PanXchange State of the Hemp Industry: October 2019New market analysis from PanXchange evaluates the fluctuating hemp market.
Spot Market Updates:
The biomass market is heating up with regard to frequency of transactions as producers harvest fresh biomass and it enters the market. Prices of biomass across the three PanXchange benchmarks have continued to transact in a similar range as product is readily available throughout the country. The biomass market, in general, has transacted in the range of $1.61 to $2.71 per percentage point of CBD content per pound (/point). Prices have continued to see downward pressure due to the cyclical effects of the market. CBG biomass continues to trade on a per pound basis as supply is limited and concentrated in Oregon, with a few farms in the Southeast and Northeast producing viable product as well. The price of CBG biomass varies widely influenced by the opaqueness of the market and has generally transacted in the range of $175 to $325/pound.
Mold continues to be a prevalent factor in biomass throughout the Midwest and the Southeast as many farmers relate problems to humidity and seed genetics not being optimized for different climates. New technologies are being optimized as drying facilities throughout the country are ramping up to full capacity, while varying results are surfacing about yields negatively impacted by mechanized harvesting.
The Colorado winterized crude oil market has transacted between $850 and $1,600/kilogram, while tolling arrangements continue to be a prominent deal structure with regard to initial extraction. The spread between non-winterized crude and winterized crude continues to narrow as winterization capacity increases throughout the country.
The Colorado CBD isolate market traded in the range of $2,000 to $4,000/kilogram in October, while the full spectrum distillate market has seemingly traded in parallel with isolate as distillation becomes more cost effective. The Colorado full spectrum distillate market transacted between $2,100 and $4,000/kilogram, while THC remediated, broad spectrum distillate continued to garner a significant premium of approximately $1,000/kilogram.
On October 1st, the Farm Service Agency (FSA) reported that the hemp industry had planted 144,429 acres for the current crop year. However, other industry-specific sources are predicting much larger crops as Vote Hemp assessed the market at 230,000 planted acres. Although this estimate is considerably higher than FSA’s, Vote Hemp predicts a 40%-50% crop loss that will not enter the market. As such, Vote Hemp projects between 115,000 and 138,000 acres of viable product.
In most established commodity markets, various government entities aggregate crop estimates for the purpose of providing objective economic data. To incentivize farmers to participate in the surveys and gather the most accurate data, the government provides various benefits such as low interest loans and access to special reports that are only given to those who participate, among other beneficial programs.
Prior to the USDA interim rules, there are no formal programs in place in the hemp market. Therefore, without any of these incentives for hemp farmers, many of the hemp acres that were reported to the FSA came from farmers with diversified land usage who are required to report all types of crops grown to maintain the federal benefits. Since many hemp farmers are solely producing hemp this year, the discrepancy between the FSA and Vote Hemp projections are understandable. This fact is further illustrated as you distill the data on a state-by-state acreage basis. In the FSA data, large producing states such as Oregon, Colorado, and Kentucky are severely understated compared to the industry consensus. Per the FSA report, the three states planted 46,137 acres cumulatively, while Colorado alone is expected to nearly double the three state cumulative figure at approximately 80,000 acres planted.
Just as many market participants are still figuring out best practices, the various government arms are doing the same with regards to tracking data in this rapidly changing industry. Though the FSA Crop Acreage Report may be understated this year, the data is still useful towards establishing trends in the industry on a macroeconomic level. Over 77% of acres reported to FSA were earmarked for refinement for CBD products. Behind CBD processing, seeds for reproduction, grain, and hemp seed oil made up 10%, 7%, and 5% of intended end uses, respectively. The industrial hemp applications are picking up momentum, but still represent a fraction of the market. Companies such as Patagonia have released their first line of hemp clothing. However, the price point is considerably higher than the traditional lines representing the amount of research and development that has to occur before hemp is seen as an economical substitute.
It is noteworthy that in the newly proposed USDA interim Final Rules, the reporting of hemp acreage planted will be a requirement for compliance, thus increasing the transparency of national supply outlook. Overall acres planted is not the best measurement for total supply in the market as yields widely vary across the board, but it is a useful metric that will become standardized as the market matures.
After almost a year since the 2018 farm bill was officially signed, the USDA has released its first draft of rules regarding industrial hemp. While the 161-page document has a lot to digest, there are some very major developments that have the potential to change the landscape of the industry going forward. Arguably the most important topic is that the rules were distributed as a draft, for informational purposes. In the coming weeks, a final draft will be published, followed by a 60 day commenting period will be opened before a final rule set will be published within two years. The USDA does note that it “will evaluate all information collected during this period to adjust, if necessary, this rule before finalizing.” The USDA also clarifies that “For the 2020 planting season, the 2018 Farm Bill provides that States and institutions of higher education can continue operating under the authorities of the 2014 Farm Bill. The 2018 Farm bill extension of the 2014 Farm Bill authority expires 12 months after the effective date of this rule.” As it is written now, the industry will be given a grace period of one year to become compliant with the new rules.
As for the rules themselves, the document includes details on where and how hemp can be grown, THC testing standards, and procedures on protocols for plants exceeding the THC limit. First, the USDA defined its proposed procedures to ensure hemp is a national commodity. Upon the enactment of these rules, the USDA will begin the approval process for the individual states' rulesets as defined in the 2018 Farm Bill. The USDA is essentially acting as the superior rule to the individual states, similar to how federal laws relate to state laws. With this rule set, the USDA will establish the baseline procedures and allow the individual states to create rules that can be more stringent but cannot supplant the higher authority. States that submit rules that are in compliance with the USDA will be approved and producers in those states will be subject to the individual state rulings. It is important to note that states such as South Dakota and Idaho, with Governors that are adamantly against the hemp industry, the USDA will issue licenses directly to those producers who wish to enter the market.
Per the draft of the USDA rules, testing will be done on a post-decarboxylation method, where total THC will be derived to account for both THC and THCa content of the plant on a dry weight basis. The USDA also states that “procedures for sampling and testing will be issued concurrently with this rule and be provided on the USDA website.” Although the move to testing total THC can be seen as more restrictive compared to some states solely testing for delta-9 THC, the USDA is providing much needed clarity on this issue, specifically with regard to intrastate commerce. Oregon had previously changed its THC testing procedures this month to account for total THC in the plant in anticipation of the upcoming USDA rules.
The USDA goes into further detail, outlining that pre-harvest samples will need to be submitted within a time period of 15-days of harvest to prove that the crop indeed is in compliance with the USDA. The 15-day time period is noteworthy as the USDA seeks an accurate benchmark of THC concentrations of the plant. Specifically, tests could be manipulated by sending samples in far earlier than when the plant is mature and the pre-harvest test is no longer accurate. Lastly, the USDA outlines protocols for the instances where a crop exceeds the THC limit. In any case of the crop going “hot,” the crop will be destroyed by the DEA or someone authorized under the Controlled Substances Act.
While the document is thorough, there are some topics that are not covered in the initial draft or have essentially been tabled for the time being. While the USDA rules do not mention smokable hemp, they do mention that at this time they will not undertake testing seeds for genetic profiles. The USDA states that there is not sufficient research on the topic, and the location of where the plant is grown can ultimately impact how the plant will perform. On a similar note, the USDA mentions that import and export procedures will be addressed if there is significant interest as many firms look to exports as a way to expand the market, control costs, and capitalize on growing demand specifically in Southeast Asia and Europe.
The USDA also mentions the status of the FDA rulings on CBD, specifically on page 83. In this section, the USDA solidifies the fact that the implementation of cannabinoids into food products falls under the purview of the FDA, specifically due to the use as a pharmaceutical ingredient. The USDA states that “If the FDA does not provide clarity about their plans for future regulation of CBD, there will continue to be uncertainty and downward pressure on the CBD portion of the hemp market.” This statement acknowledges that the USDA is aware of market headwinds, furthering the point that the USDA is intent on creating a commercially viable ruleset.
Although some may read the draft and conclude that they are counterproductive or harsh with regard to the industry's needs, the rules are starting to provide much needed clarity on the multitude of issues that currently impede progress, efficiency, and transparency. It’s important for industry stakeholders to review the rules and comment on areas of concern so that we can help build a path to guidelines that ensure long term growth and competitiveness for industrial hemp in the US.
It is undeniable that the hemp market is transforming at an unprecedented pace. New legislation is moving through Capitol Hill by the day, research is yielding improvements on processes and understanding the potential of the hemp plant, and companies continue to establish themselves as industry leaders. While the momentum on all these fronts is exciting, it is also prudent to take a step back and analyze the way in which the market is functioning to better understand trajectory in both the near and long term.
Current crop transactions are occurring in the spot market, closely mirroring other traditional agriculture commodities such as wheat, corn, and soybeans. On the other hand, tolling splits have become an increasingly prominent deal structure along the supply chain from pre-harvest services such as drying and harvesting to post-harvest extraction. Tolling splits in a vacuum are not a detriment to the industry as it allows for services to be exchanged without the need for additional working capital, however, the repeated occurrence of these deals over traditional cash-in-hand transactions highlight major trends that are shaping the industry going forward.
It is apparent that the industry has deployed most of the capital that was flowing into the industry after the 2018 Farm Bill into hard assets like facilities, research, and development, equipment, and supplies. This capital was put to good work as a significant amount of funds are needed to get an operation running in a timely manner, however, this has put a strain on the amount of working capital. It is worth noting that the continued downward pressure on prices has impacted revenue models for those who anticipated the market to be higher than today, but initial investments are only part of the picture.
Looking at the financial side of the industry, the frequency of multi-million dollar investments has slowed in a competitive market after reaching a high point in 2018. To further the point, access to traditional cash infusions such as revolving credit lines have been unattainable for many firms to this point. From the perspective of the financial institutions, the hemp industry is somewhat of murky water as there are apparent conflicts between state and federal legislation and stigmas surrounding the hemp as it relates to marijuana. Further, it is inherently hard to assess risk when no firm has credit history. This is slowly changing as typically smaller and more agile financial institutions with an appetite to gain market share are taking a more in depth look at the opportunities in hemp.
In summary, the above trends have compounded to create a turbid situation where industrial hemp products are moving without the exchange of money, essentially pushing returns down the road. If passed, the SAFE Banking Act will help increase the hemp industries' access to funds, but it doesn’t ameliorate the current situation.
We have studied several agricultural markets around the globe at PanXchange and are proud to be in the US hemp market. The volatility, dearth of working capital, and potential oversupply are all normal components of a nascent market. These issues in hemp are now compounded as it’s evolving at an unprecedented speed whilst we still await clarity on several regulatory issues. Nonetheless, we remain exceptionally bullish on the long-term potential for US hemp industry. The hemp industry has incredible potential, and it is important to not lose sight of this; if climbing Mt. Everest was easy, we would not marvel at those who have been successful.
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