March 22, 2019

This article will be featured along with other articles addressing investment opportunities in agriculture and surrounding themes in the GAI Gazette, Volume 6, Issue 1, which will be distributed in conjunction with the 11th annual flagship Global AgInvesting event, held in New York City on April 1-3, 2019. Join us in New York to hear valuable insight and best practices for investment strategy from the expert speaking faculty. Learn more and register.

By Bethleen McCall, Colorado Hemp Industries Association

Industrial hemp production has been occurring in parts of the United States since 2014 under a pilot program created by the 2014 Farm Bill. It is estimated that just over 75,000 acres were grown nationwide in 2018, with Colorado continuing to lead the industry with the most farms and processors in the nation.

After the long-awaited legitimization of the U.S. industrial hemp industry through the recently-passed 2018 Farm Bill, it is now up to regulators and industry partners to institute a framework to ensure industrial hemp grows responsibly to its full potential, bolstering the U.S economy and opening up a new investment alternative.

A Multi-Use Crop

Industrial hemp is a close cousin of marijuana, and they share the name cannabis sativa. The difference is that hemp, by law, must have less than 0.3 percent of THC, the psychoactive ingredient in cannabis.

The sought-after ingredient in hemp is cannabidiol or CBD, and in many states, the plant can now be legally grown, processed, and shipped across state lines. Additionally, 30 countries permit farmers to grow it in some manner. Often called the plant with 25,000 uses, industrial hemp can be used as food for humans and animals, as well as in construction materials, biomass plastics, textiles, personal care items, and nutraceutical products. It is used in everything from facial creams to coffee drinks to sleep tinctures. In 2017, the sector produced at least US$820 million in revenues, which grew to over $1 billion in 2018 with an expected 14 percent CAGR through 2022.¹ The sector is projected to be worth US$10.6 billion by 2025.²

There are three main components of the industrial hemp plant that have proven to be viable. The fiber, which has shown great promise not only as a textile but more so as a natural fiber composite. The seed, which is high in protein offering great potential in the increasingly popular plant-based protein market for human consumption, and the seed cake for livestock feeding. The seed is also sought after by the cosmetics industry for its oil content, which includes nutritionally significant ratios of amino acids. Additionally, its potential as a bio-fuel is being explored. Finally, the plant is desired for its CBD content, which may be useful in bolstering the body’s endocannabinoid system. This by far is the most profitable sector in the industry. Medical research is just beginning in the promising new field of cannabinoids and the different ways supplementing the endocannabinoid system may benefit people who suffer from a wide range of illnesses such as depression, Parkinson’s Disease, and epilepsy.

Who’s in Charge?

With the removal of hemp from the Controlled Substances Act, regulatory oversight of the crop transferred from the Drug Enforcement Agency (DEA) to the U.S. Department of Agriculture (USDA). Thus hemp is now treated as a mainstream commodity crop, with the USDA having purview over agricultural production, and the establishment of standards, specifications, and rules to manage the emerging industry.³ After baselines are established, states will have the option to submit their own plans to oversee production. If states choose not to submit a plan, it is anticipated that producers from those states will be able to apply directly through the USDA to grow industrial hemp.

Existing industry insiders are closely monitoring the outcome, which may result in mass exodus from states with less favorable programs. Kentucky is one state that is very enthusiastic about the opportunities – having once earned it the moniker of “Hemp Capital of the World”.⁴ It also is where farmers are seeing hemp outperform long-standing crops like tobacco, and investments are being made, such as the US$40 million Kentucky-based GennCanna put into a new multi-processing facility in that state in December 2018.⁵

The FDA also has regulatory oversight over the hemp industry. Hemp-seed derived ingredients such as protein powder and oil already have received generally-recognized-as-safe (GRAS) status, and the FDA said in December 2018 that efforts will be ongoing to ensure consumer safety in the cannabinoid market. The U.S. Hemp Authority is also working to ensure consumer safety by creating their own guidelines of best practices and standards for industrial hemp products, and have begun independently verifying hemp products.

As another check and balance, the passing of the 2018 Farm Bill means that now the Risk Management Agency will begin collecting crop history. Traditionally they require three years of cropping history for an area, prior to offering federally backed crop insurance for specialty crops. The private sector has answered the call with limited crop insurance offerings for the 2019 outdoor industrial hemp season.

Banking on It

Thanks to the full legalization of hemp, the banking, merchant services, and the lending industries are undergoing a transition. Where many banks and merchant services had avoided transactions with industrial hemp businesses due to misinformation about requirements for suspicious activity reporting and the like, and its association with the cannabis sector, they are now engaging in the sector. This previously stifled the industry by restricting access to bank accounts, limiting the ability to accept payments, and impeding operating and infrastructure improvement loans for producers, processors, and manufacturers. The majority of investment in the space to-date has been from private wealth, such as the announcement by Sanitas Peak Financial of a US$50 million private equity fund on the same day of the signing of the Farm Bill. The fund, focused on all aspects of industrial hemp production from farming, to extraction, processing, laboratory testing, and distribution, was co-founded by Nicholas Mortimer and Charles Wellso in Colorado.⁶

The ability to access traditional loans, Rural Development funds, and federal grants is a huge game changer for the industry, especially in rural America. Previously shuttered tobacco farms are primed to take advantage of the emerging CBD industry due to their existing drying sheds. Soy farmers struggling with a diminished market due to tariffs and competition from the South American market also could make the conversion to industrial hemp, a higher protein crop. And indeed the numbers show that producers are now planting the crop in record numbers, where 2018 saw hemp grown across 23 U.S. states on 78,176 acres—more than triple the number of acres from the previous year, according to the 2018 U.S. Hemp Crop Report.⁷

The Power of CBD

The retail potential of hemp-derived CBD and cannabinoid products are just beginning to be realized. With the federal policy shift, chain retailers are testing a wide range of hemp products with their customers. Coca-Cola Co. confirmed in September that it was exploring the CBD market and “the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world”.⁸ Also, last autumn Walmart confirmed that it had undertaken preliminary fact finding as it considers offering cannabinoid products in its Canadian locations. In Canada – where sowing hemp has begun to replace canola acreage as experts claim farmers can earn twice as much growing hemp as they can growing canola – it is anticipated that farmers will plant over 100,000 hectares of hemp this year.⁹

Currently, the only retailers with significant product penetration to date are head shops and select natural food stores, though CBD products are expected to go mainstream very quickly, and are readily available online.

Prior to the recent Farm Bill, the CBD industry was on easily on track to be a billion dollar-plus sector by 2020 in the United States. With the policy change, its earning potential is greatly increased and impossible to responsibly project this early on.

The Wall Street Impact

The Federal pivot on industrial hemp also brings new opportunities to Wall Street. U.S.-based hemp companies now have full access to the Nasdaq and NYSE, creating a global shift in cannabis investing. This is likely to lead to more activity in the technology, food, agricultural, and medical industries, as well as to give U.S.-based hemp companies an advantage over the global market.

While much remains to be seen, the 2019 growing season promises dramatic increases in hemp acreage. Limiting factors for the upcoming season, in addition to unknown regulations, include limited quantities of seed stock and clone availability, and overall unstable genetics; no herbicides labeled for industrial hemp production; and limited workforce numbers. Additionally, even with a willing consumer market, the processing side of the industry simply cannot expand quick enough to handle the overall production capacity.

Despite these obstacles, industrial hemp production and processing have already proven to be an economic win for communities. In 2017, the Kentucky Department of Agriculture reported that of the 2,300 acres harvested, licensed hemp processors paid Kentucky growers US$7.5 million. Processors then leveraged that into gross product sales of US$16.7 million for 2017. Licensed processors also reported capital investments of US$25.6 million leading to 81 new full-time jobs in the industrial hemp industry in processing alone.

By the time the 2020 growing season approaches, it is likely that the USDA and FDA will have created the foundation of their programs, and most states will be operating an approved industrial hemp program. Knowing that much of the uncertainty will be resolved within the next 18 months, myriad investors, producers, processors, and manufacturers who have been watching the evolving industry from the sidelines are likely to make their move into the space and capitalize on the rapidly emerging industry, which is set to reach an impressive multi-billion-dollar mark by the close of 2020.

ABOUT THE AUTHOR

Bethleen McCall is a fifth generation ag producer from Northeast Colorado, who specializes in industrial hemp, currently serving as the vice president of the Colorado Hemp Industries Association. McCall presented “Hemp: Ag’s Great Missed Opportunity” at the 2018 Women in Agribusiness Summit in Denver. She can be reached at bethleen.mccall@gmail.com.

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DISCLAIMER: All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, GAI Gazette, or parent company HighQuest Group.

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