The verdict is in, and Year One of legalized cannabis in Canada was a dud

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There’s no getting around it: Year one of legalized cannabis in Canada was a dud.

It was an unmitigated disaster for many investors. The bubble burst, and the shares of most large Canadian marijuana producers dropped by at least 50 per cent. The public markets are largely closed to the industry; at the moment, there’s simply no appetite for more pot stocks.

The Trudeau government’s goal wasn’t to make shareholders or investment banks rich, though. It was to whittle down the black-market marijuana business. Giving cannabis users a place to buy regulated marijuana would generate new tax revenue, open up new business opportunities and reduce the burden on police and the courts.

By that measure, the first year was underwhelming, to say the least. The best estimates are that the legal market represents somewhere between 12 per cent and 30 per cent of cannabis consumption. The bulk of sales are still underground. That’s partly because the rollout of stores has been so slow in Ontario, where a new provincial government did a U-turn on retailing policy just weeks before legalization day on Oct. 17, 2018.

Some of this will get ironed out in Year 2. But entrepreneurs across the country say new products and more stores will not be enough to turn the Canadian cannabis industry into a world leader. They point their fingers squarely at governments for their approach – which, they say, has been to legalize but then overregulate, rather than get behind the sector.

At every link in the newly built cannabis supply chain, there is a common feeling among growers, processors, wholesalers, retailers and even delivery drivers that governments at all levels are messing up the legalization process. Many feel their sector is stuck between two worlds: They are both law-abiding and shunned. Cannabis companies must comply with a thicket of new regulations, including severe restrictions on advertising, sponsorship and other brand-building activities, but many still cannot access basic financial services or tax credits, employment incentives and other government help made available to other sectors.

A number of industry participants say the federal government brought in the Cannabis Act with great fanfare a year ago, but then stepped away from the file, leaving most of the work to Health Canada, whose primary interest, naturally, is in enforcing Ottawa’s rule book rather than seeing the industry develop as an economic force.

In the meantime, cannabis producers have struggled to offer low-cost, high-quality products capable of enticing consumers away from illicit alternatives. Thousands of independent farmers who have been refining the art of cannabis growing through the medical-marijuana system for decades are still looking at the recreational sector from the outside, unable to get in.

Over the course of three weeks, The Globe and Mail’s Cannabis Professional news service travelled more than 7,000 kilometres across Canada, visiting 14 communities in 10 provinces to learn what those on the front lines of the industry say about the fight to make legalization a success, and to make inroads in a market dominated by established criminal enterprise.

“My hope for whichever party gets into power [in the Oct. 21 federal election] is that they seriously rethink the entire cannabis system,” said Rudi Schiebel, chief executive of Habitat Craft Cannabis Ltd., a licenced microcultivator in Chase, B.C., that uses aquaponics to farm both cannabis and salmon.

“The barriers to entry make it incredibly hard for the expertise that exists today to enter the market [and] instead of empowering our competitive advantage in Canada, the government has systematically treated both the growers and the users looking for quality cannabis as a nuisance.”

Mark Spear spent two years working for industry giant Canopy Growth Corp., when it was still known as Tweed Marijuana. He is now the CEO of a cannabis startup that guides existing farmers who want to apply their generations’ worth of cultivation expertise to cannabis.

He says with his company, Wildfire Collective, filling a void of assistance to farmers, it’s another symptom of Ottawa’s “nonchalant” attitude toward legal cannabis that is allowing a Prohibition-era mentality to remain part of mainstream society.

“While cannabis was legalized federally, you wouldn’t know it in many cases,” Mr. Spear said. “From provincial and municipal fear-mongering on the risks of retail or cultivation, to suspended bank and social-media accounts … the federal government in particular should be working closely with other levels of government to ease misguided anxiety."

Some say government ambivalence begins at Health Canada. No other sector of the economy is managed by a single federal agency with no economic mandate.

“They have let one department [Health Canada] manage the whole file, and if they want to grow the sector, they can do more from a multidepartmental base within the government to really support the sector in a more pro-active and open way,” Jeff Purcell, senior vice-president of operational services at Organigram Holdings Inc., said during a tour of the company’s massive cultivation facility in Moncton. The operation employs 750 people and is expected to surpass 1,000 in the near future.

“They really could stand to put more resources toward understanding the sector a bit better,” Mr. Purcell said.

Several industry insiders also pointed at provincial and municipal governments as part of the reason for the legal industry’s slow start. Mr. Spear’s company, for example, had to abandon one site where it had been planning to build an indoor cultivation facility after the local township expressed concern and threatened to change its bylaws. Several months later, after Wildfire had invested time and money finding a new site, the township invited Mr. Spear to return, having since realized his business would be overseen mostly by the province.

Omar Yar Khan, a political strategist and vice-president of communications firm Hill and Knowlton, said that if Ottawa really wants the industry to succeed, it should consider the creation of a cannabis-sector strategy.

“The federal government has a life-sciences sector strategy and they will have an advanced manufacturing sector strategy and a machine-learning sector strategy, but there is no cannabis-sector strategy that I am aware of at the federal level," said Mr. Khan, who works with clients in the cannabis business.

Other federal departments should play a larger role, he said; this would allow the sector targeted grants, financing for new equipment and tax credits for investments in R&D, among other programs.

“Up until now at the federal level, anything to do with cannabis has been based out of Health Canada and out of Public Safety, but it would make sense, particularly after the election, to feed some responsibility, particularly around the economic development aspects of the industry to the [Ministry of Innovation, Science and Economic Development],” Mr. Khan said. “Provinces are responsible for health care, but that doesn’t mean that there is no health innovation strategy in Ottawa, of course there is.”

Anne McLellan, the former federal Liberal health and justice minister, who chaired the 2016 cannabis legalization task force, said industry watchers are using a timeline to judge the success of legalization that is too short.

“We still have black-market tobacco and black-market alcohol,” Ms. McLellan said this week at a cannabis anniversary event in Toronto. "So I just implore people to be reasonable about the expectations.

“Yes, one of the animating reasons why the Government of Canada wanted to legalize was to deal with the black market. But nobody in the Government of Canada suggested that that was going to happen within a year or two years. Let’s look a decade from now. Once you’ve learned what’s going on out there, you can always change something like a marketing restriction, and you can loosen them; but it’s awfully hard to take back what’s given. That’s one of the first lessons anyone in government learns.”

There is no shortage of ideas available for how governments can better support the cannabis sector without losing focus on public health and safety.

One might be to loosen their grip on wholesale distribution, which in most of Canada is run by provincial governments.

In Saskatchewan, the province encouraged competition by allowing private cannabis wholesalers to operate under strict government supervision. Every other province plays middleman between producers and retailers and, as a consequence, retail cannabis prices in Saskatchewan are as much as $3 a gram lower than in other provinces, said Isaac Watson, vice-president of product development for Edmonton-based retailer Fire & Flower.

“We can negotiate better costing than most of the provinces,” Mr. Watson said during a tour of Open Fields, the company’s 6,000-square-foot wholesale warehouse near Saskatoon. “That means cannabis in Saskatchewan generally is less expensive than elsewhere in Canada.”

Some federal programs designed to support other sectors of the economy are open to the legal cannabis industry, notes Peter Crooks, a neuropharmacologist who previously ran Canada’s Smartest Kitchen and is now chief product innovation officer of Dosecann, the cannabis processing division of Auxly Group based in Prince Edward Island. He took representatives of the Industrial Research Assistance Program on a tour of the company’s Charlottetown facility in September.

“A lot of the federal granting programs are now open to cannabis,” Mr. Crooks said, “but they do not do a good job of marketing themselves, of letting companies know that these funding agencies are now willing to work with cannabis companies.”

Among the most common criticisms of existing federal policy is the lack of pathways into the legal regime for anyone who worked in illicit cannabis during prohibition. Many are looking for a way into the legal regime, but lack the resources required to go legit.

Joël Lacelle, who lives in the Northern Ontario logging town of Hearst, about 500 kilometres northeast of Thunder Bay, was fortunate enough to have a rental property in the Ottawa area that he and his wife were able to sell. That raised much of the $400,000 he needed to build what is today Hearst Organic Cannabis Products, one of the first companies in Canada to win a licence for cannabis microcultivation. That licence allows him to have less elaborate security than a standard cultivation facility, but limits his cultivation space to 200 square metres.

His friend who runs another grow-op on the other side of town has not been as lucky. “He is reliant on the income he makes from the illegal market,” Mr. Lacelle said. “He’s pissed off. He’s going to get [a licence] eventually – it is just that people have been growing for so many years and then somebody comes in and tells you to stop growing and to apply for a licence that you might not even get. That is really hard.”

Price is often pointed to as the biggest continued driver of illegal sales, with the latest Statistics Canada data showing legal cannabis prices averaged $10.23 a gram during the third quarter of 2019, compared with an average price-per-gram of $5.59 for illicit pot.

However, quality and strength have also been regularly cited reasons why some regular consumers of marijuana remain tethered to local black-market dealers supplied by experienced grey-market growers.

There are a handful of private companies that have built their models around converting grey-market operators into legally compliant businesses, but they are under no illusions about what can be accomplished without government support. Many of these businesses were growing cannabis legally for medical clients, but were also selling product to recreational users illegally on the side.

“Our entire model is to do what the government failed to do, what they didn’t even try, which is bringing in these small growers to the new system,” said Jamie Shaw, chief culture officer of Pasha Brands. The Vancouver-based company is trying to amass a network of small-scale growers, with Pasha either helping cultivators navigate the licensing processes for their own facilities, or having their grey-market partners’ branded products produced and sold by Medcann Health Products, a licenced cultivator wholly owned by Pasha.

The company also offers processing, packaging, distribution and marketing services to independent growers such as Mr. Lacelle in Hearst and others unwilling or unable to do those things on their own.

“We will at most be able to convert our own little piece of [the grey market], but that is just one small piece,” Ms. Shaw said. “The federal government keeps saying they want to transition the illegal market, but there has been zero effort to actually do that .”

In Vaudreuil, Que., a logistical hub outside Montreal, Jon Morrison is attempting something similar. The president of C3 Farm (C3 stands for Cannabis Compliance and Commercialization) has a 39-year lease for the sprawling, three-million-square-foot campus that was once the North American headquarters of Swiss pharma giant Hoffmann-La Roche and is using it as a cannabis accelerator.

The facility – consisting of a 12-storey mixed-use office tower, a food-grade production facility and an industrial-scale manufacturing centre – has not been fully occupied since the European company moved out in the 1980s. Mr. Morrison has signed deals with 12 cannabis startups, some of which had previously been operating in the grey market, as well as the McGill University cannabis research centre to base their operations out of C3.

“This project, if it was addressing anything else, would be so heavily funded by government,” Mr. Morrison said, noting the accelerator is creating employment and intellectual property, facilitating research and development, and building facilities that have long-term production horizons and long-term economic value.

“These are all things where normally you would have the BDC [Business Development Bank of Canada] finance equipment, you normally have the federal government give you a certain amount of R&D tax credits, you normally have the federal government help you with employment incentives, [but] we have none of those things,” Mr. Morrison said.

“You normally would have all of these incentives,” he said, “and our industry right now, being at its infancy and with a need to evolve quickly, we need those incentives even more.”

With a report Mark Rendell in Toronto