Pot Leaks

Here are your brownies Mrs. Smith. Can I see some ID?

To my not very great surprise, John Ivison of the National Post had parts of the Canada Marijuana Task Force Report leaked to him.

What was a tiny bit surprising was to be called by “The Morning Show with Matt Gurney and Supriya Dwivedi” http://www.640toronto.com/morningshow/ at 5:30 AM this morning (Producer Ryan…you owe me baked goods.) to comment on the information disclosed in the leak. You can listen to my remarkably coherent (having been awake for a minute and a half) ramblings here.

A couple of slightly less random thoughts on the leaked material.

The leak itself is interesting and more than a little outrageous. The Report clearly favours Health Canada Licenced Medical Marijuana growers and many of those corporate grow shows are publically traded companies. Allowing the report to come out in dribs and drabs (because “translation”) could cause deep uncertainty in the public markets. The government should release the report, in toto, immediately.

Substantively, the Report apparently recommends that legalization efforts be directed at “getting rid of the $7-billion-a year black market. Sources familiar with the report, which is expected to be made public Dec. 21, say all the other recommendations flow from that guiding principle.”

It is not clear whether that “black market” includes the grey market of dispensaries and pot shops which has grown up in Canada and which continues to expand.

Using “legalization” as a weapon against the “black market” is pretty much the level of restrictive thinking I expected from the Task Force. Rather than seeing legalization as an opportunity to regularize the marijuana market, the language suggests a resumption of the war on drugs by other means.

The Task Force is apparently suggesting that the 40 Health Canada approved licencees remain the only legal source of marijuana and proposes that recreational pot, like medicinal pot, continue to be delivered by Canada Post. A nostalgic bow to the mail and a suggestion pretty certain to keep dispensaries and “Bob on the corner” in business for the foreseeable future. Here is a free clue for the Liberal government: recreational pot users are impulse buyers. As I say in my book, “The most common triggers for the decision is that, by their lights, a customer is running low on pot, has run out of pot or has been out of pot for some time but only now has the money to buy more pot.” In short, not likely to wait a week for Canada Post to deliver.

But recreational pot users may be waiting a lot longer than that. Let’s do a bit of simple math. A 7 billion dollar a year “black” market at, say, $10 per gram implies a 700 million gram market or 700,000 kilograms. According to Health Canada’s market data, Canada’s licenced corporate grow shows, in the quarter ending September 30, 2016 produced 5734 kilograms of pot and had inventory of 13,236 kg. Just for fun, lets say we take quarterly production to 7000kg. Annualized, in round numbers, 30,000kg.

Yup, the combined production of all the Health Canada licenced corporate grow shows is, optimistically, less than 5% of projected recreational demand aka “the black market”. Don’t be looking for the postie with your pot anytime soon.

There is no question that some, but not all, of the current licencees can scale up their operations; however a 20x increase in production is not likely with only 40 licencees.

Ivison’s story goes on to suggest that, at least initially, Canada Post would have a monopoly on pot deliveries. The logic here being that Canada Post would verify the identity and age of the people it was delivering to. Right. Just for fun think about how that would work. Would you go to your local post office and present ID to pick up your pot? Would the postie (for those of you who still have home delivery) ask for id at your door? Canada Post according to its 2015 Annual Report delivers millions of parcels. Some days it delivers over 1 million parcels. E-commerce is taking off and Canada Post is getting its share of the business. But a great deal of the parcel post does not involve any interaction with the recipient.

If you take the “black market” number of 700 million grams and assume people will buy in 10 gram parcels – call it $100 – that is 70 million face to face deliveries a year. There will be new jobs at the Post Office.

The only encouraging thing in the Ivison piece is that distribution and production will have to be discussed with the provinces. Ivison suggests that, at least in BC, “which already has a large number of pot shops, the expectation is that the provincial government will require dispensaries to buy marijuana from a licensed producer.” This would make a heck of a lot more sense than distributing through the Post Office.

I am waiting for the release of the actual report, but if Ivison’s article is substantially correct, the Liberal Government is being handed a largely unworkable plan for marijuana legalization. Insufficient supply, inefficient distribution and a prohibitionary mentality seem to have destroyed the entrepreneurial opportunity marijuana legalization presented.

I’m not surprised.