Five Key Risks and Exposures of Canadian Licensed Producers (LPs): What Should Investors Be Worried About?

As exiting opportunities arise from the Canadian cannabis market, investors should be aware of five key risks and exposures challenging the country's licensed producers (LPs).

Overproduction

There are currently 109 Canadian license producers (LPs) of medical cannabis with production capabilities that significantly outweigh domestic demand. To remain operational, the LPs must rely on the export market, exposing themselves to governmental and other market forces out of their zones of influence. LPs will have to balance their efforts in protecting and defending the international markets while simultaneously developing them.

Competition From Low-cost Producers

Canada holds the first-mover advantage on the international export stage. However, that benefit may dwindle as lower-cost producers in the global market (such as those in Thailand and Colombia) establish themselves to meet international export standards at a fraction of Canada's costs.

A Shift From Flower To Oil-based Products

Consumer preferences for cannabis oil and oil-based products (e.g., concentrates, edibles, and health products) are on the rise. In the production of cannabis oils, the origin and source of the plant material are less important. Thus, the need for high-quality (and costly) flowers produced by Canadian LPs may diminish.

A Shift To Domestic Cannabis Production

Countries such as Germany and Italy are transitioning from imports to domestic cultivation and processing. Their aim is to take advantage of the economic stimulus and job creation experienced by the US and Canada, upon activation of their legal cannabis markets. By importing foreign expertise instead of products, newly established domestic producers will limit the number of countries which Canadian LPs can target for export, thus making Canadian prices less competitive.

Local Moratoriums On Cannabis

Restrictions from local governments on the production or sale (including import or export) of cannabis can have profound effects on the growth trajectory of Canadian cannabis LPs. Germany is considering import restrictions on Canadian cannabis, given Canada's recent legalization of adult use. LPs knew this would eventually come, but did not anticipate enforcement this early in the development of the market.

For a full analysis of the business opportunities, risks, and investment perspectives in the Canadian market, see our Canada Cannabis Report: 2018 Industry Outlook.

Yona Torres is a contributing writer/editor for New Frontier Data. An attorney in Washington, DC, Yona has worked in corporate defense litigation for 11 years.  She has also been a freelance writer for several online and regional print publications such as Washington Life and DCSTYLEMag.com.

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