A Marijuana Shortage? How Health Canada Is Making Changes To Fix The Cultivation Problem

Pardon the cliche, but the marijuana industry appears to be the greatest thing since sliced bread. Although the cannabis industry has existed for decades behind the scenes, the legalization of recreational weed in Canada, along with more than 40 countries giving medical marijuana the green light around the world, has opened the floodgates for legal revenue to flow into the industry.

But, as is common with any nascent and fast-growing industry, it's dealing with growing pains. This is especially true of our neighbor to the north, Canada.

Marijuana Shortages Seriously Constrict Canadian Sales

Over the past two months, Statistics Canada has reported that retail sales figures for cannabis stores have declined, with February's total sales slotting in 13% lower than what cannabis stores brought in during December. This decline is the result of a persistent shortage of marijuana in Canada that's caused by a combination of factors.

To begin with, Health Canada is contending with a massive backlog of cultivation, processing, and sale applications. As of January, the regulatory agency had more than 800 applications in backlog, with the average cultivation application taking many months, and the average sales application taking close to a year, to approve. This regulatory red tape has slowed the ability of growers to plant, harvest, process, and sell cannabis.

Second, Canada has been contending with a shortage of compliant packaging solutions. Health Canada laid out a pretty long list of requirements for packaging solutions last year, including that they be tamper- and child-resistant, contain specific warning labels, and don't appeal to adolescents. Without ample packaging materials, raw cannabis is left sitting on the sidelines awaiting processing.

And third, the growers themselves are to blame. Constructing greenhouses can cost a lot of money, and marijuana growers simply weren't willing to outlay a lot of capital to cultivation development until they were absolutely certain that the Cannabis Act would become law. It wasn't until roughly December 2017 or January 2018, when the excise tax rate was outlined by regulators, that it became apparent the Cannabis Act would become law. Thus, growers' tardiness in focusing on capacity expansion is also to blame.

This Game-Changing Move Is Designed To Alleviate Canada's Pot Shortage

However, Health Canada believes it has a solution that'll greatly alleviate the cannabis bottleneck currently wreaking havoc in the country. As reported by BNN Bloomberg, Health Canada unveiled a plan this week to only allow applicants that have completed their greenhouses to submit cultivation applications.

Prior to this rule change, marijuana growers would submit their cultivation applications months, or perhaps even more than a year, before they'd break ground on constructing or retrofitting a grow farm. They did this because they knew it would take many months, or more than a year, before the regulatory agency would have time to review their application. But according to Health Canada, more than 70% of applications for a cultivation facility whose paperwork was approved by the agency over the last three years failed to provide evidence of a compliant manufacturing facility.

For example, Aphria (NYSE:APHA) has been waiting for more than a year to receive approval for its cultivation license application for its Leamington, Ontario, joint venture with Double Diamond Farms. The Aphria Diamond facility, as it's known, involves retrofitting existing vegetable-growing facilities owned by Double Diamond for cannabis production. When complete, the grow site is expected to provide the bulk of Aphria's annual peak output, with 140,000 kilos of forecast production out of the 255,000 kilos the company expects at its peak across all grow sites.

In this instance, Aphria's facility is ready to roll, but it's been left twiddling its thumbs with regard to more than half of its future production because of Health Canada's monstrous backlog of applications.

Cash-Rich Pot Stocks Are Now In The Driver's Seat For Approvals

Perhaps the most sizable implication of Health Canada's new cultivation application requirement is that it puts small-time cannabis growers at a marked disadvantage. If growers have to construct their facility prior to submitting their cultivation application, it's going to allow cash-rich marijuana stocks an inside track to be approved for licenses, as well as to gobble up as much market share as possible.

Canopy Growth (NYSE:CGC) , which has already been lucky enough to have more than 4.4 million square feet of its peak 5.6 million square feet of cultivation space licensed by Health Canada, should have little issue securing licenses for the remaining square footage this year. Thanks to a $4 billion equity investment from Modelo and Corona beer maker Constellation Brands, Canopy is cash-rich, and should have no trouble getting its grow farms ready for inspection by Health Canada. In other words, as the nation's projected second-largest grower by peak output, Canopy should be able to secure a double-digit percentage of recreational market share in Canada.

We should also see Aurora Cannabis (NYSE:ACB) benefit from this rule change. With the exception of the completed and operational Aurora Sky campus, which features a state-of-the-art 800,000-square-foot grow facility, many of Aurora's biggest projects are awaiting licensing. This includes the 1.62-million-square-foot Aurora Sun campus in Medicine Hat, Alberta, which may very well produce more marijuana from a single grow site than any other facility in the country at 230,000 kilos. Although Aurora Sun is still being constructed, Aurora Cannabis, which has approximately $379 million in cash on hand, should have little issue gaining licensing approval for this game-changing facility sooner than expected.

Mind you, Health Canada's rule change isn't a cure-all for the industry. It doesn't resolve the packaging solutions issues the country is currently contending with, and growers (big and small) will still need time to complete their greenhouse construction. But make no mistake about it, this is a big step in the right direction to alleviating Canada's marijuana supply chain problems.

This article originally appeared in the Motley Fool.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.