Hot Commodities Edition 13: The Year of the Hemp

Happy New Year. We’re naming 2019 “the year of hemp.”

It’s a market we’re excited about, so today we’re giving a bit of a high-level primer on the hemp supply chain. Stay tuned for additional news

Farm Bill

President Trump signed the new farm bill into law on December 20th, 2018, legalizing industrial hemp production nationwide. So, does this mean that farmers can go out and plant however much hemp they want? There’s a bit more to it than that.

State governments must converse with governors and chief law enforcement officers to devise a plan for state licensing and regulation and submit that to the secretary of the USDA. Farmers in states that don’t develop their own licensing procedures fall under federal jurisdiction and must register with the USDA and comply with federal rules.

According to the farm bill, all industrial hemp plants must also have a THC quantity of no more than 0.3% on a dry weight basis. The bill also details the punishment for going over that amount and gives guidelines on how farmers can become compliant.

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Use and Production

While there are many advertised uses for hemp, including fiber use in textiles, seeds in food, and oils in manufacturing, the largest initial demand will be for Cannabidiol (CBD), or production for medicinal use.

So, is hemp production going to boom, with farmers switching from dryland crops across the board?

It’s a tricky question, but dryland grain and oilseed farmers would have to make some expensive investment to convert land to hemp production, including costs from new planting, harvesting, and curing equipment, as well as new irrigation techniques where needed. With farm debt nearing all-time inflation-adjusted highs, and the farm debt-asset ratio increasing from 13.1% in 2017 to 13.5% 2018 (pdf), farmers are likely wary of taking on additional debt to finance new equipment. But there are a few geographical areas where hemp production could see booms.

The first area, and the region with the main supporters of this addition to the farm bill, is traditional tobacco country. According to the Agricultural Marketing Research Center, “Tobacco production has decreased from more than 2 billion pounds in the 1970s to 629 million pounds in 2016, down 16 percent from 2010.”

Tobacco is one of the most labor-intensive markets, with seeds started in greenhouses or cold frames, then seedlings manually planted in rows. Upon harvesting, the leaves are bundled and cured in huge barns. The planting, sowing, and curing of tobacco is amazingly similar to hemp production. Mitch McConnell of Kentucky, the second-largest tobacco producer among states, was arguably the largest reason why the hemp provision was included in the farm bill to begin with.

The other areas where we could see an additional boom are states that previously legalized marijuana and already have a cannabis industry. Pueblo, Colorado was one of the first communities to actively push for hemp production and the first in Colorado to adopt regulations for industrial hemp. Pueblo County already has a strong growing and processing presence.

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Markets

Geographically, the hemp market hubs are already naturally gravitating towards the areas mentioned above that are ripe for an increase in hemp production, notably Colorado, Oregon, North Carolina, Kentucky, Montana, and Tennessee.

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Opacity

New markets always face the problem of opacity, with price discovery systems not yet developed and disconnected markets yet to eliminate arbitrage opportunities. But hemp faces extra headwinds because, with hemp being previously illegal and having a close connection to marijuana, many of the players operate in a less than legal space.

Also, since hemp was illegal on a national level prior to the 2018 farm bill, banks and payment processors could not get involved, pushing the market into a cash-based business. These types of businesses always attract crime and "creative finance specialists." When you are concerned that a new buyer could show up brandishing an AR15, one quickly gets in the habit of not discussing their business.

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Blockchain

There’s been an endless barrage of dank-kush-canna-coin launches since the early days of crypto, but in reality hemp could be the perfect market for a blockchain traceability product.

While the regulatory framework from the USDA is not complete, there will likely be traceability requirements for genetics and CBD or THC concentration which will reach back all the way to the individual grower.

In addition, China is the top global hemp producer, but all levels of CBD distillate are locally illegal, so all production is exported. The hemp plant acts as a sponge and absorbs everything in its environment, and toxins can be amplified by the curing process. Areas like China with lax environmental regulations have been known to export products with low quality control or even adulteration, including some with high heavy-metal and pesticide content, which are imported as car wax or similar products, then repackaged, relabeled, and sold as U.S.- or Europe-origin CBD.

The above bodes incredibly well for a well-designed blockchain system, and the

hemp market has a unique ability to get the traceability right. We will be enthusiastically following new entrants, so if you are in the supply chain for the hemp market, please reach out to the team, as we’d love to hear what you’re working on.