CANADA CANNABIS SPOT INDEX (CCSI)
*The provincial excise taxes vary. Cannabis Benchmarks estimates the population weighted average excise tax for Canada.
**CCSI is inclusive of the estimated Federal & Provincial cannabis excise taxes..
The CCSI was assessed at C$5.99 per gram this week, down 3.2% from last week’s C$6.18 per gram. This week’s price equates to US$2,034 per pound at the current exchange rate.
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This week the Ontario Cannabis Store (OCS), the body that controls the province’s cannabis market, released their Q1 Cannabis Insights report. The report contains a wide variety of useful data to show how Ontario’s market is developing. In today’s report, we will focus specifically on price.
The legal Canadian cannabis market has faced strong competition from illicit supply chains since legalization in October 2018. Ontario residents have specifically been challenged with both high prices and few stores, factors that have helped keep the illicit markets robust. That being said, this new report shows that the legal market is making significant progress on those fronts.
The report shows that from April 1 to June 30, not only did sales grow by 5.4%, but the price of dried flower on the OCS online store dropped by 16.7%, to below the price of illegal cannabis sold through mail-order marijuana (MoM) sites for the first time. The average price of legal dried flower was C$7.05/gram (including sales taxes) after dropping for four straight quarters. This was the result of discount lines of cannabis released by the big licensed producers and 552 individual product price drops over the quarter. In comparison, the average dried flower price on illegal MoM sites remained almost flat at C$7.98/gram. We should note that cannabis quality was not taken into consideration for this price comparison. Legal product has some advantages in this regard due to required quality assurance and safety testing, prohibitions on pesticide use, and standards for accuracy in labeling, among other regulations.
Clearly, lower prices have helped legal sellers build market share. The report indicates 25.1% of cannabis sales are now being made through legal channels. The period covered by the report also coincided with the COVID lockdowns in Ontario. We believe that, along with lower prices, consumers prefer regulated, legal cannabis due to increased health and safety considerations taken by licensed retailers and in the OCS purchasing process, compared to buying from an illegal seller.
Overall, this report shows positive trends for the regulated industry. It indicates that licensed cultivators can use their economies of scale and more efficient growing prices to cut prices and still maintain a profit margin; however, it is not clear how much room they have for further price cuts or discounting.
There are a number of structural reasons that legal channels have a hard time competing with the illicit markets:
Excise taxes: These taxes are distributed to federal and provincial governments to administer the trade of cannabis, strictly monitor licensed producers with health inspector visits, social educational programs, and more.
Federal and provincial sales taxes.
Laboratory testing: All legal cannabis requires a certificate of analysis (COA) from a federally approved laboratory. The laboratory analyzes the chemical profile of the product – including THC and CBD potencies, as well as terpene profiles – and tests for harmful substances such as pesticides, mold, and other contaminants.
Secure packaging: Regulated packaging to ensure the product stays out of the hands of underage users and also remains fresh.
Distribution and storage: A well planned and secure distribution and local storage network require armed and insured cannabis transportation and storage facilities.
Cannabis Benchmarks®, a division of New Leaf Data Services, LLC
2 October 2020 Copyright © 2020 New Leaf Data Services, LLC. All rights reserved.