The absolute glut of cannabis in the Canadian market right now has made many investors, myself included, very nervous about the direction of pot prices and the long-term ability of legalized cannabis to get rid of what appears to be an otherwise thriving black market.
In this article, I’m going to discuss why this is such a big deal for investors and why I’d steer clear of the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) for a while.
Recent reports have come out that the industry’s largest cannabis producer, Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) has singlehandedly accounted for approximately 20% of total sales, but has produced around 50% of total market demand.
In quantitative terms, the company sold 70 tons of pot this past year, but produced 183 tons of the green stuff. This is unfortunately par for the course in the sector, as producers have continued to produce more pot than has been needed, with disappointing demand numbers hampering the sector as a whole.
These supply overages also impact prices of finished product, as producers scramble to turn inventory into cash. Many producers are able to produce cannabis for less than $1 a gram.
So, in theory, wholesale prices can drop significantly in this type of scenario, for some time, until either demand picks up or supply drops due to some sort of OPEC-like agreement, which I see as highly unlikely in this environment. For the next year at least, I would encourage investors considering buying into the HMMJ ETF to hold off.
Invest wisely, my friends.
