Cannabis Market Update: Q2 2023 in Review

Could government recommendations help Canada's cannabis industry?

During Q2, a new source of support emerged for changes that Canadian cannabis firms have spent years requesting.

Back in May, the Canadian Competition Bureau released its findings on the improvements it believes the government could make to help the industry. The report was in support of Health Canada's ongoing review of the Cannabis Act.

The bureau highlighted issues related to THC limits on edible cannabis products, strict rules around packaging and today's difficult license requirements and regulatory costs.

“By adopting these recommendations, the Bureau firmly believes that Health Canada can improve the competitiveness of Canada’s legal cannabis industry now, and in the long run,” the report states.

In addition, the bureau outlined the following issues in the cannabis industry:

• Canada’s excise duty framework, which makes profitability and viability in the market challenging, particularly for small- and medium-sized cannabis producers.

• A lack of industry standardization, which makes it difficult for cannabis producers to get products to market and compete across provincial and territorial boundaries.

However, the bureau conceded these issues are outside of Health Canada’s purview.

Rami El-Cheikh, leader of EY's Americas Cannabis Center of Excellence, told the Investing News Network (INN) that he feels positive about the recommendations in the report.

“What's encouraging is the government is becoming more proactive now and stating these things, and hopefully they're going to encourage Health Canada to address some of these issues,” he said.

At the same time, El-Cheikh is worried that Health Canada may not fully act on the suggestions. He pointed out that it's an entity focused on cannabis health and safety, not the commercial success or failure of the industry.

“There's nothing — there's no reference in the cannabis arguments (from Health Canada) that we're creating a thriving commercial industry, it's all about protecting people,” he explained. “That's why I think everything needs to be revisited now that we have five years plus (of) data and learnings."

Lack of cannabis reform stalls progress in US market

Investors have had little to celebrate in 2023 when it comes to significant cannabis reform in the US. While state markets continue to evolve and open up, the larger federal framework remains unmoved.

The SAFE Banking Act was reintroduced in the Senate earlier this year, but so far hasn't seen major momentum.

“Federal regulatory momentum came to a standstill, earnings slowed down to single‑digit growth as inflation eroded margins and squeezed consumer wallets, and financing continued to dry up with regional banks and credit unions tightening their credits in the face of a banking crisis in the US,” the managers of the Purpose Marijuana Opportunities Fund (CBOE:MJJ) wrote in a note.

The experts said cannabis operators have had to adjust their strategies and focus on fiscal discipline.

“In this challenging environment, cannabis operators have been forced to tighten up their operations, limit their future growth objectives, and focus on cash-flow generation to help self-fund their survival through these difficult times,” they noted.

According to another cannabis-focused fund, the slow movement of banking reform in the US has hindered the overall investment opportunity attached to cannabis.

“The lack of access to institutional investors in our opinion is one of the primary reasons that MSOs, despite the strong cash flow of select names, have depressed multiples and underwhelming share price performance over the last 18-24 months,” a note from the Ninepoint Alternative Health Fund states.

At the end of the day, the industry is in desperate need of reform to shift to a higher gear. “Regulatory relief is the golden ticket both operators and investors are chasing,” the report indicates.

When it comes to US cannabis operators, Green Thumb Industries (CSE:GTII,OTCQX:GTBIF), TerrAscend (CSE:TER,OTCQX:TRSSF) and Trulieve Cannabis (CSE:TRUL,OTCQX:TCNNF) occupy high positions in the Ninepoint Alternative Health Fund.

Investor takeaway

Cannabis investors faced a tough market in the first half of 2023. While experts are not losing hope when it comes to the long-term viability of the industry, it’s clear these days are challenging for stakeholders.

El-Cheikh told INN that when looking at cannabis operator sentiment he sees similarities to 2022.

“If I go back to the cannabis user survey, the theme of the year for 2022 was, 'I just want to survive, I'm not looking to win, I just want to survive' … there was a lot of recognition that 2023 is going to look very much like 2022, but it's going to be more intense in terms of pressures,” he said.