Hemp Q&A: Promise, peril and uncertainty define market’s early life

Promising initial returns in industrial hemp have moderated as expected and significant regulatory uncertainties remain, but progress towards integration into US agriculture continues. In late December, for example, the US Department of Agriculture approved industrial hemp licensing plans for Louisiana, Ohio and New Jersey.

Louisville, Kentucky-based Chad Rosen, founder and chief executive of Victory Hemp Foods, spoke to Agri Investor about the hemp market in the Bluegrass State, his view on the relationship between cannabis and hemp investors, and the role of US institutional farmland managers, who he says are likely to incorporate hemp into crop rotations in the not-too-distant future.

You relocated from California to Kentucky to start your hemp business in 2014, in part because of the strong support for a pilot hemp project in the state. Should we be surprised not to see Kentucky among the first states to have their hemp production plans approved by USDA?

I don’t think so. The Kentucky plan was the first to be submitted ahead of all other states in the country, so we probably gave them quite a bit to think about, having submitted a program application based on four years’ experience. The federal and state governments recognize that it’s going to be a little bit of a sausage-making process, which is never pretty.

For us [Kentucky], the question that remains is: how smart is it to be leading in every facet when so many of these things are still getting figured out? We may have made some mistakes in being the first ones out of the gate. Some would say it’s more important we get it right and we should not necessarily rush. There is so much excitement right now around hemp and there is a lot of pain that people are experiencing having rushed in.

What has led to the excitement?

This [hemp] is a commodity crop that is going to rival soy and corn. Maybe not tomorrow or the next day, but we are going to be approaching wide-scale planting and sowing and it will be another commodity crop.

There are a lot of reasons to keep pressing on through what might feel like a mess right now, as rule-makers have more questions than the industry has aligned answers for. This is the first occasion in a long time that we’ve had such a potentially tremendous agricultural resource, that has the potential to be the next commodity crop in America coming into the rotation.

How does that change the shape of modern farm income? What are the profit potential and market opportunities associated with something like that?

The characteristics of hemp have so much value from the perspective of there being different marketable parts from the same plant. You have a widely utilizable fiber for domestic industry – whether its automotive, textile or construction; a flower that produces a cannabinoid that is ideal for supplements and wellness; and seeds that can play a major role in the major consumer shift towards plant-based diets. There’s a great opportunity for farmers to actually keep some of that revenue generated from their farms without having to rely on government programs.

“Hemp is a commodity crop that is going to rival soy and corn”

But it’s not going to happen because of cannabidiol – CBD – oil products alone, and it won’t reach scale without the grain and the fiber. People who are on the grain and fiber side of the plant often feel as if they are standing in the middle of a cornfield screaming at the top of their lungs and no one can hear them. We see what’s coming, and we see all the attention being paid to CBD, the shiny coin, and that really is overshadowing the big picture.

What does the supply chain most need to develop right now?

State and Federal regulation that reflects legislative intent is critical to making sure farmers and processors aren’t growing or processing a controlled substance. A bit of technology around things like rapid-testing devices, to define whether the plant meets the threshold of THC [Tetrahydrocannabinol – the principal psychoactive chemical in cannabis] concentration would help some of the logistical problems, as would better genetics to begin with. Farmers getting more familiar with agronomics around planting and harvesting and ensuring quality for the market is something that is going to take a little while. But I think we are going to get it all right with a bit more time.

What does the market most need to develop right now?

Certainly, consistent quality products will help markets develop and then flourish. That’s going to depend on a scalable, redundant supply chain, and investments into all points where value needs to be added to bring those raw materials to markets that value them. In some cases, we can re-purpose infrastructure, in others we’ll have to greenfield it.

As far as penetrating the market once the supply chain is better, the value proposition simply needs to win for hemp to succeed. Hemp foods [protein, oil and fiber derived from the seed], for example, are GRAS [generally recognized as safe] by the FDA , so that removes a major hurdle for food manufacturers considering using hemp seed ingredients in their products.

What about investors? What has been the relationship between investor attention to the cannabis and CBD markets, as well as hemp?

Many in the investment community are really excited about the cannabinoids in the plants and few are taking into account where the supply chain is going tomorrow and where the market is today. Expecting CBD – or CBG (cannabigerol) and CBN (cannabinoil) – to have the same unit economics and gross margins as cannabis is avoiding a lot of the supply chain and market realities. Those products are much more controlled and supported in a cannabis market than they are in a hemp market, because its federally legal and products on store shelves exist no matter where you are.

There is a much broader market for CBD from the perspective of customers that can legally purchase the products, but at the same time, it can be grown virtually everywhere, and it can be grown outdoors on vast acreage. In addition, if the most valuable part of the plant is the single molecule, you don’t need to have very high-quality flowers, because they are going to be just thrown into a vat of ethanol or other solvent [to extract CBD].

What is unfortunate is that not a lot of these investors are looking outside the cannabinoid world when it comes to making investments in hemp. The supply/demand curve is far too different to apply the same investment lens and I think many are learning that very quickly.

There are going to be a lot of investments lost this year with CBD-only investments. We are already seeing it. We are seeing companies going bankrupt. We’re seeing companies pull out. We’re seeing farmers’ contracts cancelled. It’s already really ugly and I think we are still going to see more of that. The market continues to oversupply, and demand continues to be stifled by the questions surrounding FDA regulations and what the purview of CBD is going to be in the market.

“For now, the hemp industry will need to rely on venture capital investment to scale”

When the [hemp] food ingredients are being used across, for example, General Mills’ brands and fibers are being used across Toyota’s vehicles, institutional investors will begin to pay attention to and understand that the market is viable for their capital. Those are the most relevant data points for institutional investors. For now, the hemp industry will need to rely on venture capital investment to scale to that point.

How and when do you expect the role of institutional farmland managers and ag-focused private equity investors in hemp markets to change?

It’s on their radar and increasingly so. We just had a specialty crop insurance announcement from USDA, so that is going to be one more feather in the cap of those saying, “We should do this.” Prices are attractive and you are dealing with folks who are not acting emotionally [institutional farmland managers], so they are not going to get hung up on whether it’s the “devil’s lettuce.” They are going to ask if [hemp] is a crop they can make money on. Especially if insurance programs are in place, they are going to look at the normal questions like, “Am I going to be able to get a yield out of it? At what price? How many processors are out there?”

They [institutional farmland managers] are, I would say, the most progressive group of farmer managers that are involved in specialty agriculture. They are looking for places where they can find markets and for new crops where they can earn a higher value. There is going to be a main-stage conversation around [hemp] grain and fiber in the years to come. I’d expect hemp to explode in the rotation of institutional farmland on the three- to five-year horizon. This year, you might have a couple of guys dipping their toes in it. We’re certainly going to start with a few institutionally managed farms in 2020.

I think by 2023, you are going to see significant [hemp] acreage being part of the mix across the Midwest. In a large part, that’s because markets are increasing for products vis-a-vis the innovations in processing the seed into ingredients that formulators can utilize across an enormous variety of categories, which has been the holdup of the seed for the past 20 years.