Cannabis inventory levels continue to rise, elevating writedown risk

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National inventory levels of unfinished cannabis rose in April, potentially accentuating the risk of a glut of unsold legal marijuana in Canada that could wind up being worthless.

The total inventory of finished and unfinished dried cannabis held by cultivators, processors, distributors and retailers stood at 215,665 kilograms in April, approximately 24.4 times the amount of total sales in the month, according to data released by Health Canada late Tuesday. The total amount of finished dried cannabis products held in inventory at the end of April was 31,880 kilograms, up 3.5 per cent compared to March. 

Last week, BMO Capital Markets analysts Tamy Chen and Peter Sklar published a report suggesting the growing amount of unfinished inventory stuck in Canadian licensed cannabis producers’ vaults may wind up being worthless, and could lead to industry-wide writedowns. Unfinished inventory is described by Health Canada as cannabis held in stock by a cultivator or processor that is not packaged, labelled, and ready for sale.

While some of the unfinished inventory is believed to be set aside by Canadian cannabis producers to be refined for future products such as infused-edibles, extracts, topicals and vape products, the BMO Capital Markets analysts said an unspecified amount might not be appropriate for consumption in the recreational or medical markets.

Meanwhile, sales of legal cannabis in Canada surged in April, likely due to an increased amount of retail stores that opened their doors in Ontario and Alberta during that month.

Health Canada said 8,853 kilograms of dried flower cannabis was sold in Canada in April, up 16 per cent from the prior month and the biggest such gain since legalization, according to the government agency’s monthly Cannabis Tracking System. Overall sales of legal dried cannabis were 39.5 per cent above levels recorded in the first month of sales after recreational pot became legal in October.

While Health Canada didn’t disclose why sales of cannabis advanced in April, Statistics Canada released data on Friday showing Ontario sold $19.6 million of cannabis in April, up from $7.6 million in the prior month.

“The increase in overall sales and sales per day suggests that the Canadian market is continuing to benefit from incremental increases in product supply and new store openings nationwide,” Eight Capital analyst Graeme Kreindler wrote in a recent report to clients.

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