Why the Black Market Still Has a Window of Opportunity Post-Legalization

In a less than a month from now, Canada will become the first G7 nation to legalize recreational cannabis in hopes to prevent underage use and reduce illegal activity. The latter will be a hard goal to meet since, for now, and likely the first year of legalization, the laws around production and distribution will be very strict. October 17th, 2018 will certainly be a symbolic day for the country, but it will be a while until our government will be able to compete against the black market veterans.

There will still likely be many advantages to buy from illegal sources. Canadian licensed producers (LPs) are restricted in the different types of products they can sell. There is a tight cap on THC potency for edibles, and prices will be high. These setbacks make the black market a formidable force. If the government wants to fulfill their mission, here’s what will have to happen:

A Wider Diversity of Products

The current law only permits dried flower, cannabis oil, gel capsules, plants, and seeds to be sold. So if you are a fan of vape pens, edibles, or concentrates, which are popular products for consumption, then October 17th will simply be symbolic. The lack of product variety is a defining shortfall. These products are booming in the 11 legalized states in the US.

As cannabis enters the mainstream there becomes a greater desire to make its use more convenient and discreet. This is why cannabis vape pens and edibles are all the rage. Vape pens are easy to use, produce little to no smoke, and are completely odorless – a great option if you don’t want to worry about reeking of weed after a smoke break. Edibles are even more convenient and thus appeal to an wider market. And then there are concentrates: hash, shatter, waxes, resins, rosins, and the like are extremely potent, where activities like dabbing are usually reserved for the most experienced stoners. None of these products will be available in October.

While the government finally gets around to permitting sales of vapes, edibles, and concentrates, these products likely won’t be available until 2019, a year after legalization. In the meantime, the black market will take advantage of these gaps and reap the economic benefits.

Lift the Potency Cap

Medical cannabis patients complain that the highest THC products fall well below what their black market dealer provides. The government has not established a THC limit on dried flower but oils are not allowed to exceed 30 mg of THC per millimeter, less than half the potency of illicit products, which go as high as 70 mg. Most importantly, the products that do have the highest THC are often the most expensive. For experienced users, the demographic that comprise the bulk of demand, this is a considerable restriction.

Price Reduction

Pricing will be the biggest disincentive for recreational users to buy from the legal market, especially if they already have a trusted and reliable source.

In the black market, the more you buy the less you pay. Statistics Canada reported an average price of $8.36 a gram, which drops to $5.48 when buying in bulk. Not only do bulk discounts not exist in the legal market, they’ll also subject to taxes. There will be a federal excise tax of $1 per gram (or 10% of the final retail price) on top of the usual 13-15%.

Even though some illicit dispensaries charge tax, your neighborhood dealer certainly doesn’t. Eventually, likely years from now, the post-legalization demand could exceed supply, which will result in more stable prices. When more LPs come onto the scene, supply will be able to catch up with the demand and the average price per gram will start to decline, hopefully!

All in Due Time

As it is, the official legalization date of October 17th is an exciting opportunity for non-experienced user who are curious and interested to try legal cannabis. But for the serious stoners and connoisseurs, they’ll have to be patient. The government will have to exceed the illicit market in product diversity, supply, potency, and price in order to capture and retain repeated business from experienced users.

When they can adequately serve the wider market, experienced users will be incentivized to buy from regulated outlets, actualizing Canada’s goal of eradicating the black market. Time will tell!