No Joke: Canadian Marijuana Production Could Hit 3 Million Kilograms By 2020

This may very well go down in history as the most pivotal year for the legal cannabis industry. While numerous legalizations have been heralded before, we've never seen an industrialized country legalize recreational weed prior to Canada doing so. When sales officially kick off on Oct. 17, 2018, big money is expected to flow into the industry, with some analysts projecting in excess of $5 billion in sales being added once the industry is fully ramped up.

This article originally appeared in The Motley Fool.

Initially, Canadians could face a cannabis shortage

However, given that there's no precedent to an industrialized country legalizing adult-use weed, there's a lot of uncertainty surrounding the expected supply and-demand outlook.

Initially, there's expected to be a supply shortage. The reason for that is twofold. First, growers had to wait until there was little doubt that the Cannabis Act would pass before spending hundreds of millions of dollars on capacity expansion. This means that most projects weren't commissioned until earlier this year and will therefore take some time to come online.

The other reason for this supply shortage is a bottleneck in the cultivation application and selling permit process, which is controlled by Health Canada. The review process can be lengthy, which could initially slow the flow of legal weed into the marketplace.

But once the industry is operating at peak capacity, annual production totals could soar. Previously, I've opined that annual production could hit anywhere from 2.3 million kilograms to perhaps as high as 2.5 million kilograms. Well, given that capacity expansion has remained fluid, I'm revising my own prediction, once again. Now it looks as if Canadian marijuana production has a real chance to hit 3 million kilograms by the end of 2020.

By 2020, 3 million kilograms of production may be possible

Keeping in mind that these figures have been incredibly fluid and they're dependent on Health Canada working through its approval glut over the next 12 months, here's how 3 million kilograms becomes possible by 2020.

Between the four-largest growers, I believe in excess of 1.5 million kilograms is possible:

• Aurora Cannabis (NASDAQOTH:ACBFF): Following the completion of its acquisition of MedReleaf, Aurora Cannabis's management team believes it can deliver in excess of 570,000 kilograms (kg) per annum once it's at full capacity. Mind you, Aurora Cannabis is a company that began the year with ambitions of just over 100,000 kilograms of annual production, and it's now sitting at the top of the pack following organic build and partnership announcements and two major acquisitions.
• Canopy Growth Corporation (NYSE:CGC): Unlike most marijuana stocks, Canopy Growth hasn't divulged its production potential. However, with 2.4 million square feet of already licensed capacity in British Columbia and a target of 5.6 million square feet, 500,000 kg of annual output seems reasonable to expect. Canopy Growth also hasn't ruled out additional acquisitions or investments.
• Aphria (NASDAQOTH:APHQF): Like its peers, Aphria has been on an expansion and acquisition spree of late, with its most recent announcement being the construction of a state-of-the-art extraction facility for cannabis concentrates. Once all of its projects are complete, Aphria forecasts an annual run rate of 255,000 kg.
• The Green Organic Dutchman (NASDAQOTH:TGODF): The Green Organic Dutchman, or TGOD, is a relatively new public company, but nonetheless has pie-in-the-sky ambitions. In a span of 13 days, the company boosted its production capacity on three occasions through a series of partnerships and organic build announcements. When operating at peak capacity, TGOD's management team foresees 195,000 kg of cannabis-equivalent production.

Altogether, that's 1.52 million kilograms of estimated annual output from four growers.

The second-tier growers

Now, let's take a peek at the next tier of producers.

• Tilray (NASDAQ:TLRY): Tilray recently became the first Canadian-based pot stock to go public on a U.S. exchange. It also aims to have 912,000 square feet of capacity online by the end of this year — 854,000 square feet of which will be devoted to growing. However, Tilray can quadruple its capacity based on its land space and now has the financing following its initial public offering to do so. My conservative expectation is 150,000 kg of production by 2020.
• Emerald Health Therapeutics: Emerald Health, in partnership with Village Farms International, formed the Pure Sunfarms joint venture that'll see a more than 1 million-square-foot facility retrofitted to grow cannabis. By 2020, this facility should yield 75,000 kg annually. Further, Emerald Health is organically building out its Metro Vancouver facility that I believe will add up to 30,000 kg per year. Add in its Agro Biotech acquisition, which can grow 10,000 kg a year, and that's an estimated annual run rate of up to 115,000 kg (some of which is also Village Farms' production).
• OrganiGram Holdings (NASDAQOTH:OGRMF): Atlantic-based OrganiGram, which has pioneered the three-tier growing system at its 490,000 square foot Moncton, New Brunswick facility, is capable of 113,000 kg per year, according to a March 2018 update. Substantially higher yields coerced OrganiGram to get more aggressive with its production earlier this year, which means the existing expansion won't be fully complete until April 2020.
• Hydropothecary Corporation (NASDAQOTH:HYYDF): Sneaking in above the 100,000 kg mark is Hydropothecary, which is undertaking a major expansion in Quebec, a province with which the company signed a five-year, 200,000 kg supply agreement. When all is said and done, Hydropothecary should have about 1.3 million square feet of growing space and produce 108,000 kg per year.
• CannTrust Holdings: At the end of June, CannTrust announced the opening of its Niagara Perpetual Harvest Facility, which is a 450,000-square-foot hydroponic grow site with output estimated at 50,000 kg per year. When complete, another 600,000 square feet will be added to the site, which should double the company's annual output to "in excess of 100,000 kilograms." Thus, my guess is for around 105,000 kg per year.

If we add up these second-tier players, we get another 591,000 kilograms of annual production likely by 2020.

The third-tier growers

Then there are the third-tier growers, as well as those where production totals are much tougher to ascertain.

• Cronos Group: Cronos Group, which became the first Canadian marijuana stock to uplist from the over-the-counter exchange to the Nasdaq, has estimated that it can reach 47,000 kg of annual output by early next year. This is being accomplished by expanding its wholly owned subsidiary, Peace Naturals. Once Cronos is fully ramped up across all of its investments, I believe in the neighborhood 70,000 kg of annual production may be possible.
• Sunniva: Sunniva's aggregate production is a bit of a mystery given that it has a 750,000-square-foot facility in Canada, with the remainder of its assets located in California. Canopy Growth does have a two-year, 90,000 kg aggregate offtake agreement with Sunniva that Sunniva's management suggests represents 45% of its annual output (ergo, 100,000 kg a year of output) — but not all of this production is in Canada. My guess is that around 60,000 kg of production is derived from Canada each year.
• The Supreme Cannabis Company: Supreme Cannabis has primarily focused on its 7ACRES facility, even though it's made smaller expansionary investments in Lesotho. The 7ACRES facility is only on track to produce 5,000 kg a year right now but is being expanded to yield a minimum of 50,000 kg annually in the near future.
• Auxly Cannabis Group: Until recently, Auxly Cannabis Group was almost entirely a cannabis royalty company with expected yield of 230,000 kg from more than a dozen partnered growers (some of which overlap the existing production mentioned above). However, the company has acquired grow farms in recent months and has formed a notable joint venture with FV Pharma. As a "guestimate," it's not out of the question that Auxly deals with 250,000 kg of unique cannabis production — i.e., production that doesn't overlap with what was discussed above — via streaming and owned/partner grow sites, per year.
• WeedMD: WeedMD, which recently witnessed its merger with Hiku Brands fall through, has a three-phase expansion underway at its Strathroy facility that'll ultimately boost capacity to 610,000 square feet, yielding in excess of 50,000 kg.

These tertiary-tier players look to add another 480,000 kg of annual output.

Don't forget the private players

And then there are the smaller and/or private companies. Remember, Health Canada has issued 114 cultivation licenses through the end of July. The companies mentioned above account for only a small percentage of those licenses, even though they're the largest producers. Expecting another 500,000 kg of production from perhaps 70 smaller and private growers, as an aggregate, isn't out of the question. If anything, it might be conservative.

Altogether, top-tier producers (1.52 million kg), second-tier (591,000 kg), third-tier (480,000 kg), and every other grower (500,000 kg) could easily push run-rate production beyond 3 million kg by the end of 2020.

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