With months left until the government’s self-imposed deadline to legalize marijuana, efforts to figure out how legal cannabis will be grown, sold and taxed in Canada are in full swing. But one question still unanswered is whether there will be space for micro growers in the legal Canadian cannabis market.
For a sector built on the blueprint of small—illegal, sure—but serviceable grow operations, it would only make sense to allow current cannabis farmers with smaller operations to legitimately enter the legal marijuana market. Canada is considered a free market economy, but governments—provincial and federal—still hold power over many industries. And this includes two closely linked to cannabis: alcohol and health care.
If these two sectors can help us predict the future of the cannabis industry, it's definitely possible that smaller-scale cannabis gardens will struggle to gain a foothold. This is especially true when pitted against industry giants, some with exclusive deals with provinces. But these smaller and niche marijuana growers are necessary if part of the goal is to have a diverse and dynamic legal cannabis industry.
The government claims one of the reasons it wanted to end marijuana prohibition was to legitimize cannabis products. But the government has made it hard for smaller cannabis growers to comply with the upcoming legalization rules. And some of these important craft and niche cannabis producers are already at risk of falling through the crack between mammoth licensed producers (LPs) and home growers.
New Permits to Allow Small Cannabis Grows, Hemp & Marijuana Nurseries
Currently, the only way for cannabis producers to grow marijuana legally is through the government’s Access to Cannabis for Medical Purposes Regulations (ACMPR). This program allows LPs to sell cannabis, cannabis oils and starter materials to the public or other LPs.
These LPs have established themselves as medical marijuana producers, giving them a generous head start in the race to produce recreational cannabis products. There are 104 LPs in Canada, and Health Canada has loosened its rules to allow even more into the legal market.
This new system of licensing is supposed to help diversify the industry and provide incentives to players to innovate. The four types of licences are:
- Standard cultivation, reserved for large-scale LPs
- Indoor micro cultivation to cover any operation under a particular production volume, yet to be determined
- Industrial hemp production
- Nurseries, so that they can carry cannabis seeds, seedlings and other starter materials
Health Canada's Good Intentions Leave Craft Cannabis on Shaky Ground
Last year in November, Health Canada released a cannabis consultation report, which suggested bringing micro cultivators to the market by expanding to the current licensing system. The aim was to encourage smaller growers to participate in the legal marijuana industry. Small-scale growers would be granted the same rights and rules as LPs have, just on a smaller scale.
This means smaller cannabis farms won't be in direct competition with goliath LPs that have market capitalization in the billions. But they have an important role in the industry: purveyors of niche products and experiential marketing. Without these smaller cannabis companies, the market would seem two-dimensional and probably fail to give customers the diverse range of products they’ll expect.
Unfortunately, the federal government is already putting barriers between consumers and craft cannabis products, and these products haven't even hit the market yet. The biggest gripe from cannabis producers is that the government won’t issue permits in the foreseeable future for outdoor cannabis farms.
Additionally, those that manage to obtain a micro-cultivation permit won’t be able to sell directly to the public, only through federally and provincially licensed sellers like the Ontario Cannabis Store. This setup also calls into question whether they’ll be able to compete in the cannabis space in the first place, if their products are sold in the same stores as the big brands.
The Biggest Barriers for Canada's Niche Cannabis Companies: Investments & Costs
In Canada, cannabis businesses can access capital markets with an ability to secure institutional lending, but even that seems to be for the big boys. With banks unwilling to work with any producer that’s not an industry giant, financing is maybe the most significant barrier to entry for small players.
Since all grows must be contained indoors, greenhouse property values have gone up just as growers are looking to secure property or expand their current operations. And growers of all kinds are also facing higher wholesale prices for greenhouse supplies due to the surge in demand from the cannabis industry. Labour costs, too, have surged all over, but especially in Ontario, where the minimum wage increased in 2018 to $14 an hour.
In California, the issue of operational affordability is pushing smaller growers out of the adult-use market even if they've been growing for years. Those who can’t afford the cost of all the newly required permits since the state legalized recreational marijuana are getting left behind. Add on the 280e provision of the tax code, which doesn’t allow U.S. cannabis companies to deduct business expenses like all other industries can, and it's easy to see why small operations in California are dampened with niche cannabis brands are closing left and right.
Since the legal cannabis market in Canada is federally regulated, we don’t have the tax issue that California has. But the rising costs of facilities and labour could bring about the same result as is happening for those marijuana growers in California trying to abide by the new rules.
It stands to be proven whether the micro-cultivation licence category will achieve a more balanced cannabis industry. At least, it does indicate the government recognizes the mistake of letting marijuana become a monopoly. But if Canada wants to maintain its dominance as a country at the forefront of cannabis production, innovation and global distribution, this micro detail is going to need a big dose of attention.
Photo credit: Esteban Lopez