New Canopy Growth CEO David Klein is already imposing discipline upon the Canadian market by closing a staggering 58% of the Ontario company’s existing indoor production capacity and 29% of its total production area.
This move equates to a 7% reduction of the total Canadian indoor grow area, as reported by Health Canada, as of November 2019 and gives Canopy 5% of total indoor growth area for the country but 27% of total outdoor grow area.
This reduction in industry capacity will reduce supply and help balance Canada’s cannabis oversupply, ultimately to the benefit of pricing – assuming these greenhouses stay closed and Canopy does not just sell them to another operator.
Company representatives told Investor Intelligence that the British Columbia grow facilities are to remain closed permanently and plans exist to divest them.
Given the capital constraints and management changes by other Canadian operators, oversupply and low prices, we would not be surprised to see more announcements from others cutting excess capacity.
However, there also could be pressure on prices from the shift to outdoor grow.
To support prices, the harvested product will have to be processed into higher margin goods, such as edibles and vapes, while not cannibalizing extraction from lower cost indoor flower.
Canopy cuts indoor capacity by 58%, overall capacity by 29%
Canopy announced it is shuttering 3 million of its 5.4 million square feet of licensed indoor production capacity, or 58%.
Below are the exact figures provided by the company to Investor Intelligence.
|Before||After 3/4/2020||% Change|
|Total licensed square feet||10,781,379||7,665,890||-29%|
|Indoor licensed square feet||5,381,383||2,265,894||-58%|
|Outdoor licensed square feet||5,399,996||5,399,996||0%|
In addition to closing the two greenhouses, the company is eliminating 500 positions and will not open a third planned greenhouse in Ontario that was expected to add another 453,000 square feet to it production capacity.
Canopy has 5.4 million square feet of outdoor grow capacity, so some of this is a shift to lower the cost of outdoor cultivation for extraction. But the decline still represents a 29% reduction in the company’s total licensed square footage capacity.
Eliminating indoor capacity has a greater impact on produced capacity because indoor can conduct several harvests per year while outdoor completes only one.
As a result, the reduction in capacity will be greater than the 29% reduction in area suggests.
Canadian indoor capacity declines by 7%
Canopy’s greenhouse cutback will reduce Canadian indoor licensed areas by 7%, a significant reduction that will help rebalance an oversupplied market.
As of November 2019, the Canadian government reported 4.397 million square meters (47.3 million square feet) of total building space for indoor grow and processing.
Canopy will now have only 5.1% of Canada’s indoor cultivation, down from 11% before.
|Measured in square feet||Nov-19||Pro Forma Canopy||% Change|
|Total Canadian licensed indoor space||47,324,068||44,208,579||-6.6%|
|Canopy’s licensed indoor space||5,381,383||2,265,894||-57.9%|
|Other operators’ licensed indoor space||41,942,685||41,942,685||0.0%|
|Canopy % of Canada licensed indoor space||11.4%||5.1%||-6.2%|
Canopy shifting to outdoor, lower costs
Canopy appears to have 27% of the total Canadian licensed outdoor cultivation.
The Canadian government reported that 185 hectares of outdoor grow exist as of November 2019, or 19.9 million square feet. Canopy has 5.4 million square feet of outdoor space.
In its second-quarter earnings release, the company said it had 5.2 million square feet of capacity; the latest description from March 4 noted 7.2 million square feet, implying the former did not include the outdoor capacity.
This shift from indoor to outdoor will offset the capacity cuts and might exacerbate the pricing pressure as lower-cost product comes to market.
Even if the outdoor harvest is used only for extraction, it removes a lower-cost wholesale channel for excess indoor flower. Ultimately, the outdoor-grown product needs to come to market as processed consumer goods.
|Total Canadian licensed outdoor space||185.0||19,913,215|
|Canopy licensed outdoor space||50.2||5,399,996|
|Canopy % of Canada licensed outdoor space||27%||27%|
Large Canadian kilogram capacity down by 11%
Different companies can grow with different levels of efficiency in the same area, so what ultimately matters is the kilograms of cannabis produced – and it seems Canopy is reducing Canadian supply by 11% (before including the outdoor grow capacity).
We consolidated the larger Canadian licensed producers’ reported existing and planned capacity in kilograms at our Investor Intelligence Conference in December 2019, with Canopy at 164,000 kilograms of a total of 832,000 kilograms. This 164,000 kilograms comes from annualizing the September quarter’s harvest of about 41,000 kilograms.
Canopy cutting back its capacity by 58% would reduce the total by 95,000 kilograms, or about 11% of the estimated Canadian licensed producers’ capacity in kilograms.
Given the recent management and strategy changes at Aurora Cannabis, we do not expect the company to expand capacity to 625,000 kilograms as previously announced, nor would we be surprised to see a similar announcement about capacity cuts from the Alberta firm and other producers going forward.
Kilograms capacity in Canada as of December 2019
*Canopy’s planned capacity is as of March 4, 2020.
Mike Regan can be reached at email@example.com.
Craig Behnke can be reached at firstname.lastname@example.org.