High industrial hemp returns likely to erode: Farmer Mac

Farmer Mac has said that currently achievable gross profits of between $170 and more than $700 per acre from industrial hemp will likely erode as barriers to entry fall and supply chain and regulatory uncertainties are addressed.

In the recently released edition of its quarterly agricultural economy overview The Feed, Farmer Mac examined the implications of the removal of a 1937 prohibition on widespread industrial hemp cultivation that was included within the 2018 Farm Bill that passed last year.

Hemp is an annual plant suitable to a variety of climates which, according to the report, grows as quickly as 12 inches per week and requires little in the way of herbicides. Its producers secure revenue by supplying separate markets for hemp seed oil and fiber from stalks and leaves.

“Plants require abundant water during their first six weeks of cultivation but become drought-resistant after the first few weeks of life,” wrote Jackson Takach, Farmer Mac’s director of economic research and business innovation. “Hemp nutrient requirements are similar to that of corn, and crops can be planted in consecutive years or rotated as needed.”

The report notes that hemp production in Canada produces gross profits of between $173 and $748 per acre. It cites a study by the North Dakota Department of Agriculture which found that three 60-acre pilot farms planted in industrial hemp produced profits of $733 per acre.

“Once regulations and licensing have been sorted out at the federal and state levels, hemp production will have relatively low barriers to entry, and these very high economic profits are likely to be eroded over time,” wrote Takach.

Farmer Mac cannot lend to cannabis or hemp projects. The report notes that issues related to the regulation of inter-state supply chains, THC content testing and related banking regulations dictate that industrial hemp is unlikely to become a lendable commodity in the near future.

Takach told Agri Investor that a lack of clarity around whether hemp can legally serve as collateral had complicated lending to industrial hemp producers, and that much of the legal US production thus far has been self-financed.

“People have had to be really careful about their sources of capital for hemp production, not only from a regulatory perspective to make sure they are complying with the state laws, but also from a banking perspective to make sure they are not violating any covenants that are pre-built into their loans,” Takach said.

The inclusion of hemp within the Farm Bill clears the way for producers to start growing it, Takach explained. He added that although there is no requirement for the US Department of Agriculture to offer insurance for the crop, he expects there will be sufficient demand among producers to justify coverage.

Takach said he was not aware of any institutional farmland owners currently pursuing industrial hemp. It is likely overall US hemp production will expand, he said, after more pricing information has been gathered and the USDA releases a full update to its policy on the crop, which it is expected to do sometime next year.

Takach said that former tobacco states in the south-east of the US are expected to see significant increases in hemp production. He added that universities and producers in New York, Iowa, Oklahoma, North Dakota and elsewhere had been actively investigating the crop’s potential.

Takach said that as production increases and industrial hemp moves from its current status as a specialty crop towards a market that treats it like a commodity crop, it will likely take until about 2024 for the currently inflated profit potential to erode.

“Like any covered commodity within the USDA’s footprint, I think people are going to try it out and see how it goes,” he said. “The potential for profit is pretty exciting, but it’s also something that is fairly easy to grow and could very quickly see supply outstrip demand.”