Why Canada's Black Market Is Still Going Strong

A year after legalizing cannabis for recreational use, we take a look at Canada's cannabis black market.

We note that the subject contained in this article represents illegal activity in certain jurisdictions. Whilst we do not condone any acts which are contrary to any such laws, we understand that readers in those jurisdictions which have decriminalised cannabis may find this article of interest.

Cannabis advocates have long argued the benefits of cannabis legalization, many of which are undoubtedly true.

Legalizing cannabis gives citizens more freedom over themselves and what they choose to consume, it gives consumers access to a wider and more regulated array of products, and it gives states and governments millions, if not billions in tax revenue. And this is all ignoring the numerous benefits being discovered surrounding the medicinal use of cannabis.

However, as more countries and states choose to legalize cannabis for recreational use, we're learning that there are smart ways to approach cannabis legalization, and not so smart ways.

And when it comes to a rocky rollout of cannabis legalization, there's no greater example than Canada, who legalized pot for recreational use on October 17th, 2018.

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The Canadian Cannabis Industry

Walking The Line

When the Cannabis Act came into effect last year, Prime Minister Justin Trudeau stated that the act would "keep the money out of the pockets of organized crime". Unfortunately, this has yet to happen.

Regulatory issues meant that companies had to wait for months to have their licenses approved, leading to a severe lack of brick and mortar stores. Unfortunately, this led to a slew of other issues, including high prices, lines that were hours long, and a lack of available product.

These problems obviously didn't do the industry any favours, and as a result, Statistics Canada estimated that 79% of marijuana was still being purchased on Canada's black market as recently as May this year.

The goal of legalization should, in part, be to ensure a higher quality product that is also safer than what the black market can offer. However, it appears that there's a fine line between anarchy and over-regulation, and Canada tilted toward the latter.

In an interview with the ABC, an associate professor from Brock University's Goodman School of Business, Michael Armstrong, stated that this over-regulation of Canada's cannabis industry has shut out a lot of smaller players.

"Canada went with a different model, a regulated pharmaceutical model," Professor Armstrong said.

"Health Canada would issue licenses to producers, who had to develop growing areas with very high cleanliness standards, lots of monitoring and lots of testing."

According to Professor Armstrong, these high standards left many black-market producers unable to legally conduct business. "Any existing producer who wanted to be part of the legal side would have to start from scratch," he said.

Not only was the industry nearly impenetrable for the average cannabis grower, but the immense regulations pushed cannabis prices higher than the black market, with a legal gram of cannabis averaging $9.99 per gram compared with $6.40 on the black market.

Some online forums have users even stated that Canada's legal weed is of lower quality than weed purchased on the black market.

Low availability, low quality, and high prices…it's easy to see why Canadians have continued to source their cannabis from the black market.

As a result of the poor rollout, 42.7% of Canadians who purchase weed told StatCan that they still get some of their cannabis from illegal sources. And while sales from the legal market are pegged to hit $US1 billion, illegal sales are still dwarfing legal revenue, and are currently estimated to reach between $US5-7 billion.

Changing Tides

While Canada certainly could've improved upon aspects of its legalization, we have to remember that it was only the second country, after Uruguay, to federally legalize cannabis.

Unsurprisingly, there were bumps along the road and in many cases, there still are. However, things are certainly improving for the Great White North.

Canada's cannabis black market has already declined by 21% since recreational pot was legalized in Canada in October. And last July, recreational sales reached their highest point—climbing to $104 million—almost double what they had been for the first six months of legalization.

Cannabis prices are expected to drop in future too, argues the CEO of High Street Cannabis, Adrian Robinson, who believes there will soon be an oversupply of cannabis in Canada.

According to Robinson, this oversupply could, "put downward pressure on pricing for Canadian companies as they rely almost entirely on the Canadian market for their revenue. The real question will be how dramatic the price drop will be."

As consumers familiarize themselves with the legal market, the black market is slowly being chipped away, to the point that more cannabis consumers are now purchasing product from the legal market place, which is a stark shift from just a year ago.

However, given the vastly higher revenues seen on the black market, it seems likely that the minority of consumers who are still purchasing illegal cannabis are purchasing it in large amounts. These are likely to be long-time users, who have been procuring their cannabis via the black market since before the plant was made legal.

Converting this demographic to the legal market is one of Canada's biggest challenges if it wants to remove the black market.

And as Canada enters the era of Legalization 2.0, a whole new demographic is expected to emerge.

Canada InfoGraphic

Known as the second wave of legalization and occurring exactly one year after the first legalization of cannabis in Canada, Legalization 2.0 will allow for the consumption of additional cannabis form factors for those over the age of 21, including edibles, extracts, and concentrates.

Increasing the options on the marijuana menu in Canada may help to further pry open the Canadian market, as many argue that the country's initially strict regulations contributed to its lacklustre performance post-legalization. This is especially true if you look at states in the U.S. that have legalized cannabis—such as Colorado, California, and Washington—where edibles and extracts now constitute almost 60% of the market. Clearly, there's a demand for smoke-free alternatives.

And this is something Deloitte has also confirmed after its 'Nurturing New Growth' report observed that there is a currently untapped demographic of cannabis consumers who are more conservative, a little older, and more family-oriented than the existing consumer market.

These are consumers that are less likely to be risk-takers, and who are also less likely to consume flower. For this reason, they haven't been lured to the existing legal market or the black market.

So come December, when edibles, extracts and concentrates hit the market, we may see a big shift in Canada's cannabis landscape.

Lessons Learned

Legalization 2.0 represents a much-needed loosening of Canada's strict laws around cannabis, which have served as a massive bottleneck on the industry over the past year.

In an industry based around a psychoactive plant, regulation is undoubtedly crucial. However, as we've learned with Canada, it can also cause a lot of hiccups.

The country's regulatory agency, Health Canada, was unprepared for the influx of cannabis applications following legalization, and as of January this year, the agency had received over 800 applications to fill. Unfortunately, this a process which could take months, to over a year to work through. This left the industry covered in red tape while also leaving growers and dispensaries twiddling their thumbs as they wait for approval.

On top of this, excessive regulation has prevented black market vendors from entering the market, leaving them to continue doing business in the shadows. And as the black market operates without regulation, taxes and licensing fees, illegal vendors will have no troubles undercutting legal sales for quite some time.

In conclusion, cannabis legalization is always a better option than extending the failed War on Drugs, however, let's not settle for mediocrity. Instead, countries should learn from Canada, ensuring that should they legalize cannabis themselves, their prices are low, their supplies are high, their storefronts are plentiful and citizens are no longer making deals in back alleys for a bit of 'erb.

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Louis O'Neill
Louis O'Neill

Louis is a writer based in Sydney with a focus on social and political issues. Having interviewed local politicians and entrepreneurs, Louis now focuses on cannabis culture, legislation & reform.

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