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Hemp production gets ahead of hemp infrastructure

Billions in hemp may rot on farms without expansion in processing sector

Bloomberg, Content provider

September 28, 2019

4 Min Read

By Michael Hirtzer and Ashley Robinson

The euphoria from the burgeoning prospects of U.S. hemp, grown as an alternative to mainstream crops caught in a trade war, has turned to caution.

In the first year of widespread commercial cultivation, hemp planting quadrupled as growers sought a profitable alternative to crops such as soybeans ensnared in the U.S.-China trade dispute. The hemp-derived compound cannabidiol, known as CBD, has a non-psychoactive cannabis ingredient at the center of a wellness trend sweeping the nation, showing up in everything from beauty products to dietary supplements.

While Congress approved hemp cultivation, the Food and Drug Administration hasn’t cleared CBD yet for use in food and drinks, and the murky regulatory environment has limited expansion in the processing sector. Delta Separations, a Cotati, California-based manufacturer with booming sales of extraction machines used to make CBD, estimated that as much as $7.5 billion in hemp may rot on farms.

“There hasn’t been the ability to install the infrastructure to support” the fledgling cash crop, Roger Cockroft, chief executive officer of Delta Separations, said in a telephone interview. “Farmers are scrambling.”

Banks also are reluctant to lend to businesses that may appear to be linked to marijuana, curbing prospects for processing expansion, Cockroft said.

Related:Are you doing your hemp homework?

Congress legalized industrial hemp and CBD in 2018, clearing the way for expanded planting. Growers seeded 142,691 acres this year, according to Department of Agriculture data on Sept. 12. With some farmers probably withholding data from to the government, total acres may reach 230,000, according to the advocacy group Vote Hemp.

“The market has developed and matured and expanded at such a rapid rate that the federal government is playing catch up,” said Beau Whitney, an economist at Whitney Economics, which tracks the cannabis industry.

David Diekhoff, a farmer in Delavan, Illinois, planted one of his 1,500 acres (607 hectares) with hemp among the soybeans and corn. His grandfather grew hemp to make rope during World War II, and his son is an executive vice president at the marijuana cultivator Revolution Enterprises.

He plans to cut the flowers from the hemp plants for use in CBD and is still looking for a buyer before the harvest at the end of the month.

“I wanted to get in on the ground floor,” Diekhoff said in a telephone interview. “It’s a new crop”

A July survey by Whitney Economics found that 65% of hemp farmers failed to find a crop buyer. Since then, many have obtained contracts from companies that may face a cash crunch.

Prices for some CBD components have fallen on the Denver-based price platform PanXchange, slumping before an expected expansion in supplies. “We’re definitely seeing some downward pressure on refined products over the last few months,” RJ Hopp, the director of hemp markets at PanXchange.

A price tumble may cause financial woes for smaller processors, leaving farmers with no payment for crops, said Bourcard Nesin, an analyst covering beverages and cannabis for Rabobank.

Farmers may face more hurdles in the fields. Hemp requires specific harvest protocols, and in order for it to be used for CBD, the crop has to be dried after the collection and before CBD extraction.

“There’s not going to be all of that supply hitting the market,” which may soften a price drop, said Whitney, the cannabis economist. “Farmers are inexperienced on how to harvest this and dry this. They’ll dry it in the fields, it’ll rain, it’ll mold.”

Diekhoff in Illinois plans to store his hemp to wait for better pricing.

“I don’t worry about it,” he said. “I think it just depends on your skills of marketing.”

‘Work in Concert’

Integrated CBD owns processing equipment to handle a hemp harvest from 1,240 acres in Yuma County, Arizona, and has lined up buyers in the cosmetics and food industries, among others, for the refined ingredient.

The business model includes growing, drying and extraction capacity to “work in concert with each other,” Patrick Horsman, the chief executive officer of Scottsdale, Arizona-based Integrated CBD, said in a phone interview. “If I was only a farmer and I didn’t have processing and drying capabilities and I was trying to get capacity from third parties, I would definitely be concerned.”

Blake Butler, the executive director of the North Carolina Industrial Hemp Association, said too many farmers made a shift amid prospects for greater profit.

The CBD craze spurred reports that “you can make money overnight, and that is not the case,” Butler said in a phone interview. The industry will balance out as farmers plan to grow hemp for other uses.

--With assistance from Craig Giammona, Kristine Owram and Dominic Carey.

To contact the reporters on this story:

Michael Hirtzer in Chicago at [email protected];

Ashley Robinson in Winnipeg at [email protected]

To contact the editors responsible for this story:

James Attwood at [email protected]

Patrick McKiernan

© 2019 Bloomberg L.P.

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