It’s Legal to Grow Hemp in the USA. What That Means.
Just last month, while both sides of America continued to spew vitriol at each other about every topic under the sun they could find to disagree about, something interesting happened that didn’t quite make the covers of most newspapers. The Hemp Farming Act of 2018 became law on December 20, 2018 and removed hemp (defined as cannabis with less than 0.3% THC) from Schedule I controlled substances making it an ordinary agricultural commodity. It is now legal to grow hemp in the United States, and while few took notice of the news over the holiday weekend, even fewer know what that means for the industrial hemp market. The first thing we want to understand here is what sort of opportunities might arise that we can profit from. Before we even begin to look at investment opportunities, let’s learn a bit about the United States hemp market.
The United States Hemp Market
The United States Congressional Research Service produced a report in June of last year titled “Hemp as an Agricultural Commodity” which provides some insights into the progress made over the years towards making industrial hemp a commercial commodity. Industrial hemp and marijuana have genetic differences such that the former contains less than or equal to 0.3% THC while the latter contains 3%-15% THC by weight. We’re going to stick with talking about industrial hemp. You’ve probably heard many the hippie drone on about how hemp can be used for everything under the sun, and that’s true. There are many things we can use hemp for:
The reality is, right now U.S. hemp product sales are relatively small at nearly $700 million annually. “If hemp is illegal, how can there even be a market for hemp products in the U.S.?” you might ask. That’s because the U.S. market largely depends on imports, both as finished hemp-containing products and as ingredients for use in further processing, with the main country they import from being Canada, the single largest supplier of U.S. hemp imports, accounting for about 90% of the value of annual imports. (Globally, approximately 30 of the world’s 192 countries grow hemp, with China being the largest hemp producing and exporting country.) Here’s a look at what types of hemp products are being sold in the United States:
Now that industrial hemp is legal, there appear to be a few opportunities here. The first would be to grow hemp and sell it at a price that’s competitive to the Canadian hemp that’s being imported to displace those imports. Appealing to American nationalism with some “buy ‘Murica hemp from ‘Murica farmers” slogans ought to do the trick. The second opportunity would be to increase domestic hemp production and drive down the cost of hemp so that it’s seen as a more desirable substitute for other inputs, and then the $700 million market can grow to a $7 billion market. A lot of this comes down to whether or not farmers will choose to grow industrial hemp. A Wall Street Journal article last week mentions how “hemp flourishes in rocky soils that are inhospitable to other crops,” and that it represents “a new potential revenue stream for tobacco farmers abandoning that crop.” Let’s talk more about farming hemp.
Farming Industrial Hemp
While hemp sales may total $700 million, the raw materials don’t account for very much. According to the same report, “hemp imports to the United States – consisting of hemp seeds and fibers often used as inputs for use in further manufacturing – totaled $67.3 million in 2017.” Since we already know that 90% of those inputs come from Canada, let’s look at how much hemp is being grown there. The below chart shows that in 2017, 140,000 acres of industrial hemp were grown in Canada, a record year:
While that might seem like a large number, it only accounts for about 1% of available Canadian farmland. What’s even more surprising is that a fair amount of industrial hemp is already being grown in the United States. In more than 30 U.S. states, growing hemp has already been legal “under certain circumstances by research institutions and state departments of agriculture.” The states colored below in purple are where you were already able to grow hemp for research purposes prior to the most recent law being passed:
According to the report, “information compiled by states and industry indicate that there were more than 25,500 acres of hemp production in 2017, up from 9,770 acres in 2016.” That’s quite a bit of hemp produced for a country where it was supposedly illegal, and 83% of all that acreage can be found in the below five states:
Now that hemp is legalized, companies are beginning to step forward with plans to capitalize on the opportunity. Those companies will first have to overcome some challenges.
Challenges Facing the U.S. Hemp Industry
While industrial hemp may have potential, the fact that it has been stifled by regulation means that the infrastructure and supply chains are not in place. The report mentions some of the challenges being faced include the need to:
- Reestablish agricultural supply chains
- Create breed varieties with modern attributes
- Upgrade harvesting equipment
- Modernize processing and manufacturing
- Identify new market opportunities
There also seems to be somewhat of a conflict of interest here as well. With all the concern about how we’re going to feed the ever-growing world population, any farmland being used to grow hemp which is supposed to help “save the planet” could be used to grow crops which could be used to “feed the planet.” That notion aside, we already have 25,000 acres of industrial hemp being grown, and before we look to scale that, we need companies who will help process hemp into usable forms or even finished products. Just this week, Canopy Growth (CGC) announced plans to invest up to $150 million to build out large-scale production capabilities in New Yawk State for hemp extraction and product manufacturing. Let’s look at a few more companies in this space.
Blühen Botanicals – Tennessee
One startup called Blühen Botanicals is building the largest hemp biomass extraction and production facility in Tennessee which consists of a 100,000+ square foot processing warehouse and an 18,000 square foot research and development facility. That processing warehouse is supposed to be operational now and is capable of processing 2,000 pounds of hemp biomass per day. Since farmers are a bit hesitant to move away from staples like soybeans and cotton, Blühen – that’s zee German word for “bloom” – is looking to educate them, and at the same time make sure that the processing facilities are in place when the hemp gets grown. They already have a dozen farming partnerships, and plan to launch some of their own products by the end of this year. In particular, they’re eyeballing Cannabidiol (CBD) products. In case you don’t know, CBD is supposed to be this wonderful drug that can do everything except cure cancer but (and here’s the clincher) it doesn’t get you high (rolls eyes).
Folium Biosciences – Colorado
Folium Biosciences is the largest vertically integrated producer, manufacturer, and distributor of hemp-derived phytocannabinoids in the USA. (Let’s review here. Phytocannabinoids are cannabinoids that come from cannabis plants. There are around 113 different types, one of which is the aforementioned Cannabidiol or CBD. And none of them will get you high.) When we say, “vertically integrated,” what we mean is that the company controls the entire supply chain, from planting the seeds to selling the products. Folium Biosciences owns and operates the largest phytocannabinoid extraction and purification facility in the USA, with plans to increase its capacity 10-fold by spending $30 million to build a 110,000 sq. ft. hemp extraction facility in Colorado, the state they happen to be based out of, and the state where 38% of all industrial hemp in the United States was grown in 2017.
There are certainly other companies out there involved in all aspects of industrial hemp production, and we’ve listed just a few examples. One would expect the list of companies (which this is not) to grow as investments are made in this space from venture capitalists and large Canadian growers. CBD products have already started to become a fad, and although you can’t get high off of them, it’s just the next avocado toast – something that isn’t really all that great and shouldn’t cost as much as it does, but since everyone raves about it on social media, the price gets set much higher than it should, and all the sheep out there eagerly pour their money into it.
While the rest of the world probably thinks that the U.S. Congress is just a bunch of attention-seeking teenagers bickering with each other on Twitter, they’re only partially right. Turns out that some of the adults in Congress are still able to produce things of value – like the report on industrial hemp that this article was based off of – which probably helped get the bill passed, and which paints an interesting picture about the potential to make some money on this newly legalized commodity. What legalization means is that now the challenges can be taken on without any regulatory risk, and farmers can start doing the math on whether they should switch to industrial hemp once the processing and manufacturing systems are in place.
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