initial public offering of a major US stock exchange.
• Two other states legalize marijuana for medical purposes (Utah and Missouri), Michigan becoming the 10th state in the general ranking of recreational marijuana.
• About half a dozen pot stocks are up in major US markets.

Again, it is only a partial list of achievements of the industry this year, but it is no less impressive.

Cannabis shortages could persist until at least 2020

Unfortunately, despite the high expectations of sales growth, investors are discovering that the marijuana industry is not without flaws. For example, in the United States, Section 280E of the United States Tax Code prohibits companies that sell a prohibited substance to the federal government (within the meaning of the Controlled Substances Act) from making normal deductions from income tax. corporate income. This has reduced the ability of US-based pot companies to retain profits and reinvest them. This is one of the many risks faced by investors in US marijuana stocks.

However, the biggest risk may be a shortage of marijuana in the north. Even though the regulators were convinced that there would be enough cannabis to meet the demand on October 17, it took a few hours for a clinic in Winnipeg, Manitoba, for a lack of product. and be forced to close. SDQC in Quebec also removed about half of the products from its online store after online orders quickly ran out of supply. To date, Quebec, Manitoba, New Brunswick, British Columbia, Alberta, Nova Scotia and Saskatchewan have all reported cannabis shortages. That's more than half of Canada's provinces and territories.

And it's getting worse. In an interview with Canada World News, as reported by Newsweek, Khurram Malik, CEO of a diverse cannabis company based in Ontario Biome Grow, suggests that strict federal regulations could integrate this shortage of at least a decade to another. According to Malik, by 2020, the offer may be sufficient to meet the demand.

Why is there a shortage of weeds in the first place?

Investors are probably not surprised that Canadian consumers' demand for cannabis is high. So you're probably wondering how it's possible that producers and regulators do not foresee that. The responsibility lies with both parties.

With regard to the pot producers, these companies had to be absolutely certain that the cannabis law would be enacted before starting to undertake projects that cost maybe $ 100 million or more. Given that funding for marijuana growers is extremely difficult, they had to be absolutely sure that the drug would be legalized before fully engaging in an increase in capacity. Thus, we have not even seen the increase in production accelerate before the first quarter of this year. It will be a year or two before cannabis producers are operating near full capacity.

For example, The Dutchman Bio Vert (NASDAQOTH: TGODF) should be among the top five producers when running all cylinders. Management anticipates an annual production of 195,000 kilograms, which includes 40,000 kilograms of equivalent from edible products and cannabis-infused beverages (once these alternatives are legal). However, The Green Organic Dutchman has not yet sold a single cannabis bud and should not even register its first sale until the first half of next year. Like most of its peers, the Green Organic Dutchman will take several years to reach peak production.

The other problem, cited by Malik in his interview with World NewsHealth Canada, which oversees the legal weed industry. Back in May, by Journal of Marijuana Business, the agency had more than 500 crop license applications to review. On average, these applications take a few months or even years to approve or reject. Then, once the producers have been given the green light to grow marijuana, they have to apply for a license to sell. On average, sales authorizations took 341 days from May 2018. This regulatory bureaucracy limits the ability of producers to market their products.

It's time to adjust your expectations for jar stocks

Even if you hate to hear this, as shortages may occur for more than a year, it is time to reduce your short term expectations of marijuana stocks. Some Wall Street businesses are already doing this and it would be wise to calm your expectations as well.

So where are some marijuana stocks coming up? For starters, we are still likely to experience strong sales growth, as many of these companies build from a few million annual sales. On the other side of the coin, this means that short-term sales are likely to be at the bottom of the estimates, which means that operating losses could be substantial. As producers continue to increase their capacity and work on product diversification, branding and marketing, their recurring activities may suffer additional losses. This means that shareholders of large producers such as the aforementioned Green Organic Dutchman may not be very happy.

The best bet for investors at this stage would be to keep these companies for at least two years. It is too early to say who will separate from the pack. But, as in all fast-growing industries, there will eventually be winners. In the meantime, keep those expectations under control.

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Sean Williams has no position in any of the actions mentioned. The Motley Fool has no position in the mentioned actions. Motley Fool has a disclosure policy.