Reefer sadness in Nevada shows potential pitfalls for Canadian legalization

by Invesbrain Saturday, July 22, 2017
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If you want to see one of the Canadian federal government’s nightmare scenarios for the debut of a legal market for recreational marijuana, take a gander at what’s happening in Nevada.

On July 10, Governor Brian Sandoval endorsed a state of emergency over pot shortages.

If you’re high right now, yes, you probably read that last sentence correctly. Regardless, it’s not an Onion headline: Gov. Sandoval backed emergency regulations from the Nevada’s Department of Taxation to address the state’s marijuana crisis.

It is funny -- unless you happen to be an employee or a dispensary relying on the viability of Nevada’s recreational marijuana market.

Related: This Canadian marijuana firm has exposure to the U.S. market

And the stakes are not penny-ante. Citing Taxation department numbers, Vice reported the state’s 47 retail marijuana stores did “well over” 40,000 transactions after sales of recreational pot became legal on July 1, with sales sometimes doubling dispensary owners’ projections. Riana Durrett, executive director of the Nevada Dispensary Association, estimated industrywide sales of around $3 million during the first four days of business.

Nevada was set to rake on $1 million in taxes from that haul. According to the Las Vegas Review-Journal, Sandoval’s budget calls for nearly $70 million in marijuana taxes over the next two fiscal years to fund the state’s public education fund.

Unintended consequences

Nevada’s marijuana woes are both unique to the state and have a similarity to a possible model of distribution into Canada -- the alcohol industry. They are also a case study in how regulatory missteps, unintended consequences and perhaps a hint of ruthlessness from a competing sector can have a potentially disastrous effect on the prospects -- and supply chains -- of a recreational marijuana market.

Related: Guidelines issued for safer marijuana use

When the state’s voters said yes to Question 2 and approved the legalized possession of pot for adults 21 years and older, Nevada’s regulators decided to treat pot like alcohol and, according to Vice, “decided that for the first 18 months of sales, only licensed liquor distributors could transport recreational pot from cultivators to dispensaries.”

Related: Is recreational marijuana legalization inevitable in the U.S.?

The Taxation department then reached out to the liquor distributors and, according to the Review-Journal, “only a handful of dealers showed lukewarm interest, and no concrete business plans were submitted for how those companies would distribute marijuana.” Part of the problem was that marijuana is still illegal in the U.S. federally, so acting as a marijuana distributor could affect the firms’ ability to distribute liquor.

Related: How high is too high to drive?

So the Taxation department decided in March to allow other entities to apply for distribution licences. That triggered a court action by the Independent Alcohol Distributors of Nevada, who maintained they should maintain their monopoly on pot distribution.

“The statute clearly gives a priority and exclusive license to alcohol distributors, in order to promote the goal of regulating marijuana similar to alcohol,” a judge ruled in issuing a restraining order prohibiting Nevada from issuing licenses to anyone other than the liquor distributors.

It meant that while it would legal to sell pot on July 1 in Nevada, there was no one who could distribute it to retail outlets. As Armen Yemenidjian, CEO of Essense Cannabis dispensaries in Las Vegas, pointed out to the Review-Journal, the regulation was logistical nonsense --  some companies, which had cultivation centers located on the same property as their dispensaries, would have to pay a distributor to take the marijuana products from one room in a building to another.

So, according to Vice, at the end of June, dispensaries started stockpiling product in preparation for weeks or even months without new deliveries after they were given one-time permission to take their stores of medical marijuana and sell them for recreational use.

But such was the rush after July 1, the Taxation reported dispensaries were facing running out of marijuana “within several days.”

“Unless the issue with distributor licensing is resolved quickly, the inability to deliver product to retail stores will result in many of these people losing their jobs and will bring this nascent market to a grinding halt,” the Taxation department’s statement said.

The emergency measures would allow the department to licence entities other than the liquor distributors for the purposes of transporting marijuana.

While he maintained the liquor distributors didn’t want to delay the start of recreational market in Nevada, Sam McMullen, the attorney representing the wholesalers, said the court ruling would do just that.

According to Forbes, a recent study from Cannabiz Consumer Group (C2G) predicts that the beer industry could lose more than $2 billion in retail sales due to legal marijuana.

A new report from Cannabiz Consumer Group (C2G) predicts that the beer industry could lose more than $2 billion in retail sales due to legal marijuana.

Forbess cited a report from Cowen & Co research analysts issued in September that said: “While recreational cannabis has only limited availability, the rise of cannabis consumption more broadly looks to be weighing on alcoholic beverage consumption, where it is now in decline for men and higher income consumers (while cannabis has gained considerable share with this cohort over the last 5 years),” the report states.

Legalization delay

While Nevada’s situation is unique, as Canada prepares for legalization, questions of supply are dogging the industry. Already, Health Canada has loosened up its restrictions on both licensed producers and applicants in an effort to boost supply.

And, according to pot analyst Alan Brochstein, supplies of cannabis oil are already scarce among medical users, with Canabo Medical (TSX-V: CMM) reporting it is seeing patients drop out of treatment because of oil shortfalls.

“The Canadian market is currently experiencing a shortage of Cannabis based oils. Many licensed producers did not anticipate the uptake in demand for Medical Marijuana and are facing difficulties providing a consistent supply of product. As a result many patients are finding an alternate source of product and leaving Canabo’s research program. The company is not able to fully optimize our business plan in this environment until the supply issues are resolved in the coming months.”

Pot analyst Jason Zandberg recently told Bloomberg he fears, much as the Nevada’s liquor distributors anticipated their court action would delay legalization, supply issues could push Canada’s July 1, 2018 target date.

“My concerns are that if that is used as an excuse to push the date of recreational legalization back, there’s a danger that it slips into the next election cycle and doesn’t actually happen.”

The Nevada experience is also showing how a botched opening can affect price. According to Vice, Nevada’s legal, recreational weed is selling for around $80 per “eighth” (3.5 grams) — more than four times the price in other states. That puts the price per gram at around $22.86.

In order to force out the black market, it is expected the price per gram in Canada for recreational marijuana will be around the $7 to $8 mark.

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