A big question when evaluating whether hemp will fit into a farm operation should be the size and the stability of the hemp market. Aaron Smith, University of Tennessee Institute of Agriculture Extension economist, recommends caution and as much knowledge as a grower can gather.
End use will be a factor. “Hemp is a heterogeneous commodity,” he says.
Specific products will define market parameters, he adds.
Hemp uses include fiber, seed (oil products other than CBD), CBD oil or other extracts, smokable hemp and other possible uses. End use will dictate variety selection, production practices, harvest methods, and processing.
End products find different markets. Smith says producers should determine: “Who are you selling it to? How much are you selling? What is the price or how is it determined? When will the product be delivered and when will payment be received?”
Storage poses another dilemma. To take advantage of market movements and delivery requirements, storage might be necessary.
If the product needs to be stored, how will you store it? Smith asks. “Who takes the storage risk?”
He recommends producers also determine if they have the capacity to carry the product for multiple months. “That’s important from both a storage and financial standpoint,” he says.
He recommends growers look hard at marketing strategies and determine what contracts are available and what quality and delivery requirements must be met.
“Contracts can assist in mitigating price and marketing risk,” Smith says. “Weigh the risks and rewards of any marketing or financial contractual arrangement. Also, understand the content and clauses contained in the contract.
“Another key consideration is counterparty risk, which is very likely to rear its ugly head this fall/winter,” Smith says. “If the business you have contracted with fails, your contract could be worthless. An unfortunate aspect of new commodities/industries is that it is almost impossible to determine who can be trusted. Some people are in the industry for nefarious purposes (take as much money and disappear, leaving others high and dry), while others genuinely took a risk, and for whatever reason, it did not turn out the way they expected, causing them to default on their financial obligations. Understating these risks and having contingencies is essential.”
A professional marketing or legal service could be an option. “Evaluate contracts objectively or, better yet, use professional advice to determine the quality of the contract.”
Smith explains what makes a good contract.
- Two parties, producer and contractor, make a legally binding agreement.
- The agreement is for a fixed term (one crop year or a defined set of production cycles).
- The agreement is signed or entered into at a specific time (i.e. before production begins or after the commodity is harvested).
- The crops must be produced according to the specified terms of the contract.
- All of the crop or a designated number of acres or pounds, which may be specifically identified, will be delivered or sold to the contractor at an agreed upon time and price or mechanism to establish price.
- If the crop is to be stored prior to payment, terms of storage and ownership should be stated, including which parties will be responsible for deterioration of commodity quality in storage.
- The producer will be paid a set amount at a time(s) according to the agreed schedule or term, which may include premiums or deductions for quality or performance.
- Ramifications for non-delivery or a force majeure clause.
Access to markets and price offers one of the biggest conundrums, Smith says. “We see tremendous variability and uncertainty in hemp markets. Currently, the industry has no official tracking, but hemp growers have reported $15 to $200 per pound that will vary based on percent of CBD and the components of the plant being harvested.
“High CBD content and high quality are essential to obtain premium prices,” Smith says.
Again, the intended use of hemp offers a variety of price offerings.
Seed for oil or seed consumed as food may bring from 40 cents to 75 cents per pound. The fiber market may offer from 3 cents to 10 cents per pound. “In the fiber market, proximity to processing is critical as transportation costs can eliminate profitability very quickly.
“Finding a stable, viable market for 2019 and 2020 production may be challenging, given unknown processing capacity and market demand,” Smith says.
Other factors to consider in marketing arrangements include:
- Processing arrangements
- Payment timing
- Protection against failure to be paid. “Price is what someone is willing to pay in your area, combined with the ability to pay,” Smith says.
- “Prices may swing dramatically in 2019/20, so try to minimize risk.”
He offers the following example for the extract market.
Gross Revenue equals the number of marketable plants x the dry matter harvested per plant (lb) x CBD % per lb of dry matter x price per %.
For example, 1,000 marketable plants/acre x 1.5 lb/plant x 10% x $1.50/lb = $22,500/acre.
After harvest, processing offers another potential challenge. “In 2019/20, processing delays or surplus supplies are likely (particularly for lower quality/lower CBD hemp).
“Working with a processor or having the ability to process the product is essential.”
Smith says producer and buyer/processor should agree on the form of the product before harvest. “Get a written, legally binding agreement if possible.”
Depending on market options, storage may be beneficial.
“If a producer invests thousands of dollars per acre in this crop, it is vital to be able to store the product safely and avoid quality deterioration if it cannot be immediately delivered to a processor,” Smith says.
- Consider: Who owns the crop in storage?
- When is payment received? How is the risk of loss allocated?
- How should the product be stored? (Dry/compacted/climate-controlled environment?)
- In many cases the storage burden will fall on the producer.
Producers with 2019 hemp production should prepare for winter and uncertainty, Smith says. They should consider:
- Reduced price environment.
- What will happen with low quality /low CBD hemp?
- It may be a challenging winter for those who have not secured a processing arrangement.
- Delivery and payment issues will occur.
The best safeguard against wintertime surprises will be preparation. Maintain quality in storage, stay in touch with buyers and processors and be mindful of costs.
The first year of any new enterprise comes with unexpected challenges and sometimes opportunities. Producers should do the best they can to protect themselves financially based on the information available to them.