Rapid Consolidation in Canada’s Cannabis Market Raises Fears Among Small Growers – Both North and South of the Border
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Last week, Canada’s Aurora Cannabis Inc. announced plans to purchase rival medical marijuana grower, MedReleaf for $2.5 billion, the biggest ever deal in the legal cannabis industry. This follows a wave of consolidation in Canadian cannabis as the country prepares to become the first G7 nation to legalize recreational marijuana nationally as early as this summer.
A few large companies are racing to raise capital and expand growing capacity to compete to capture this lucrative market once it officially opens. Aurora, for instance, has acquired more than nine companies in two years. Once their eleven growing facilities reach full capacity, the company estimates that it will be able to produce at least 70 percent of Canadians’ estimated demand for cannabis.
In an interview with Ernst & Young, Bruce Linton, CEO of another dominant cannabis firm, Canopy Growth Corp., projected that “over the long term, I see an industry with two or three major, relevant players and bunch of craft producers.”
Such consolidation would shift a billion dollar industry from a network of rural small businesses to a few large corporations. While consumers will invariably demand some quality cannabis from independent growers, the size and accessibility of this craft market will have major ramifications for the communities built around this quasi-legal economy. Hundreds of small growers, in both the US and Canada, worry that regulatory decisions around licensing, distribution and retailing could empower the biggest growers and cut them out of the green rush.
Indeed, in the largest US state to legalize weed, California, craft growers are already falling behind. “We’re definitely watching communities and economies start to collapse, it’s very much happening in real time,” says Hezekiah Allen, the Executive Director of the California Growers Association.
The CGA estimates that there are more than 60,000 California cannabis farms employing over 250,000 people. These farms are concentrated in fourteen counties, where roughly 35-40 percent of local economic activity depends on cannabis.
Initially, California lawmakers set out to support these economies and build the legal recreational cannabis market around small businesses. They promised a five-year moratorium on large growers entering the market, capped cannabis farms at one acre, and offered lower licensing fees for smaller farms.
But these protections were effectively revoked through a loophole that allowed one company to own multiple small growing licenses. Large cannabis companies started to grow, and as of February, just 10 companies held 30 percent of all growing licenses. Meanwhile, existing small growers cannot keep pace. They face costly barriers to bringing their operations up to code, without access to traditional banking or small business loans. And restrictive city-by-city caps on retail licenses make it challenging for small growers to claim limited shelf space and reach customers.
“While Californians struggle to connect the dots on legalization at the local level, the big businesses are not waiting,” says Allen, “a few chain retailers with a few mega farms can pretty quickly corner a significant share of the market.”
Canada’s craft growers could also struggle to get to market, as they compete with even more heavily capitalized entrants amidst a restrictive licensing and distribution regime.
A report by the Cannabis Growers of Canada estimated that the small-scale cannabis industry employs 13,000 people in British Columbia alone. “I would like to see the economy of the rural areas competing with the big players,” said Brian Taylor, former Mayor of Grand Forks, B.C., and leader of the B.C. Marijuana Party, “all people are really asking for is an open and free market and opportunity for craft to compete.”
But it doesn’t look like craft growers will have that open market. The Canadian government recently proposed an incredibly small cap of 2,100 square feet on the size of a micro-growing license, some two to five times smaller than craft growers advocated for.
In addition to limited growing space, small farms will have limited buyers and limited branding. The majority of provinces, including British Columbia, plan to source cannabis through government-run distribution systems. In B.C., the government distributor may offer as little as $2-$3 per gram of cannabis, below craft growers’ estimated cost of production. To add insult to injury, strict rules around packaging will make it harder for craft growers to differentiate their products and command a higher price.
“They’re not really making room” for small growers to participate, explained Rielle Capler, a Ph.D. candidate at the University of British Columbia, “cannabis is a major important industry in B.C., you’re going to take that all away and I don’t know what the repercussions are going to be.”
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