US legalization of cannabis could be a game changer
Hemp markets are swiftly evolving following the passage of the 2018 Farm Bill, which legalized hemp in the US. CBD, one of many cannabinoids found in hemp, makes up the most active segment of the hemp sector but has endured significant price erosion since hemp acreage ballooned in 2019. Hemp prices fell by over 80% in the period between July and October of 2019, according to The Jacobsen.
The perception of oversupply led a decline in hemp biomass prices and precipitated an industry-wide inability to perform on contracts. This was compounded by significant inventories of shelf-stable hemp derivatives like crude CBD extract and CBD isolate. Crude CBD prices, and also CBD isolate prices, all plummeted in Q4 of 2019.
Hempseed is primarily grown for oil extraction, but some portion of production is marketed as raw, shelled, hemp hearts. Think sunflower seed kernels. Hemp fiber production has yet to gain traction in the US, though there is enormous support for the segment conceptually. Considerable investment activity is laying the groundwork for a diverse fiber segment, which is projected to eclipse the cannabinoid segment, with applications ranging from bioplastics to disposable wipes.
Hemp fiber prices, and hempseed prices, are among the most stable as far as hemp pricing goes. Ongoing efforts to allow for the inclusion of hempseed meal – the byproduct of crushing the oilseed – in livestock feeds, will buoy that segment considerably. Hempseed meal prices will need to compete with other readily available protein sources, but even at $200/ton, hempseed operators stand to increase profits dramatically.
Producers in states like Kentucky and Colorado have a head start in market and infrastructure development, with some of the most CBD extraction capacity historically. Market development in the US has been primarily dictated by state hemp policy, enabling operators in Colorado and Kentucky to capture trade flows and leap out ahead of competitors in some cases.
Other states have mobilized agencies to various degrees. State governments that are allocating sufficient resources to problem-solving in the upstart industry will create advantages for producers. Likewise, regional, state, and national industry groups are helping to overcome barriers that are prevalent now, and collaborations are beginning to flourish.
Hemp markets and hemp prices are entirely subject to policy developments on the horizon. Among these policies is the USDA’s Interim Final Rule (IFR) that governs the actual production of hemp. This is largely overseen by state or tribal agencies, but the USDA will also directly license producers in states like New York and Virginia, where state governments have decided to let the USDA handle the administrative and financial burden of oversite. USDA regulations for hemp, which were originally slated for implementation this fall, were delayed until September of 2021, allowing select states to continue on with the laxer elements of the 2014 Pilot Program.
Some 26 States and 38 tribes with approved USDA plans are subject to rules that are viewed as onerous, and a threat to the nascent industry. THC is the key issue, dictating harvest timing, sampling methods, and what to do with non-compliant crops. This could be the driving force behind the upward momentum in cannabis stocks like Curaleaf (CURLF)
The DEA has also weighed in directly, issuing their own IFR, to align the new crop with the long-standing Controlled Substances Act (CSA). This has not been well received by the hemp industry, and even key stakeholders like US Agriculture Secretary Sonny Perdue have noted that the DEA has not been an easy bedfellow throughout the process. Hemp and overall cannabis policy are an existential threat to the agency, an agency that is self-driven in this respect, and out of step with the electorate. The DEA has long viewed hemp as subterfuge, saying as much to the Colorado legislature in 1995, when the state made an early false-start into hemp.
The most pivotal regulatory issue for hemp is the FDA’s position on CBD for various applications. The FDA approved the CBD-based prescription drug Epidiolex in 2019, making the addition of that ingredient to food and beverages problematic, at best. The agency has yet to provide any meaningful guidance to operators in the CBD segment.
This has deterred large corporations, particularly ones like beermakers Constellation Brands and AB InBev that have high-risk exposure compared to emerging microbrands. Some states have rushed to fill the regulatory vacuum, offering consumer protections that the FDA has yet to deliver. Florida’s department of agriculture commenced safety testing of ingestible CBD products this year only to discover elevated lead content at the outset. Others, like Virginia and New York, have explicitly made CBD legal in their states.
On aggregate, beverages were anticipated to result in vast demand for hemp derivatives like CBD isolate. Beverage makers operating in states where it is permissible to add CBD will have a market advantage should the FDA create a federal regulatory path forward. Demand is expected to spike considerably in this scenario, with major beverage makers poised to jump in forthwith.
Stakeholders in hemp are hopeful that a new White House administration will help to iron out some of the major wrinkles that have emerged over the last two years. Whether a new administration will directly impact rulemaking at FDA is unknown. the agency has been able to avoid the appearance of politicization over the years to some degree, but not entirely. Political pressure on the FDA to develop CBD policy has been palpable, with bipartisan directives compelling them to report to Congress, and a bill in the House meant to circumvent the FDA with CBD legislation.
Hemp is ultimately tied to overall cannabis policy, both being defined by an arbitrary metric for THC content that has no real foundation in empirical science. The White House Office of Management and Budget (OMB) is a key agency for federal regulatory activities, and Biden’s ostensible choice, Neera Tanden has become a political lightning rod for the administration. This agency could have considerable influence on CBD policy.
Positive policy developments in hemp and CBD will have outsized impacts on-demand, and hemp prices will follow suit. Biden and Harris campaigned on a decriminalization platform, which may not create the results hemp stakeholders are looking for. It has the potential of clearing hurdles for access to financial services, which are out of reach for many organic hemps or CBD operators because of cannabis and THC’s legacy.
68% of adults in the US support legalization, and lawmakers are increasingly open to policy changes, driven by COVID budget shortfalls, and the spectacle of states like Illinois raking in $100 million tax revenues over the course of 10 months. The hemp sector is well-positioned politically, with plenty to be hopeful for in 2021, as far as hemp policy development and the resulting impact on hemp prices.
David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.