In this edition of our series on the Task Force’s final report "A Framework for the Legalization and Regulation of Cannabis in Canada" (the "Report") we explore the Task Force recommendations for regulating the production of cannabis. One of the major themes that formed the basis of the discussions throughout the Task Force consultation process was the establishment of a safe and responsible production system. Accordingly, the Task Force recommended that the government’s principal interest should be to establish an efficient, accountable and transparent system for regulatory oversight of the cannabis supply chain which emphasizes the protection of health and safety and reducing diversion to the black market.

The following are four key takeaways from the Task Force’s recommendations relating to the production of cannabis.

1. Entry into the Non-Medical Market

The Task Force recommends that the federal government take a measured approach to regulating the production of cannabis including regulating the entry of new producers into the market. In developing the new framework, the Task Force identified several concerns that should be considered, including:

  • Oversupply of cannabis: The Task Force recommends aligning supply with likely demand to avoid potential negative outcomes (e.g., overconsumption). In achieving this goal, the Task Force recommends implementing production controls by limiting the number of production licenses or the total capacity permitted under such licenses.
  • High compliance costs: The Task Force acknowledged that the certain compliance requirements under the Access to Cannabis for Medical Purposes Regulations (the “ACMPR”) may be prohibitively expensive and, therefore, a barrier to entry for new market participants, especially with respect to smaller producers. Accordingly, the Task Force recommends that licensing and production controls should be used to encourage a diverse, competitive marketplace that also includes craft and artisanal producers.
  • Security clearance requirements: The Task Force listened to stakeholders who are currently operating in the unregulated cannabis market but desire to legitimize their businesses and transition into the regulated market. This group expressed concerns that they will be excluded from the regulated market as a result of their involvement in the unregulated market due to the stringent security clearance requirements currently in place under the ACMPR. In our view, if the same security clearance requirements are carried over into the non-medical regime, it may prevent many qualified industry professionals from participating in the regulated market, and potentially rob the regulated market from some of the most qualified operators, while at the same time, aiding the survival of the unregulated market as these operators are left without a viable pathway into regulated operations.

Given the above, we view the Task Force recommendations as being generally favourable to early movers such as current licensed producers (“LPs”). Given LPs’ existing production capacity, current distribution capabilities, and quality assurance systems, they are well positioned to be the primary source of supply for the non-medical market. However, the Report was also very favourable in terms of recommending allowances for a broader group of market participants by identifying the need for market diversity and our expectation is that the non-medical market will provide opportunities for craft and artisanal growers to play a meaningful role in the regulated cannabis economy.

2. Quality Assurance

The Report emphasizes the need for rigorous safety and quality standards in order to protect public health and safety. This already exist in the medical cannabis industry and while the Task Force recommends that certain parts of the current medical regime be reconsidered in order to encourage a diverse marketplace (e.g., onerous physical security requirements), quality control measures are not an area where we expect to see materially reduced compliance standards.

Therefore, we believe that the current LPs will have a market advantage given their experience in complying with Health Canada’s quality control requirements. Further, we believe that laboratories (which are licensed as “Licensed Dealers” (“LDs”) pursuant to the Narcotic Control Regulations) will become increasingly important as the range of consumer products expand and quality controls and quality assurance testing becomes more diverse and more complex. Lastly, we expect that specialized ACMPR consultants and technical professionals who offer expert advice regarding good production practices, development and implementation of standard operating procedures and record management solutions will be in high demand in the non-medical market.

3. Personal Cultivation

The Task Force recommends permitting some cultivation of non-medical cannabis for personal use and draws parallels to the regime of home production of wine and beer for personal use. However, the Task Force acknowledged that small-scale personal cultivation of cannabis is not without risks, especially when considering the potential exposure of children to cannabis. Consequently, the Task Force recommends a model whereby limited personal cultivation is permitted, incorporating limits on the scale of cultivation, guidelines surrounding personal cultivation methods, the regulation of starting materials (such as seeds, seedlings, and plant cuttings) and oversight by local authorities.

The Task Force recommends that personal cultivation be limited to four plants to a maximum height of 100 centimeters, while prohibiting certain dangerous manufacturing processes such as use of volatile solvents to create cannabis concentrates. We anticipate that enforcement of these restrictions will present new challenges to local authorities who will need to develop procedures to ensure that personal cultivation is carried out within the prescribed parameters.

Interestingly, the Report notes that, while there should be some provision for personal production, the Task Force does not see personal cultivation as a viable alternative to commercial production under strict regulatory oversight. In our view, personal cultivation exemptions will likely be used by hobby growers and those that require increased access to medical cannabis. As such, we do not anticipate that personal cultivation will result in a significant decrease in the demand for cannabis products produced by LPs and new market entrants.

4. Outdoor Cultivation

The Task Force recommends permitting outdoor cannabis cultivation, primarily out of a desire to limit the environmental impact of indoor production. Subject to adequate security measures, the Report suggests that outdoor cultivation may reduce the environmental burden which indoor production presents as a result of energy intensive indoor lighting, climate controls and water usage requirements. Another reason offered by the Task Force for outdoor cultivation was to lower barriers to entry to smaller craft or artisanal producers.

In our view, outdoor cultivation presents a few threshold considerations. Outdoor cultivation is largely dependent on a suitable environment and appropriate genetics in order to produce both sufficient plant yield and product quality. Cannabis is an annual plant (it germinates, flowers, and is harvested in the same year) and, in part, its different stages of growth are related to the amount of sun it receives at each stage. Given Canada’s diverse climate, outdoor cultivation is likely to be concentrated in regions with a suitable growing environment and will, in part, depend on the market availability of cannabis varieties that can thrive in such regions. As such, ensuring an adequate legal supply of cannabis varieties that are suitable for the Canadian climate will be critical for creating a feasible outdoor cultivation regime. Therefore, those interested in outdoor cultivation will need to consider several factors to determine economic feasibility including:

  • appropriate geographic locations;
  • availability of cannabis genetics;
  • potentially lower annual yields; and
  • the associated cost of quality assurance and security measures.

Within a regime that allows for outdoor cultivation, we would expect to see LPs and LDs who are currently investing in cannabis breeding and phenotyping programs to be well positioned to quickly pivot those programs to take advantage of new outdoor cultivation opportunities.