Canada's appetite for legal cannabis could be almost as big as it is for wine, CIBC says

Canadians could soon be spending more on recreational cannabis than they do on liquor, if a report from a major bank is to be believed.

Canadian Imperial Bank of Commerce calculated in a report this week that in the next two years, Canadians will consume 800,000 kilograms of cannabis, the vast majority of which will be for recreational use.

"We believe that by 2020, the legal market for adult-use cannabis will approach $6.5 billion in retail sales," CIBC said. "For context, this is greater than the amount of spirits sold in this country, and approaches wine in scale."

The federal government has been telegraphing for more than a year its intention of legalizing recreational cannabis by July. While that timeline has slid back somewhat, the government is still on track to legalize the drug some time this summer.

When that happens, the floodgates will open to what experts predict will be a major industry in no time.

Currently, Canadians legally consume about 60,000 kilograms of marijuana per year, for medical purposes. But "this is a drop in the bucket compared to illicit purchases," the bank said.

Statistics Canada waded into the issue earlier this year, noting that roughly five million Canadians consumed marijuana in 2017, spending more than $5.7 billion in the process.  That compares with about $16 billion worth of tobacco purchases; $9.2 billion on beer, $7 billion on wine, and $5.1 billion on spirits.

And that's at a time when recreational use is still illegal.

There's ample evidence that Canadians are avid pot users, which is why CIBC and others expect revenues to grow rapidly. Statistics Canada data shows pot consumption has grown consistently by about five per cent a year since the 1960s.

Numerous U.S. states have moved to legalize the drug recently, and the experiences of two of the more high profile ones — Washington and Colorado — give a good framework for what the bank is expecting in Canada.

After initial supply problems, sales have grown in each state by about 30 per cent per year, since legalization. The two states combined are home to fewer people than live in Ontario, but they are nonetheless now racking up nearly $3 billion US in cannabis sales every year, and over $650 million to various levels of government from taxes, licences and fees, CIBC said.

That's not to suggest that there won't be added costs, mainly by local governments tasked with enforcing the law, and dealing with its effects.

In a separate report Tuesday, ratings agency Moody's said provinces can expect to rake in more than $150 million in revenue just from their share of taxes on the drug, led by B.C. at $50 million, with Ontario and Alberta not far behind.

While there will be some added costs for things like regulation and enforcement, on the whole the positives outweigh the negatives. "Legalization has the potential to reduce the burden on the judiciary, boost employment and offer a new revenue stream for First Nations populations," Moody's said.

While Moody's doesn't offer a forecast of the size of the market, it bases its assumptions on previous research from Euromonitor International, which pegs the size of Canada's recreational market at $8 billion after legalization.

A big question mark we don't yet have an answer to, CIBC says, is pricing. Governments have been basing their tax policies on an assumption of a retail price of about $10 per gram for legal cannabis.

But prices in the real world have been getting steadily cheaper for years. StatsCan data shows that the black market currently charges as little as $7 a gram in some places.

So the biggest hurdle standing in the way of Canada's next big industry could very well be greedy pricing policies, either by government monopolies or entrepreneurs who think they can beat the black market no matter what.

"Retailers who think $20 a gram cannabis is attainable will quickly find consumers walking out of their stores, pulling out their phones, and DM-ing their previous dealer," CIBC said, "to see if they can still get that deal on Bruce Banner at $8 a gram."