Canada's cannabis industry has a policy wishlist for 2022. Will anything change?

For Canadian cannabis investors, 2021 was a rollercoaster ride of a year driven largely by wild swings in expectations for federal legalization south of the border, and plunging recreational pot prices at home that continue to test the financial resilience of producers.

At the same time, Canada's pot firms are anxiously awaiting Ottawa's three-year review of its industry-defining legislation. But the Health Minister's deadline to table findings and recommendations in the House of Commons and Senate isn't until early 2023.

With yet another year of uncertainty on the horizon, Yahoo Finance Canada spoke to three industry stakeholders about the trends they see shaping the sector, and what's on their wishlist of policy changes from Ottawa.

George Smitherman - President and CEO of the Cannabis Council of Canada

On the third anniversary of recreational legalization, Smitherman's industry group issued a report card giving Health Canada a "D" grade for its handling of legalization under the Cannabis Act. The former deputy premier of Ontario says "a lot of anxiety and tremendous challenges around financial viability" underscore the importance of updating policies to support the industry.

Smitherman hopes to see changes to allow stronger edible products. The current potency limit is 10 milligrams of THC per package. California, for example, allows 100 milligrams per package. He'd also like to see the rules changed to allow consumers to buy more infused beverages in one purchase. Currently, in some cases, one can of low-dose cannabis drink equates to five grams of dried flower, making it impossible to purchase more than five under the 28-gram possession limit.

He also says producers should be allowed to sell dried cannabis flower in non-childproof packaging, because the risk of ingestion is lower than in other categories, like edibles that resemble candy. Such a change, he says, would help reduce the amount of single-use plastics used by the industry. Smitherman also wants more information to be allowed on packages to help consumers choose products based on more than potency and price.

However, he says talks with "mid-to-lower level elements of the bureaucracy" over the summer prompted the council to respond in writing, saying the "narrow fine-tuning exercise that you're contemplating is headed towards really, really failing the expectations of the community, and of the sector."

Some of the biggest challenges facing the industry extend beyond the scope of the Cannabis Act. Among those, Smitherman says, is the falling price of legal recreational pot. The industry's roll-out of low-price, bulk bags of pot aimed at luring customers from the illegal market has weighed heavily on the balance sheets of producers. Many are now desperate to abandon discount products designed to rapidly expand their market share.

"We are fighting it out on price with the illicit market, and the fight is being borne almost entirely on the back of licensed holders who are largely not profitable, while governments who actually have the public safety responsibility to eliminate and reduce that illicit marketplace are making off like bandits," Smitherman said in an interview.

The Ontario Cannabis Store, the province-run online retailer and monopoly supplier to private stores, says in its latest quarterly review that legal sales overtook illegal channels for the first time in the province between July and September. Ontario projected in its Fall Economic Statement that its cannabis business will make $155 million in profit this fiscal year, up from $67 million the prior year, and $19 million two years ago. The province also expects to receive $185 million in revenue this year from federal cannabis excise duties.

In order to ease pressure on producers from lower prices, Smitherman wants to see the excise tax rules adjusted, another issue outside the scope of the Cannabis Act.

Canada's excise duty on dried cannabis flower is either $1 per gram or 10 per cent of the value of the gram, whichever is greater. Flower sales make up the bulk of cannabis purchases. Falling prices have meant that $1 equates to a larger portion of the sale. A campaign launched by craft cultivators says the tax is costing them 20 to 30 per cent of their topline revenue, a figure they claim is often higher than the salaries on their payroll.

Smitherman says product innovation has been a bright spot in the industry, a trend he expects to continue as companies explore the broad spectrum of cannabinoids, including opportunities to improve sleep and manage anxiety.

"The plant has a lot to teach us. I feel like I'm not innovating my consumption as fast as product innovation is occurring. There's always something new," he said. "I'm 57 years old. Many people my age and beyond, that's the audience that's coming."

Mandesh Dosanjh - Pure Sunfarms President and CEO

Pure Sunfarms is a Delta, B.C.-based licensed producer and a subsidiary of Village Farms International (VFF.TO)(VFF). Despite its smaller size, the company often ranks among the top brands by sales, and has developed a reputation for consistently producing quality dried flower.

Like Smitherman, president and CEO Mandesh Dosanjh wants to see reforms to the excise tax rules, suggesting the $1 minimum component was designed with $10 per gram sales prices in mind. The Cannabis Benchmarks' Canada Cannabis Spot Index price was $4.97 per gram for the week ending Dec. 10.

"We'd like to see the government revert that $1 per gram to a percentage, something that's more flexible, as opposed to a flat rate," Dosanjh said in an interview.

He has also been critical of the Cannabis Act's lack of consistent standards for the labs testing the cannabinoid content of products. Earlier this year, Pure Sunfarms filed an inquiry with Health Canada seeking clarification on labelling regulations. In it, the company questioned the stated potency of products from rival Canopy Growth (WEED.TO)(CGC). This prompted Health Canada to remind licensed producers that THC and CBD potency labels must reflect laboratory testing results for each individual lot of cannabis. With limited product information available to consumers, the percentage of THC is seen as the primary influencer of consumer choices, in addition to price.

"Certain producers will keep farming out to different labs to see who's going to give them the highest potency test, and then they'll release the batch under that," Dosanjh said. "I think that's the wrong thing, and not what Health Canada wanted to do."

He also expects the number of cannabis companies to shrink, either through consolidation or insolvency. According to Health Canada, nearly 800 cultivators, processors and sellers are currently authorized under the Cannabis Act.

"When you have so many producers not making money or having positive cash from operations, I mean, the music has to stop at some point," Dosanjh said.

Niel Marotta - Indiva President and CEO

Indiva (NDVA.V) is a London, Ont.-based edibles maker that claims a dominant 45 per cent share of sales in that category, citing third-party data from Hifyre.

"We sell a packet of edibles almost every second in this country," Marotta said in an interview.

Perhaps unsurprisingly, he would like to see the potency limits on edibles increased, and for Quebec's government to lift its ban on edible and vape-based cannabis products.

Marotta says price compression is also a concern for his company, although he notes Indiva is more insulated against the impacts due to its focus on the edibles category, rather than dried flower.

"I think Canadian investors are going to be sick of subsidizing uneconomic, underpriced cannabis flower," he said. "It's like a transfer of wealth from investors to consumers."

Like Smitherman, he's encouraged by the pace of product innovation in the sector. He hopes to one day target the restaurant industry with edible products, if regulations allow. These include cannabis-infused sugar and salt, which the company hopes to launch in Canada next year.

"Every time I go to a restaurant, I bring edibles with me. I put them on the table, and it invariably starts a conversation with the server helping us that day," he said. "This is anecdotal, but they all want to be able to see cannabis products in their restaurants the same way they sell beer, liquor, and wine. I think it's really no different."

However, Marotta says he isn't holding his breath for fast progress on government cannabis policies, pointing to an Ontario city with a population of more than 800,000 that won't even allow brick-and-mortar pot retail.

"Mississauga won't even allow cannabis stores," he said. "So I don't expect anything revolutionary."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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