Episode 52

The Canada Situation: How Surplus Product Is Harming the Cannabis Industry

Currently, there are billions of grams of product sitting in surplus in Canada. On the surface, this may look like a great situation for Canada to be in – having a stockpile of in-demand product. But the reality is much less hopeful. In this episode, we’ll dive into the details of the Canada situation, how it’s affecting cannabis businesses around the world, and what possible ramifications we can expect long-term so that you can plan accordingly.

Adam Kulbach 0:14
Hello and welcome to the higher enlightenment podcast brought to you by higher yields cannabis consulting your seed to sale Business Solutions team. My name is Adam, part of the creative team here at higher yields. And today’s episode number 52 is about the Canada situation how surplus product is hurting the cannabis industry. And today’s special guests are Karen Kapoor and Corey Wagner from higher yields consulting. So let’s start with the self introductions. Let’s start with you, Cory.

Cory Waggoner 0:47
Cory Wagner CEO and founder here at higher yields consulting.

Adam Kulbach 0:51
Thank you. How about you Chiron

Karen Kapoor 0:54
Hi, my name is Grant deplore. I am owner of Nighthawk cannabis Inc. And also I’m owner of red consulting, Inc. based up in Canada,

Adam Kulbach 1:04
thank you. First, let’s talk about the situation. Currently there are billions of grams of product sitting in surplus in Canada. So what is going on out there?

Karen Kapoor 1:16
So Canadian, this has to be partially blamed on on the federal regulations and plus also on the enterpreneurship skills of Canadian people who are involved in the cannabis sector. Unlike states, when the industry started, everybody got licenses. Because it is not like licenses numbers are not kept in Canada. So a lot of licenses were issued, since it especially after legalization, and a lot more than previous one. And people started growing, growing growing cannabis, there was this whole, like the PopCo companies who will go big anyway, it was just like a pissing match, frankly, put it that way. But who can grow big who can grow more. And what we have seen in my personal experience the provinces or as their states in the USA, they were not that much ready to take the product in. And then the marketing caps all those regulations. So basically, it will literally create an oversupply of the product but the consumption was not that much there. So industry literally outgrew the the market cap. And other reason is also lack of integrity. Sorry interconnectedness between the whole cannabis industry because some people are looking for product other people’s don’t even know if those guys want products. So so that kind of a platforms are lacking in this industry here in Canada. They are like, there is so many brokers. And most of the brokers don’t get anything done. I tried to do that tonight. I’ve never worked it out, only one or two brokers brought something and so far, I don’t think I have made any deal with any broker so far do I have very good relations with a lot of them. So this whole oversupply and then again, the provinces are cutting down the prices so much they dictate the prices like you don’t have your way on the prices, whatever Ontario cannabis store, say or British sorry, British Columbia store says you have to move accordingly. So this whole situation has become so volatile that you might have noticed a lot of companies are going under, like some people are even saying the companies who will make 20 23.2 But only they will survive further. But they said the same thing. And pretty pretty one as though so yeah, so this is a bit going on here and this is going to this is good for some companies, because a lot of companies are just selling the product just to survive at a very cheap rate, like prices are come from $8 in 2016 17 program now, you can find indoor grow product for 80 cents for 75 cents in big words in certain cases.

Adam Kulbach 4:04
So what is the impact of this on Canada, specifically?

Karen Kapoor 4:10
A lot of job losses are going to happen which are already continuing. A lot of billions of dollars has been lost in the industry, especially by the purpose. As you might have seen recently. The Chocolate Factory cannot be bought from that chocolate company Hershey’s. Now they have sold it back to them 33 million and and this is going what’s going to happen is what happened in the alcohol industry back in 19 6070s. After the war, a lot of local breweries popped up across North America I believe after Prohibition ended and then amalgamation started happening which you’re seeing in Canada right now. And seems like the companies which are private or run a tight ship, they are doing okay doing well. And the company is which went extravagant across the board. They are going And, like Tilray is going towards alcohol industry, Canopy Growth has their own issues. So there’s a lot of happening in the industry, a lot of jobs has been, it is going to slow down the economy. But I would say this is a corrective action every industry takes over time, frankly speaking. Firstly, it’ll be a lot of things, a lot of companies, then some companies make it then some companies combine and join hands to, you know, to work together, then they evaluate become one entity and try to work again. So I think that consolidation has started significantly in Canada, but still, the private players who are not come close, those collaborations are becoming stronger. But over time, you will see that there will be lot of packaging facilities. But when it comes to large scale manufacturing, there will be few companies and the craft element where you have very small growers, they are doing their own thing, like the only target for the crop product, like high quality product, some folks are doing really well in that, but some folks are really struggling because prices are

Cory Waggoner 6:07
I think, overall, it’s something we’re, you know, we’re seeing in Canada, but it’s in the beginning of the industry like 2010 2015, there’s a big gap in knowledge of like how to efficiently cultivate product, how to create product, and now with as many programs that exist around the world, and the amount of people and technology and investments from some of these vendors and equipment providers into the industry to really drive innovation. You know, we’re now seeing I think, where that knowledge is has caught up to the industry, and it’s causing these these market saturations. And, you know, what we talk a lot about with with clients, because we’ve always been very efficient in our growth methods is, you know, we can produce 1000 10,000 100,000 pounds a month, you know, with the right facility, the right budgets, but can we sell it, you know, and now I think groups are starting to get a lot more, they’re starting to look at their data a lot more, they’re looking to become efficient now, because for a long time, they could be, they could operate very sloppy, and they could produce for really high rates, and they could sell for extremely high margins. And now we’re not seeing that, you know, the margins are much smaller, and then you can’t continue to produce at the rates they were and sell at these current market prices and expect to survive. So you know, just kind of echo with Chrome sand, you know, is there are a lot of people shedding, you know, kind of purging out of the industry and some of these bigger operators are starting to understand, you know, what their strengths and weaknesses are and how they can team up to, you know, be be a better operation overall, and, and consolidate some of these things. And you know, we’ve seen some of that here in the US with Columbia carrying Cresco labs last year. So it’s definitely it’s, it’s what we saw here in the US and how these markets matured. And what we’re seeing in the international markets is very similar, but you know, a lot of it still comes back to like, solid plan eight, you know, beyond just, you know, we’re gonna grow the best and the most, and really focusing on efficiency and, and branding, staying compliant, which really helps drive a lot of that efficiency.

Karen Kapoor 8:17
One thing I would like to add to that as you are 100%, right, curious about the efficiency of the production, because when I started in industry in 2018, the production was really low compared to what we have, and especially with the interest of the big outdoor growers like myself, like we grew at 65 acres this year cannabis and we hope to hardest around 150,000 euros freshers Cannabis Club. And the thing is that as the prices are coming low with the slowdown of the overall economy of Canada and North America and they say people don’t have that much money to buy fancy weed and if so, that is also one of the reasons why they are driving the prices down like in Canada right now you can buy an ounce of cannabis, probably around $70 Canadian, so it will be like 5055 bucks us my conversion might not be correct but but that is how do the price has gone. And in 2018 I remember to buy like even one gram at the retail like people were paying around 40 to $45 a gram at the store and there’s a medical guys versus only prescription for medical because before 2018 There was no recreational so yeah, it is just going to become just like a commodity pricing just like how we have superstores here you guys have breakfast was there you have the same belt coming from the same time but two different brands. I think it is slowly going towards that similar trajectory.

Adam Kulbach 9:46
Right um, traditional supply and demand economics matter if you want to develop a sustainable regulated market selling cannabis quality and price have to be better than the black market in our industry. We’re industry will never break through. So what do you guys think about that?

Cory Waggoner 10:07
The black markets been a really interesting one. Because it kind of felt like for a while the legal market was winning in a lot of ways, and people were starting to feel more confident in, you know, having a product that has been, has been created in a commercial facility that is compliant, something that has been tested, and they know what they’re putting into their body, something that they know, you know, the potencies, and the terpene profiles. And then we started to see more people gravitating to the legal side, because there’s really more data, and you can be a lot more specific of, you know, as the consumer, what you’re looking for what you like, how it makes you feel. But I would say, you know, in the last two years, with Delta eight and delta nine, it’s kind of created this, like, this legal illegal market, where now when we approach new markets, we have to kind of take into consideration that the state may issue or the country may issue a limited amount of licenses, but how strict are they with delta and delta nine, because people will still go to a gas station and buy weed, essentially, from a gas station that that hasn’t been tested that, you know, they know really nothing about. And, you know, I’m not sure what the what that’s going to how that’s going to all kind of work out, you know, because it is, it is frustrating, especially to these owners and operators. Similarly, caregiver laws that they used to have to kind of battle with where operators could grow, a lot of plants grow, a lot of products sell their product, they didn’t have to get taxed, they didn’t have to have cameras, didn’t have licenses, they didn’t have inspections. And so I mean, it really just drives down their production costs. And now, you know, we’re kind of seeing this the same thing, you know, popping up with the Delta eight, Delta nine, so hard to say where, you know, and when the black market will completely go away, and for how long it exists. You know, I don’t know, maybe similar to what Corrado saying, as far as alcohol, you know, it’s kind of the same thing where people still do kind of small craft brews and small distilling, you know, in their basements and things like that. And, you know, as long as you’re not selling it, it’s for your own consumption. You know, maybe that’s where that, you know, very small black market exists. But for now, it kind of feels like we were, we were battling it, and we were winning. And now we’re there’s kind of a another pressure from that black market coming to us that operators are having to try to figure out how to navigate and protect our market share.

Karen Kapoor 12:40
I agree with Tori. In Canada, they dealt it with a little bit smartly, I would say. So the government came up with a program called microbeads. So micro grows, you don’t need that much investment. You don’t need security cameras, you don’t need that much cost of operations. And a lot of black market people has prospered with the legal framework, who did not have a pass any criminal backgrounds. And the one thing which really, I would say broke the back, or the BC black market, whatever limited knowledge I have got, through some conversations with the local people or whatnot. COVID has really killed a lot of black market in Canada, because earlier what what we have been told is quite a quite frankly, a lot of videos to be smuggled black market videos to be smuggled to us in exchange for the drugs or money. But when the COVID restrictions happen, that all stopped, and some say estimates would even say that 70,000 80,000 lives, workshops, black market shops were shut down across BC, it could be even more it could be 100,000 lives, you don’t know, because there is no specific data. And when it comes to the pricing, I can say that at this point, Canadian market is pretty well, very competitive pricing compared to even indoor guys, the black market guys right now. But black market is still around. Because some guys do have their niche clients, they will not go to anybody else because they are buying to the dealer for a long time. But overall, I would say Canada is still dealing with this problem. But that micro program has helped them a lot. A lot of black market folks have transferred to the legal industry. But how happy these folks are in the legal industry and how long they will stay? That is a big question. Because we are we’re Grover used to make $2,000 About in say, 2010 he’s getting like 400 bucks or 500 bucks, or even not even like the price has gone sold. So like as I say packet gram, but 50 gram doesn’t matter, because it’s all about commodity commoditization of the whole industry, especially with the interest of the outdoor guys. That price has gone even though so and in some are even organically certified and stuff. So Yeah, it will be really interesting to see how it plays out. Probably it might play out the same as in USA, that first you see a bit of a slump in the black market. But afterwards it can go up but there is so many producers here that I kind of doubt that black market will survive for

Adam Kulbach 15:19
what percentage do you think of the market is the black market in Canada and and America?

Karen Kapoor 15:27
It’s really hard to say some black market guys say that legal market is only five to 10% of the total cannabis industry, which is sometimes a bit hard to digest especially I’m talking about Canada, USA, I do not know that much. But that is really hard to say because I believe Canadian market was in few billion dollars to $3 billion. And even if you say it is only percent, then overall black market industry becomes really big. So those numbers I don’t know how true they are. But some people still like in Ontario of that market, the system surviving because recently we see every day like 500 litre shop got raided. This happened that happened. So Opp, like Ontario police is really coming out of the stuff same RCMP is trying to do out here. But it also depends from province to province, Ontario is a bit more modern, non receptive of weed throughout the culture where bc it was always more like accepted government never did. It was just like California. Let’s put it that way. So this in California is pretty similar encroachment comes to cannabis. So it will be interesting to see how it plays out.

Adam Kulbach 16:41
How can other countries avoid a similar debacle.

Karen Kapoor 16:44
But they have to be very like they they need to learn a lot from what happened throughout the history in the cannabis industry and alcohol industry before they before they pick up anything in the regulations. So Germany, for example, is going really carefully in this to navigating very carefully, they are slow in their process. And but I mean, if there’s no in the process in the black market there is already thriving in these countries. So it has to be like you cannot fight a black market unless you break their backs with the financial stuff. And that is what Canada is trying to do. It seems like prices are so low that black market, people might not be able to compete with it. And it will take few decades to just come out of that whole thing because it takes quite a bit time people to switch their habits over time. And another thing is quite a few of regular cannabis smokers. They always think that the government we just be paying taxes to the government that is also a little bit mentality somewhat they’re in the customers who prefer black market, you know, products. But overall, I would say that first thing is the regulations, regulations should be business friendly. They should not try to punish people. For example, in Canada, you’re just growing a plant. Yes, it has its different impacts, but it isn’t. We have to face more regulations than even alcohol industry. We have taxed heavily compared to alcohol industry. A lot of companies shut down just because they were not able to pay the taxes. For example, if you sell some cannabis, more than half of it is taken away by the government or the store guys. And the grower hardly gets If he’s lucky, he might get 15% in his pocket 15 to 20% in his pocket. So running. If the taxation is done, right, people are provided incentivizing for businesses policy is more friendly to grow cannabis, export cannabis import and r&d. Like if these five six sectors they, they I would say they should deal with it in combination together, not like as the separate entities. And they need to have this this should be done not by like health agencies like Health Canada or somebody like they’re in other countries. It shouldn’t be under agriculture, because they know how to grow a plant and it should be dealt with only as a food, food or nutraceutical. It doesn’t have to go to pharmaceutical because it doesn’t impact. It doesn’t have that much refinement of the product.

Adam Kulbach 19:30
How’s the Canada situation affecting cannabis businesses around the world? First thing

Karen Kapoor 19:35
is it’s hard to get investment. Like people don’t like to invest in cannabis anymore. Yes, there you will see always this thing going around of Africa is coming online. They will be big. Then our island is a big thing. They are saying oh we’ll take I think apart from Australia, and say some Western European countries nobody has moved at at faster rate, in order to get cannabis, you know, legalized and the whole because most of these companies are directly or indirectly connected with Canadian businesses, like there was a big company in Ontario who invested in. But they actually they said that they are investing. And if you go and see most of the suppliers of the Australian market, most Canadian companies Americans can’t export at this point because it is illegal a federal level. I’m not sure if DTS is I think for sure illegal for you know, better CBD can be exported or not, I don’t know much about that. So all dependent Canadian companies are more stable, that they can be part of the most stable supply chain. So Canada is still IOC, because the mental legalization first they are the one of the largest exporters of cannabis in the world at this point. So anything that I would say affects the can Canadian industry, it is going to affect directly or indirectly the other industries in other countries as well. When I say other industries, cannabis industry,

Adam Kulbach 21:13
so for the future, long term, how can cannabis businesses leverage a situation for their benefit, and, you know, adopt for the future,

Cory Waggoner 21:24
I’m just gonna say, you know, one thing that we’re seeing is a lot of facilities that are looking to retool, retrofit, really start to pay attention and dive into their data. And a lot of that, you know, just having to do with efficiency. So but having to do with some of the rebates on on energy efficient equipment right now, in some groups, just knowing and kind of learning over the years that maybe just bringing in this guy who calls himself a master grower isn’t the best option for us to move forward. And so seeing a lot of people and a lot of groups really go and move towards more of a true system approach, something we do a lot and really promote here higher yields, is, you know, if we put these controls in place, and we put these genetics through here, and we run it like we did in these other facilities, then we can get a very consistent outcome. Now, there’s always variables to that. But overall, like there’s there’s proven data behind it, versus, you know, a lot of the things that we saw for a long time that I think have created some of the issues for some of these inefficient cultivators of trying special things try and, you know, little scientific experiments with no controls, or, you know, having three or four growers come in, and they’re doing this over here, they’re doing breeding projects over there. So it’s a lot of a lot of people needing to understand what their production costs are really needing to kind of clean up their back a house, a lot of these businesses had been running just kind of by seat of their pants, and we asked them, What what are you producing for or, you know, what, what is your, you know, your average yield, you know, per month per light per square foot. And it’s always something drastically larger than what the data actually tells us. So, I think a lot of these groups just continuing to prepare themselves, you know, to, to really put the right systems in place, know the time that we’re in, and right now, it’s really weathering the storm, because I do believe in the next 1218 months, things are going to start to bounce back. And that’s simply because all of these groups are going out of business. So there’s going to be less product on the market, we’re starting to see more regulation, a lot of times when you see regulation, you see, prices go up, because it’s harder to get product to market. And when you see deregulation, which we’ve seen in a lot of these states, and very progressive deregulation, you know, it makes the barrier of entry very, very easy. And when it’s easy, then it’s easy to get product to market. And it’s easy to product to market, everybody wants to do it. So, you know, moving forward, I think operators, it’s it’s all about being efficient. And then as far as federal government, state governments, local governments, just being mindful of what, you know, what a safe and sustainable program is, right? Like we want to make sure public health and safety is always the number one concern, but also these businesses have to survive. And if you allow too many of them to open up, then they’re not going to survive, and you’re going to have a lot of bankrupt businesses and that’s, you know, a big part of that sustainability but also not making it so conservative and so difficult to get involved that average people don’t have the opportunity to live their dreams or you know, run through these things. So that’s at least my thoughts on things Karang What do you think

Karen Kapoor 24:52
you’re right, but the overall structure which needs to be supporting the industry is non existent for cannabis. Let’s be very Be bluntly honest about it. Probably you might have noticed in states as well, like, first of all, there is no academic research going on in cannabis like it is going next to nothing. So whatever little bit is happening is happening at the field of like, how it impacts the humans and all that stuff. We are far apart, we even reach to that point of city jail. And there is zero support from academia when it comes to plant science or agriculture side of things. In, in Canada, at least. For example, if you go to a university, in middle of Saskatchewan, they have a breeding program, for example, they have really canola or peas or wheat for everything, but none of nobody has cannabis. Yes, there is some research, we’re doing something. Well, I believe there was a couple of crops. We were doing greenhouse studies and whatnot. But if I say a solid dedicated breeding program for which government funds like other breeding programs, they that is not I’m even willing to say that cannabis research in plant science could be even 40 to 50 years behind. Yes, we like when it comes to there is no structured plant breeding happening here. Like yes, you can go and buy strains and varieties from here and there. But you don’t see any concrete data on outdoors available publicly. There’s hardly any research. Now research articles are coming out of cannabis, but not at a scale where you will see for any other problem. That is number one, in my opinion, when it comes to sustainability, because you will need a really good product sustainable products across different diverse regions. Is that then second, when you say I agree with you on the regulation spot revelations, like I would say healthcare has done a great job so far. Yes, there is still tough regulations. But the federal agencies can’t do anything unless the policy change happens. Because if there’s a because of the political, if I mess is the political will because it’s still lacking, I would say, USA for sure, at the federal level. But Canada Liberal government game and this, they were really good, they regularized quite a bit of stuff compared to the code. But still it is very stringent compared to food industry, or compared to alcohol industry. Unless those regulations are not like very deep, or at least create a level playing. third biggest problem which we are facing is banking. Banks don’t support us, there is no financial institution that supports you. Like, for example, if I want to open a barber shop, I can go to the bank, I will put my plan, they will say okay, that’s a big town, you know, we’ll loan you something. Try even opening a bank account. They need so much documentation that you will feel like a bloody criminal. If you go to dealing with the banks, or credit unions in Canada also, they are helping out a lot. But because when you have a cannabis account, you get audited way more by the authorities. Because all of us go through financial audits and stuff, go to bank accounts. And banks can shut down your bank account without notice without cause. And now they’re not even taking any too many clients on cannabis because they say we get too much audited. For example, I have to pay an extra fee of $500 a month just to maintain my bank account. And I don’t think in any other industry that in any banking system or at least not in Canada, I have not seen that. And lastly comes work trained good quality workforce. It’s really hard to find good train good work ethic workforce in Canada. That is another big thing the industry is facing because most of the people who are black market tremors are working in the black market. Some people have good ethnic but majority human face problems because where these folks are making 35 or $40 an hour trimming cannabis are 30 bucks $35 An hour growing cannabis. Normal license holders cannot pay that kind of money. And to your point about Master growers and you know other folks because a cannabis company is just standing on mainly three things we have Robert when it comes to individual car sales guy your quality assurance guy, the sales guy don’t communicate with the production people too much because of whatever reason there is a lot of lack of communication I have seen in the industry here and then the quality assurance guys are the last one to be informed Okay, we are going to make this deal figure it out how to do the paperwork. So there is also this lack of communication because a lot of folks who come in this industry they don’t come from I would say any business background or professional background, I will say somebody was going to look at the home and then say okay, you know what, I have money. So let’s do by the license, hire a consultant. And also consultants are all consultants are not that great consultants I would say. Some people have little bit knowledge and they try to see they have a lot of knowledge and I myself do Is that at the start of my talk man, I was trying to engage him with some books. So yeah, it is it will evolve over time, because every industry has gone through this. Pharmaceutical has industry has gone through this in late 1800s, early 1900s, when the Redskin food industry was the same. Around the war time, when the all this whole new innovations were coming up with packaging and stuff, they evolved as well. And I think within next five to 10 years, I would say cannabis industry might reach at that point, with the help of more schools are coming up who are offering programs for cannabis cultivation, we’re open program for extraction, quality assurance. So within the next three to five years, I would say you will see a lot of people coming out of these schools, at least in Canada, who has some basic working knowledge. And then you can train these guys according to your environment in your property to work well.

Adam Kulbach 30:53
Yeah, it sounds like there’s a lot of opportunities for educational facilities to start programs,

Karen Kapoor 31:00
Oh, 100%. Like in my farm, I have 71 spins growing out of 34 commercial. Like, I believe I have enough genetic material that five PhD people can do PhDs there, but I know I, it will be really hard for me to get funding from the government for that, and the universities to agree with me to do that PhD program, or even masters or bachelors program. So that’s why like, even people like me who have a science background, we are also bit hesitant to reach out, because our focus is to ensure the commercialization of our crop. But if Institute’s want to collaborate industry has a lot to offer, we just like I will say Canada is just like an orphan child, who neither agriculture as a parent is willing to take us. Neither pharma industry, not food industry. So VR sound made up our own entity which we will need in Canada.

Adam Kulbach 31:52
That’s all the questions that I have. Would you guys like to expand on anything or any other thoughts?

Cory Waggoner 31:59
It’s an interesting time to be in cannabis. And, you know, this is the first like, I think, you know, with all the market compression going on, you know, this is really the first big wave of I don’t know, the market becoming very regulated. And so it’d be really interesting to see how people who survives it, who changes, who doesn’t. And you know, who comes out on the other side?

Karen Kapoor 32:25
Yep, it is, I would say the most interesting time I have seen so far in my almost five years in the industry. And what our approach here, like your whichever companies I’m involved is try to the best quality and try to be the cheapest on the market. Because of the unless the overall economy doesn’t get up for each country like the US or Canada, as you know, both seems almost going in recession. Unless that doesn’t turn around. I would say, yeah, next year, year and a half, two years will be really interesting to say. And I 100% agree with Cory. There will be few companies who will survive who are running tight ship, and whoever is spending an extra penny which is useless, which doesn’t give you a return, they will go on. Alright. Well, thank you

Adam Kulbach 33:13
very much, guys for being on the podcast today. Really appreciate it was very informative.

Cory Waggoner 33:19
Yeah. Thanks, Adam. Thanks, Karen.

Karen Kapoor 33:21
Thank you, Cory. Thanks.