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1 Important Fact About Canadian Marijuana That You're Probably Overlooking

Sean Williams, The Motley Fool

In a shade over two months, on Oct. 17, history will be made. After months of debate in Parliament, and years of promises from Prime Minister Justin Trudeau, recreational marijuana will become officially legal in Canada and go on sale in private and government-owned dispensaries.

To say that legalized cannabis is a big deal would be a big understatement. Though estimates vary wildly given that no industrialized country has ever given the green light to adult-use weed before, the industry could be looking at adding $5 billion in yearly sales. This would come atop the hundreds of millions of dollars the legal pot industry has been generating from domestic weed sales and exports to foreign countries where medical marijuana is legal.

A tipped-over bottle of prescription cannabis lying on top of a doctor's prescription pad.
A tipped-over bottle of prescription cannabis lying on top of a doctor's prescription pad.

Image source: Getty Images.

Investors could be overlooking this important Canadian pot industry fact

However, growth in the cannabis industry, and these lofty sales figures, aren't as cut-and-dried as you might think. Whereas most folks are probably focused on Canada and its domestic sales potential, the important fact of the matter is that exports to international markets are actually going to matter much more.

Health Canada suggested in a report from earlier this year that aggregate Canadian demand could hit around 1 million kilograms. Meanwhile, individual provinces and Wall Street analysts have come in with estimates closer to 800,000 kilograms of annual demand. Regardless of which regulatory agency, province, or analyst is closer, these figure represent a very healthy uptick from the existing demand based on medical marijuana alone, and it would suggest an environment where consumer demand and tourism is strong.

But growers haven't been planning on a market where demand tops out around 1 million kilograms. They've been expanding as if there's no limit to cannabis demand. In fact, I recently opined that Canadian marijuana growers could yield in excess of 3 million kilograms annually by as soon as 2020.

An indoor cannabis grow facility
An indoor cannabis grow facility

Image source: Getty Images.

For instance, Aurora Cannabis (NASDAQOTH: ACBFF), the grower with the largest expected annual output when at full capacity, teamed up with Alfred Pedersen & Son in Denmark earlier this year to retrofit existing vegetable-growing greenhouses for cannabis production. The 1 million square feet of capacity that's being retrofitted is capable of producing 120,000 kilograms of weed (over 20% of Aurora's annual output of 570,000 kilograms at peak capacity), and will primarily be tasked with supplying the Scandinavian region and Denmark with medical cannabis. Unlike many of its peers, Aurora Cannabis's sole focus is on the medical marijuana consumer.

Add in Canopy Growth Corporation, Aphria, and The Green Organic Dutchman, and peak annual production soars to north of 1.5 million kilograms per year by 2020 for just the four-largest growers. If my calculations prove somewhat accurate on hitting 3 million kilograms of production by 2020, growers may be looking to ship up to 2 million kilograms annually to foreign markets. That would be in the neighborhood of double the influence of the domestic Canadian market.

The big unknown

Of course, there's also a lot we don't yet understand about foreign market demand. In other words, while growers would like to assume that the more than two dozen countries around the world to have legalized medical marijuana will gobble up their oversupply without question, there's no guarantee that'll happen.

A doctor holding a baggie of dried cannabis in his left hand and cannabis oil capsules in his right hand.
A doctor holding a baggie of dried cannabis in his left hand and cannabis oil capsules in his right hand.

Image source: Getty Images.

One of the asterisks that should be placed next to overseas medical pot demand is that not every country has given the green light to marijuana that's smoked. Physicians generally don't favor prescriptions that require the patient to smoke something, and instead prefer products such as cannabis oils or edibles. Some growers are angling to have a wide variety of cannabis products available for export, while others will lean more toward dried cannabis. It remains to be seen how much of this dried flower winds up being purchased by foreign countries.

We also don't know if foreign demand will be adequate to handle what could be 2 million kilograms of Canadian domestic oversupply by 2020. You'd think that with most of Europe giving the green light to medical marijuana in some capacity there would be more than enough demand, but you might be overlooking the possibility of these countries developing their own grow facilities from the ground up. Industry dynamics could change pretty quickly over the next two or three years, and if foreign markets don't have the appetite to purchase around two-thirds of Canadian pot production, a significant decline in the per-gram cannabis price could follow.

While the supply-and-demand outlook ultimately remains cloudy at best, there's no doubt in my mind that foreign markets are the key to success or failure for the Canadian pot industry. Though you might be awestruck by the official launch of recreational weed sales in Canada two months from now, you'd be wise to divert your attention overseas and pay close attention to their demand for Canadian medical cannabis.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.