The laws of supply and demand are imbalanced in multiple states across the United States and Canadian provinces. As a result, many markets face cannabis oversupply or undersupply problems. Which problem a specific state or province faces depends primarily on the state’s regulatory framework for legal adult-use and/or medical marijuana.

Cannabis Can’t Defy the Laws of Supply and Demand

The laws of supply and demand are simple. When consumer demand and commercial supply balance, all consumers get the products they want and businesses have an opportunity to maximize profit. If demand outweighs supply, consumers don’t get what they need and businesses don’t make as much money as they could if demand was met. If supply outweighs demand, businesses will be left with unsold goods that equate to wasted money.

Simple right?

In a free market system, it should be, but when you mix in regulations, supply and demand imbalances are more likely. That is exactly what’s happening in both the U.S. and Canadian cannabis industries.

Regulation Leads to Cannabis Shortages

Canada opened its adult-use cannabis market on October 17, 2018, and within hours, some stores across the country were having supply problems. After the first few weeks of operation, it was clear that Canada’s cannabis market was facing a product shortage that would last a very long time.

The province of Quebec opted to close its stores for three days per week, while Alberta stopped issuing retailer licenses, and Ontario limited the number of store licenses to just 25.

One of the biggest factors causing the cannabis shortage in Canada is regulation.

The amount of time to obtain a license to grow marijuana in Canada’s legal market is excessive with some cultivators waiting months or even a year. Once a grower obtains a cultivation license, it needs to produce two full crops, have them tested, get its sales software audited, and apply for a sales license, which could take another year.

Some industry professionals believe the cannabis supply problems in Canada will take at least 12 months to correct while others believe it could extend to 24 months.

Michigan also faced a medical marijuana shortage this month when new regulations went into effect requiring that dispensaries only obtain cannabis from licensed commercial growers. However, the state doesn’t have enough growers and processors to meet patient demand.

The problem escalated quickly when patients couldn’t access the medicine they needed. As a result, the governor and director of Michigan’s Department of Licensing and Regulatory Affairs asked the state’s medical marijuana board to allow dispensaries that had been operating under temporary licenses to reopen with supply obtained from caregivers (as they had been doing in the past).

This is just a temporary solution to solve the undersupply problem in Michigan. The state still needs to change regulations to ensure demand for medical marijuana is met in the future.

In California, a different type of shortage happened in 2018 when new testing regulations passed. The problem was, there weren’t enough licensed testing facilities to handle the required testing. As a result, retailers weren’t able to meet the demand of the state’s growing recreational cannabis market.

Regulation Leads to Cannabis Oversupply

We saw the problem of cannabis oversupply in Oregon begin in 2017, and by the end of 2018, an abundance of cannabis drove prices down and profits with them in the legal cannabis market. As a result, many licensed businesses had to close. Most of these businesses were small without the capital needed to withstand significant losses in sales for an extended period of time.

One of the primary factors causing Oregon’s oversupply problem is regulations. Many people believe the state’s regulations allowed for the approval of too many cultivator licenses without canopy size limits.

Both Washington and Colorado experienced similar oversupply problems in recent years. To stop the problem from getting bigger, both states stopped issuing cultivator licenses.

According to the Cannabiz Media License Database, the number of cultivator licenses issued in Oregon during 2018 increased by 26% over the number issued in 2017 compared to a 1% increase in Washington and 1% decrease in Colorado. It’s possible Oregon’s oversupply problem might get worse if regulations aren’t changed to allow supply and demand to come closer into alignment.

Balancing Supply and Demand in the Cannabis Industry

Clearly, it will take some time for marijuana programs in the U.S. and Canada to improve, but states and provinces can learn from each other. Consider Oklahoma where a very large number of licenses are being approved. How will this affect supply and demand? Is an imbalance the likely result? Only time will tell.

It’s quite possible that Oklahoma might need to learn a lesson from Nevada where supply problems after the launch of its adult-use market led the governor to declare a state of emergency, which allowed more applicants to apply for licenses to open the supply chain.

The lesson to take away is this – states might be making their own rules, but they don’t have to operate in regulatory silos. In other words, states developing marijuana programs shouldn’t repeat the mistakes made by other states.

Eventually, marijuana programs will run smoothly across the U.S. and Canada, but until then, the problem of supply and demand imbalance isn’t over yet.