(This is the first installment of a two-part series on the destruction, supply and sale of regulated cannabis products in Canada.)
Canadian licensed producers have destroyed a growing amount of cannabis every year since adult-use legalization nearly four years ago, with 2021’s record quantity far exceeding the product sold that year, an MJBizDaily analysis has found.
The latest data signals that some Canadian mass-producers might need to further rein in output to bring it more in line with forecasted sales, after years of trying to rightsize capacity so they’re not growing more than they’re able to sell.
All told, Canada’s federally licensed marijuana producers destroyed a record 425 million grams – or 468 tons – of unsold, unpackaged dried cannabis last year, according to Health Canada data provided to MJBizDaily.
Last year’s total was up more than 50% from the 279 million grams of dried cannabis that was destroyed in 2020. LPs destroyed 155 million grams in 2019.
Seattle-based analytics firm Headset estimates that sales of dried cannabis and pre-rolls amounted to 293 million grams last year in four key provinces, indicating destroyed inventory again exceeded sold production.
Headset monitors sales in Alberta, British Columbia, Ontario and Saskatchewan, which together account for approximately three-quarters of all legal sales of recreational marijuana products in Canada.
In addition to the destruction of unpackaged dried cannabis, more than 7 million packaged cannabis products across the country were sent for destruction in 2021, according to the Health Canada data.
Quantities of destroyed cannabis include:
- 3,576,232 packages of dried cannabis.
- 1,118,148 packages of extracts, including vapes.
- 2,421,823 packages of edibles, including beverages.
- 15,359 packages of topicals.
Headset tracked cannabis sales of 104 million packaged units in 2021 – indicating that, unlike unpackaged dried cannabis, sales of packaged merchandise far exceeded the amount that was destroyed.
The Health Canada data does not include the weight of the packaged production.
Destruction has been growing in Canada’s young cannabis industry after the largest producers funded and built out more production capacity than the industry needed after the launch of recreational sales in October 2018.
Most of the biggest greenhouse transactions led to direct real estate losses worth millions of dollars and “balance sheet adjustments” worth billions of dollars in inventory and other asset write-downs, previous MJBizDaily reporting found.
In fact, cannabis producers in Canada sold less than 20% of their production between legalization in 2018 and the end of 2020.
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Since 2018, almost 900 million grams of unpackaged dried cannabis has been destroyed by licensed producers because of overproduction and quality issues – a weight approximately equal to 650 Toyota Prius cars.
That figure would easily pass the 1 billion-gram mark when destroyed packaged marijuana is accounted for.
Bloated balance sheets
Stewart Maxwell, a cannabis crop consultant based in British Columbia, said some large producers might be putting off destruction to make their balance sheets look better than they really are.
“I think some of the larger producers just want cannabis in their inventories. Even if they never sell it, it still looks good on your books to have assets,” he said.
“A lot of producers aren’t destroying products when it’s ready to be destroyed, even though it’s no longer marketable.”
Across all product categories in Canada, the amount of packaged product sitting in corporate inventories far exceeds the amount of packaged merchandise that is sold.
That imbalance indicates that high levels of inventory destruction could continue for some time.
In December, for instance, 14 million packaged units of extracts were stashed in inventories of producers, wholesalers and retailers.
In the same month, sales amounted to less than 3 million units in recreational and medical channels.
Roughly 19 million units of cannabis edibles were packaged and ready for sale in December. Only about 4 million units were sold, according to government data.
Cannabis topicals inventory reached 550,000 units, compared with sales of 65,000 units.
Meanwhile, roughly 36 million packaged units of dried cannabis were in inventory that month, with sales reaching 9.6 million units.
Packaged cannabis destroyed in Canada by product type
|Product type||2020||2021||Percent change|
|Dried cannabis units||2,642,779||3,576,232||35.32%|
|Cannabis extracts units||1,337,364||1,118,148||-16.39%|
|Edible cannabis units||714,485||2,421,823||238.96%|
|Cannabis topicals units||943||15,359||1528.74%|
The imbalance primarily lies with licensed producers, not wholesalers or retailers, the Health Canada data suggests.
Maxwell warned that the overproduction will make life difficult for most new entrants into the industry.
“I’m a crop consultant. I make my living teaching people how to grow more weed. But quite often, my first meeting is uncomfortable,” he said.
“A majority of the time, I’m telling people, ‘I’m sorry, but you’re going to fail.’ And they usually don’t hire me when I tell him that, but that’s the reality if you’re just getting into this industry (now).
“The odds are, even if you are a good actor and you have substantial financial assets behind you, the numbers are not good for anyone. Because of these issues – oversupply. Cannabis can’t find its real price point.”
One of the companies navigating Canada’s tumultuous cannabis market better than some of its larger competitors is cultivator Organigram Holdings.
The New Brunswick-based company has managed to grow its overall market share and sales, while most of its main rivals have seen their sales crash and write-downs skyrocket over the same period.
A recent report by New York-based financial services firm Cowen noted that some Organigram rivals experienced sales declines upwards of 39% year-over-year in the second quarter of this year.
Organigram’s sales, by contrast, rose 60%.
CEO Beena Goldenberg said part of the reason is that Organigram sells most of what it produces, avoiding the massive destruction and write-downs facing larger competitors.
“No. 1, Organigram built out our capacity over time. We had mistakes, too. But in the last couple of years, we’ve been producing based on our sales forecast,” she said in a phone interview.
Goldenberg said not overproducing requires a deep understanding of what your customers want to buy and why.
“Like anything else, it’s all about making sure you’re producing what a consumer wants,” she said. “Quality is becoming the determining factor.”
She said markets are stabilizing enough to make accurate forecasts, “and you shouldn’t have massive amounts to write off. You should be working with the provinces on making sure you have an optimized (product) lineup.”
Cannabis is an agricultural product, Goldenberg said, so consumers don’t want something that’s six months to two years old.
“I think we’re performing very well because we have fresh products in the marketplace all the time. It’s not aged six months, nine months,” she said.
Being able to deliver fresh products boils down to three factors, she said:
- Forecast accuracy.
- Measured investments in inventory.
- Customer service.
“In my whole career, not specific to cannabis, it is always (finding) that balance between forecast accuracy and investment in inventory and customer-service levels. You have to optimize those three factors,” Goldenberg said.
She said Organigram is sitting on about three weeks of inventory.
“That is critical to our process,” she said. “We look at what we need, and we produce accordingly.”
Matt Lamers can be reached at firstname.lastname@example.org.