Jun 19, 2019
Surplus of unsold cannabis may lead to industry-wide writedowns: BMO
Pot producers' inventory surplus on track for writedowns, BMO warns
A glut of unsold pot stuck in Canadian licensed cannabis producer vaults may wind up being worthless, and could lead to industry-wide writedowns, according to analysts from BMO Capital Markets.
BMO Capital Markets cannabis analysts Tamy Chen and Peter Sklar highlighted the growing amount of "unfinished inventory" since recreational marijuana was legalized in October in a note to clients Wednesday.
As of March there were more than 150,000 kilograms of unfinished inventory – defined by regulators as cannabis that is not packaged, labelled or ready for sale – held by Canadian pot companies, according to the most recent Health Canada figures. That's up from about 101,000 kilograms on Oct. 17, 2018, the first day of legalization.
"What remains unclear is why the planting of recently licensed grow rooms has not been meaningfully offset by the conversion of prior months' unfinished inventory into finished products for sale to provincial distributors given the apparent supply shortage in retail channels," the analysts wrote.
The BMO analysts said that while some producers have acknowledged that some of its unsold inventory has been earmarked to be converted into cannabis extracts – which can be used for Canada’s upcoming sale of edibles, topicals and vape products – a sizeable amount may fall short of quality requirements for recreational sales.
"If some of the dated 'unfinished inventory' is ultimately determined to not be extraction-grade, then there would be a need for inventory writedowns," the analysts wrote, adding it was difficult to quantify how much of that cannabis would be affected by writedowns.
Since cannabis was legalized in October, the Canadian legal pot market has been hampered by product shortages, processing and packaging bottlenecks, a mixed retail rollout, and a still-thriving illicit market.
While several analysts previously concluded that the current inventory buildup is likely due to producers ensuring there is an adequate supply of cannabis edibles available for sale later this year, a Statistics Canada statistician recently told BNN Bloomberg it was “inconclusive” to make that determination.
Investors will get a closer look at whether product writedowns are happening when Canopy Growth Corp. reports fourth-quarter results on Friday.
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