How big is Canada’s marijuana market, really?

Many are gambling demand will skyrocket when pot is legal. Here's why that's not a safe bet

In June, a company called MYM Nutraceuticals announced plans to build one of the world’s largest marijuana greenhouse operations. It’s a joint venture of sorts with the town of Weedon (naturally) in Quebec, where the municipality will buy the land and the company will have the right to purchase the acreage later. MYM anticipates the operation will consist of 15 greenhouses totalling 1.5 million-square-feet of production space. At full capacity, MYM says it can produce more than 150 metric tons of cannabis per year, worth about $750 million. In another release a few days later, the “Weedon Project” had apparently expanded to include a cannabis education centre, a cannabis museum, a 2,500-person auditorium and a 22-room hotel. The release also saw fit to mention that the president of MYM’s cannabis subsidiary is the nephew of “Canadian hockey super star” Guy Lafleur.

The project, to say the least, is ambitious—MYM Nutraceuticals is a penny stock that doesn’t even have a license from Health Canada to produce marijuana in Weedon—yet. But such bold pronouncements are not out of the place among publicly traded cannabis startups. Companies with little to no revenue can attain fat valuations as investors pile into the sector, based on the assumption that a multi-billion cannabis market will emerge after the federal government legalizes recreational consumption next year. But the size of that market and how much marijuana Canadians will really consume is still anyone’s guess. Companies and investors could end up burned if their optimistic projections never materialize.

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A lot depends on just how much marijuana Canadians consume. A survey of 1,500 Canadians conducted by Abacus Data on behalf of Maclean’s as part of The Canada Project found that 84 per cent of respondents over the age of 18 never smoke marijuana. Of the 16 per cent of Canadians that do, daily users amount to 5 per cent, while 3 per cent say they use a few times a week.

These findings show less enthusiasm for marijuana than some other studies. Deloitte, for example, published a report last year  that found 22 per cent of adult Canadians use marijuana at least some of them time. Based on that number, Deloitte estimates the base retail market value of recreational marijuana could be up to $8.7 billion. With ancillary services such as security thrown in, Deloitte projects a total market size of $22.6 billion. But in arriving at these estimates, Deloitte included another 17 per cent of respondents who said they “might” try marijuana if legalized, “suggesting the total potential marketplace…is close to 40% of the adult population.”

That could prove to be a big assumption. How many non-users will become tokers after legalization is still unknown. Even among existing users, the majority of marijuana is consumed by a minority of people. The Parliamentary Budget Office anticipates that Canadians who use cannabis at least once a week will account for 98 per cent of all marijuana consumption. Russell Stanley, an equity analyst at Echelon Wealth Partners who covers marijuana stocks, is not counting on a surge of new users. “I’m sure there will be people who might decide to try it,” he says, “but really the opportunity is that the illicit market will move to legal consumption.”

How much marijuana will be needed to satisfy that demand is another unknown. Canaccord Genuity estimates the combined recreational and medical markets could require 575 metric tons by 2021. Neil Closner, the CEO of marijuana producer MedReleaf Corp., has said demand could total 1,000 metric tons. The problem, he said in an interview on BNN this month, is that producers weren’t growing enough marijuana. “If you add up all of the announcements from all of the licensed producers to date in terms of their expected capacity growth over the next year, you’re only hitting at about half of their total demand,” Closner said. The host seemed amazed by Closner’s estimates. “A thousand tons,” he parroted. He didn’t press for specifics.

In a follow-up with Maclean’s, the company referred to a report from CIBC that extrapolated from the size of Colorado’s recreational industry to project a $10-billion market in Canada. MedReleaf worked backward from there to arrive at 1,000 tons of supply. (To complicate matters, the CIBC report has been criticized by the Marijuana Policy Group, a Denver-based consulting firm, for overstating potential tax revenue from cannabis sales in Canada by 300 per cent.)

The Marijuana Policy Group cautions against simply scaling up Colorado’s market to gauge the potential in Canada, as some analysts and companies have done. (The firm is preparing a report for Health Canada, and declined to comment specifically on the country’s potential recreational market.) One difference is that Colorado is surrounded by states that haven’t legalized, and it benefits from tourists who come to take advantage of the recreational market. There is also the possibility that some cannabis is purchased legally in Colorado, and then transported out-of-state and sold illicitly at a markup. “You can’t take that Colorado model and say Canada is going to have the same kind of growth trajectory,” says Chris Damas, editor of an investment newsletter called the BCMI Report, which analyzes marijuana stocks.

Stanley at Echelon contends the differences between Colorado and Canada cut the other way, too. The legal age in Colorado is 21, for example. “Nobody in Canada has firmly said what they’re going to do yet,” he says, “but the legal age could effectively be a couple of years lower here.” The New Brunswick government’s working group on cannabis this month recommended the legal age be set at 19. Two years can make big a difference in terms of the size of the market, since young people are more likely to use cannabis.

Because of these uncertainties, even the PBO’s estimates vary widely: By 2021, Canadians could consume anywhere between 403 and 1190 metric tons of cannabis. Recently, some analysts and politicians have raised concerns that producers won’t be able to satisfy demand next year should the federal government legalize the recreational market as planned. (Health Canada has pledged to speed up its approval process.) Damas says these concerns are overblown. There might be a supply crunch in the short-term, but oversupply could be the bigger issue for the industry over the next few years.

MORE: If you’ve ever smoke marijuana, beware of the U.S. border

For starters, he doubts that every recreational user will immediately switch over to the legal market. “The illicit market is not going to give up their share that easily,” Damas says. Not every province and territory may be ready to introduce a legal regime next year, and the availability of marijuana will vary by location. Urbanites will likely have an easier time finding legal cannabis than those rural areas, for example.

Meanwhile, new companies are still emerging and existing players are announcing expansion plans. Damas estimates the legal market will amount to 360 tons of consumption initially. Producers are already on track to pump out 475 tons of cannabis—and that’s a conservative estimate. Other jurisdictions have dealt with oversupply. Growers in Colorado saturated the market last year, sending wholesale prices tumbling. Washington went from a shortage of marijuana when recreational sales began in 2014 to a supply glut in just six months.

As legalization in Canada creeps closer, some of the investor enthusiasm for marijuana stocks has waned. Stanley says share prices have come down as much as 20 per cent over the past few months. Analysts chalk it up to the uncertainty around how the recreational market—everything from distribution to taxation—will ultimately operate.

MYM Nutraceuticals appeared to buck the trend in June, though: Its thinly traded shares surged more than 150 per cent to a high of 71 cents on the back of its announcements about Weedon. The mayor remains enthusiastic about the project. “One day this could make Weedon known across the world,” he told CBC. If nothing else, the town of Weedon is living up to its new slogan: “Dare to reinvent.”