Can Germany avoid overproduction as new marijuana markets ramp up?

Germany dramatically liberalized its medical marijuana program this year by removing cannabis from its narcotics list, a change that makes it much easier to obtain a physician’s prescription for the drug.

As a result of this change, Germany’s medical cannabis patient numbers are climbing quickly, and some operators estimate those numbers will grow from a few hundred thousand patients to a few million in a year or two.

Canada was in a similar – but not identical – situation in 2018, when it launched a recreational market nationwide.

Licensed cannabis operators expected millions of new consumers, and in response, they raised millions of dollars to build cultivation facilities to meet the expected demand.

But demand has failed to reach anticipated levels, leaving Canada with a legendary oversupply of cannabis that ultimately had to be destroyed.

Cannabis oversupply

Are the operators supplying Germany’s medical marijuana market today vulnerable to the same oversupply problems that Canada faced?

That was the question posed to a panel of three experts June 25 at the Cannabis Europa conference in London:

• Paolo De Luca, chief strategy officer at Organigram Holdings in Moncton, New Brunswick.
• George Scorsis, executive chair of Entourage Health Corp., a cannabis product manufacturer in Toronto.
• Benedikt Sons, co-founder, managing director and CEO of Cansativa, a cannabis cultivation and distribution company in Mörfelden-Walldorf, Germany.

Here’s what they discussed during the panel discussion:

Why did overproduction happen in Canada?

De Luca: The primary factor was there was just too much capital, too much easy money.

And not only was the money available, companies – especially public companies – were rewarded for raising capital and then announcing that they were going to build these facilities.

It was a self-fulfilling prophecy to raise money, announce that you’re going to build more cultivation capacity and then your valuation would go through the roof.

Scorsis: We didn’t know the patient; we didn’t know the consumer very well.

One thing we did know was how to raise capital quickly.

And that’s unfortunate, because the capital actually preceded our understanding of the market.

But what you’re seeing today is stabilization.

I think Canada has a long way to go still.

I still believe that we’re learning with new products and new innovations in the marketplace, but it was a good lesson for the rest of the world to see, if a very painful and expensive one.

Sons: What’s happening in Germany is quite different.

We’re having a medical market in Germany only right now.

While Canada was having those capacity expansions, we were still struggling to get product into Germany.

So, we’ve come from a regime where we had a little more demand than supply.

I’m fairly confident that we won’t make the same mistakes in Germany.

What’s your advice to German cannabis entrepreneurs about raising capital?

Scorsis: It’s important for us to be responsible, first and foremost, and really understand what our target audience is going to be.

I think that was one of the voids that we had in Canada.

If you’re looking at where capital is coming from, in many cases, it’s coming from alternative areas.

In the old days, we used to go into public markets and raise, whether through a bought deal or overnight raises.

Those have really dried up.

One of the reasons why it’s dried up is because a lot of us did not hit our targets, so it’s more responsible looking at alternative sources for capital.

Now, our sources of capital are quite different: My source of capital in Canada now is a labor union, which sees this as a good alternative to the opiate issue.

We’re no longer looking in the public markets for capital.

We’re looking at alternatives and smarter money now – we need to be more pragmatic.

De Luca: I would hesitate to raise money for cultivation. I don’t think there’s necessarily a need until there’s a persistent shortage.

Can licensing policies help control overproduction?

Sons: There are only three licensed cultivators, which came from a tender in 2021.

This won’t change, so there is a little bit of an existing cap.

We have a very well-established international supply chain of GACP (Good Agricultural And Collection Practice) and GMP (Good Manufacturing Practice) cultivators that are connected into the market.

So, I do not see any reason why we should cap this, because we have existing international competition, which at the end of the day always comes down to price and quality.

We also have the pharmaceutical framework in the German market, which also provides some entry barriers, some hurdles, that you have to correct to operate in the market.

Scorsis: One thing I’ve been trying to get the industry behind in Canada is better cultivation metrics: What is your cost of cultivation for various quality levels of flower?

You don’t want to reveal it directly to your competitor necessarily.

But if you have someone who anonymizes the data – an accountant or someone with that kind of independence – then you can see how your cultivation metrics stack against your competitors.

If you know that your competitor can grow at 50 cents a gram and you grow at 80 cents a gram, then you know maybe you shouldn’t be growing, you should be buying off of them.

How do you forecast patient numbers and consumer demand?

Sons: Forecasting works.

Typically, we might see a deviation of plus or minus 20% for us, which, in our seven years of operations, has led to the destruction of around 2% of products that we sourced, which is a good figure.

Now it is about using the existing data – using the right tools and also correlations and putting all the data together – and being smart about coming up with sourcing volumes.

Just buying another 5,000 kilograms (roughly 11,000 pounds) is something you probably should not do.

You should have a strategy.

De Luca: It’s a lot easier now than it was before, and it really takes a disruption by either a product innovation or a new strain – like high-THC strains – to really move the needle now (compared to) two or three years ago.

Can exports be a way to get rid of excess product?

Scorsis: All of us, especially from a Canadian marketplace, are looking outside of the country.

We have funded capacity at this rate that we can utilize internationally.

The challenge for us is our regulations, converting into EU-GMP is still quite a challenging endeavor for most Canadian companies, because we just run under different regulations.

But it’s definitely an avenue, especially with the price consolidation that’s happening in Canada.

We can sell abroad at a much better premium.

With markets popping up in places like Germany, Portugal and Greece, I think it’s going to be more challenging for us in Canada to continue to be able to compete – especially in the European market.

But many of us are successfully exporting right now, and we’ll continue.

Sons: From the perspective in the German market, we’re exporting to different countries, but it’s not in terms of using this as an outlet.

The lead times typically are longer than you would expect.

So, if you’re running into an inventory issue, it might be too late to think, “OK, what could be a direct export market and how can we put those products into that market?”

We would rather incorporate the volume demand for this market in our sourcing rather than push those products into the market.

In theory, exports could be an interesting and compelling outlet.

But compared to the size of the European market, the German market is the most relevant market at the moment, and then relying on other markets as outlets might be a wrong strategy.

De Luca: We love exports.

It’s a higher-margin business strategy for us, but it’s not as easy as it sounds.

This panel discussion has been edited for length and clarity. 

Omar Sacirbey can be reached at omar.sacirbey@mjbizdaily.com.