The Marijuana Bubble, and when it will Burst

By Tim Kalinowski

 

While the market has been positively bullish on the prospects of the Canadian legal marijuana industry, there are some who are concerned the hype and enthusiasm associated with the industry is overblown.

“There seems to be a lot going into market that has already been filled to this point,” says Albert Cramer, co-owner of Rolling Acres Greenhouse and Big Marble Farms near Medicine Hat and president of the Alberta Greenhouse Growers Association. “You hear about all these billion dollar deals in that industry right now. It’s actually crazy. I think it might be a bubble, and we’re really worried.

“In Medicine Hat where I am from Aurora is building a 30-acre facility here. They are building a state-of-the-art facility. What happens if it this bubble bursts? Well, these facilities could be growing vegetables. It could be real disruptive for our vegetable industry as a whole, and maybe for flower growers too.”

And Cramer is not alone in his concern.

“Few people in the industry in Canada would say this, but there is definite possibility there is a bubble in Canada,” states Chris Walsh, vice-president and founding editor of “Marijuana Business Daily,” a periodical based in Denver, Colorado. “And there is this massive green rush going on where everyone is just expanding and building and growing cannabis without seeing the bigger picture. There are so many unknowns in how this is going to play out. Any time something moves this quickly in an industry, and the hype grows to this extent, you’ve got to be a little wary.”

Walsh says Colorado’s experience with legalization a decade ago can serve as a bit of cautionary tale for those start-ups in the recreational marijuana industry in Canada who are pushing hard to get into the game.

“It’s about companies really staying as close as you can to the realistic projections of the market,” he states. “What you find is a lot of businesses do get swept up in the hype, and they think just by opening their doors they are going to make hundreds of millions of dollars.

“Even in in a big, burgeoning market like we saw in the U.S. after legalization, you can still find plenty of companies that didn’t make it, or made big blunders. They are now out of business, or were so weak they got gobbled up a fire sale prices by a competitor.”

Like most analysts, Walsh predicts the Canadian cannabis market is poised to explode after recreational marijuana is made legal, which could see legal sales triple or quadruple in a very short time period. But, he warns, not all has been finalized on the regulatory end of things and there is a backlog of hundreds of applications from companies trying to get licences from the federal government to grow the controlled crop.

How quickly the federal government can clear that backlog could have severe implications for venture companies, many of whom are already putting massive investments into expanding their greenhouse  and distribution operations. If a company is over-extended, as Walsh suspects some are, you need a quick turn around into a lucrative market to pull you out of the hole. Those companies could be sawed off at the knees by a sluggish federal licencing process, says Walsh.

“Whether there is going to be a supply issue, one way or the other, with recreational marijuana in Canada is the big question,” he explains. “You have a lot of people in the industry sounding alarm bells that when recreational sales start there is going to be severe shortages, with some even saying it could take years to work its way out of that situation. But, on the other side of the equation here, we don’t really know how it’s going to work yet. There is still a lot of regulatory and licencing issues that have yet to be determined. We don’t really know the true scope of demand or how quickly companies are going to get licenced to sell their products.”

Albert Cramer confirms that’s what his members in the AGGA seem to think as well, making many existing and profitable greenhouses in traditional crops wary to head down the legal marijuana path in  these early stages.

“I know I am not going to get into it at my age,” he says with a laugh. “I think it is overall a very small percentage of growers who are looking at it seriously. When you are in the greenhouse industry, and you are growing vegetables, you know there has to be a market. You’ve got to know how much crop to grow, and you have to sustain that growth. It’s not easy.

“When you know all that stuff, and then think about changing over into marijuana as a new crop, there is so many unpredictables to it. People will do what they know. And if they know they can make a living off of what they are doing, when they look at marijuana they tend to think there are too many unknowns.”

That’s not to say Cramer isn’t supportive of those greenhouse businesses attempting to get into the legal cannabis market, a few of which are members of the AGGA.

In fact, he says, everyone in his industry is absolutely rooting for those businesses to succeed out of an instinct for pure self-preservation, if nothing else.

“You don’t want something like this to fail, because it just disrupts everything,” he says. “I hope for the best, but I am not sure how it’s all going to turn out yet.”