We’ve reflected on 2019 in a previous bulletin, a year of great progress in a newly legitimized ag industry, but not without significant challenges.  There is a large and diverse group of participants in this new crop segment, including farmers, ancillary service providers ranging from farm equipment dealers and manufacturers, to custom harvesting and drying. Also, processors, politicians, activists, and a range professional services.  Some businesses in farm country did well this year; transplanter units for setting clones and seedlings were flying off the dealer’s lots in some areas.

Some of the dubious characters that have created frustration for new participants – including “brokers” and “consultants” – are fading away, as professional businesspeople fill the vacuum.  Bad actors are being held accountable for failure to pay farmers for product delivered. This is in contrast to well-intentioned processors that were unable to follow through with forward contracts due to cash flow problems, or employers unable to make payroll due to a broad range of financial pressures.  2020 will not be without its own set of challenges, but we have made progress in many areas, including developing professional networks of trustworthy individuals.

The goldrush mentality associated with CBD hemp is unique in agriculture.  Farmers are savvy and always looking for opportunities to maximize return on land, labor, equipment and infrastructure, but certainly have not chosen their profession for the money.  Everyone needs work, for a sense of purpose or financial security, or both, but production agriculture does not attract people looking for quick and easy money.  We’ve seen some clash of values, and significant conflicts related to seed and other issues. Many newcomers, some having transitioned laterally from other cannabis segments, others from successful careers in other industries, will be leaders in this rapidly expanding field.  It has instantly increased diversity in agriculture, and with so many young people jumping in, has had an immediate effect on an aging farm demographic.  We’ve also seen this crop bring multiple generations together on family farms, with new enterprises that draw on the strengths of various family members.

Next year will see continued innovation in technology, ranging from CBD extraction to fiber utilization in applications like we see in HempWood’s engineered lumber.  Domestic hurd availability will increase in 2020 and should support a growing industry in hemp lime construction and animal bedding.  There are companies working behind the scenes to develop woven textile applications for bast fiber, along with the more easily attainable non-woven applications.  The cold-pressed oil segment should bolster grain production, but regulatory approval for utilizing seedcake for animal feed will ultimately drive this.   Post-extraction biomass will begin to find its way into the market as new concepts develop.

2019 has brought with it a major market correction, but without any real impact on retail CBD pricing.  Aside from the other critical issue influencing demand, regulatory, retail pricing for CBD is limiting demand and driving consumers to cheap imports.   Retail pricing is expected to decrease some over 2020, reflecting the contraction of prices we’ve seen on the wholesale side, and increased competition.

We anticipate increased spending on the extractor side with fresh 2020 budgets, and if the Interim Final Rule (IFR) is implemented as currently written, biomass buying may pick up and buoy hemp prices, though not to levels seen earlier this year.  Volume of CBD hemp and derivatives trading is low overall as we wrap up 2019.  There is much to look forward to in 2020.  All of us here at The Jacobsen wish you all the best in your endeavors.

Post-Extraction Biomass

Post-extraction hemp biomass has been a liability for producers and processors.  Some have used the material for composting, but others have buried, burned, or hauled to the landfill.  The Jacobsen has just learned of the first commercial application for post-extraction biomass, though some details will not be available while products are in development stages.

Green Biomass Company, formerly Green Bison, has contracted with two Kentucky extraction operations to utilize 900 tons of post-extraction CBD hemp.  Green Biomass is paying $20/ton for used flower, stalk, and stem and will pelletize the material onsite.  Green Biomass COO Josh Hockman spoke with The Jacobsen last week, and shared details about the enterprise.  One application for the pellets is for exporting to Europe for fuel.

Europe consumes 70% of the worlds wood pellets and imported 6.1 million metric tons (mmt) from the U.S., and 1.7 mmt from Canada in 2018.  Overall E.U. imports for that year were 10.3 mmt, with 2019 figures forecasted to exceed 12.2 mmt.  Wood pellet usage in EU member states totaled 27.35 mmt in 2018, up from 24.15 mmt in 2017.  30 mmt were for forecasted for 2019, showing steady growth in this segment.  This is a direct result of the E.U.’s Renewable Energy Directive (RED), part of the greater E.U. Energy and Climate Change Package (CCP).

The RED will continue to drive wood pellet usage in Europe, with the U.K. being the top consumer, at 8 mmt annually (2017).  Some EU member states subsidize pellets for home heating.  The breakdown for utilization in 2017 for the E.U. is as follows:

Residential Heating                             40%

Commercial Power                              33%

Commercial Heating                           14%

Combined Heat & Power (CHP)      12%

The RED is likely to favor biomass pellets from hemp over traditional wood pellets because of the sustainability implications.  European pellet plants may also use hemp biomass as feedstock but are already unable to meet the demand of member states.  The overall energy footprint for post-extraction hemp biomass fuel pellets is anecdotally smaller than that of traditional wood pellets.    As a result, hemp biomass pellets will be very attractive to both commercial and residential buyers.  Similar policy has driven demand for bast fiber in the European automotive sector.

Not all biomass feedstock performs as well as hemp.  Ash production for hemp is 2%, comparable to wood, and besting alternative feedstocks such as switchgrass, straw, or miscanthus, all of which can produce upwards of 10% ash.  These three feedstocks also produce large and excessive “clinkers”, melted ash that clumps together and cools to the consistency of glass.  Increased ash and unwieldly clinkers add to operating costs and maintenance headaches.  Odor could create some barriers for hemp fuel pellets, particularly in residential settings.

This is another important step in the development of the hemp complex, by converting a waste stream into a revenue stream.  If demand follows current trends, and renewable hemp biomass fuel pellets are widely adopted, we could see increased competition in this segment, and higher prices for post-extraction material.  For new hemp concepts to succeed, the products must be cheaper, better, or more sustainable than current ones.  Hemp may very well check all three boxes.

Regulatory Confusion

 The release of the Interim Final rule (IFR) for hemp has created a great deal of confusion for industry participants.  Besides contentious points related to THC testing, there is a lot of gray space when it comes to what regulations states will operate under in 2020.  States have until October 31, 2020 to submit their plans to the USDA for approval.  States that do not submit a plan will be under the USDA’s jurisdiction, and growers will acquire their cultivation permits directly from USDA.  One has to assume the USDA is still sorting out those details, we know individual states are doing the same.  Maryland is the sole state currently listed as operating under the USDA licensing program for 2020.

Three states, New Jersey, Ohio, and Louisiana and three tribes, Flandreau Santee Sioux, LaJolla Band of Luiseno Indians, and Santa Rosa Band of Cahuilla Indians have to date received approval from the USDA for hemp program plans.  Seventeen other states have plans listed as “under review” at the USDA website, with some of them listed as having been submitted prior to the release of the IFR.  What the implications are for plans submitted prior to the IFR release is unclear.  Without some prescience, it is hard to imagine states submitting plans that align with the stringent THC testing protocols.

The IFR requires producers to utilize state sanctioned employees to collect samples and must submit their samples to a DEA registered lab, for which there are just over thirty listed nationwide.   Crops must be harvested within 15 days of sampling, and 100% of crops must be tested.  In 2019, 25-50% of crops were tested vis-à-vis the States’ Departments of Agriculture.  Colorado has noted that their budget only allows for sampling 25% of all hemp crops.  The New York State Comptroller issued a report on New Year’s Eve which outlined shortcomings of the state’s administration of the hemp program in 2019.  The report noted that over 40% of hemp crops went untested in 2019, and blamed incomplete records and unreliable data systems for the inability to track hemp harvests.

Many states can relate to the shortcomings found in the comptroller’s report.  States were essentially given an unfunded mandate to administrate a new, complex program that has grown at unprecedented rates.  Chaos is inevitable for this highly regulated crop, with disparate regulations found from state to state.  This will continue for the coming growing season, as not all states will be playing from the same rule book.  North Carolina, Maine, Minnesota, Missouri, and New Mexico will continue to operate under existing rules.  The North Carolina Industrial Hemp Commission notified producers that while the 2020 season will continue under existing rules, the transition in October is unclear. Crops will still be in the ground in the eastern part of the state, so these may be subject to new regulations at harvest.

This creates an unlevel playing field for 2020, with some states continuing with more lenient rules, allowing them to use risk based or randomized crop testing, non-DEA registered labs, and without the rigid sampling requirements, or the 15-day preharvest window.  Oregon’s plan is under review, and Colorado is currently developing their plan.  Kentucky submitted their plan prior to the release of the IFR, so it’s unclear what this will mean for these major players this year.

This is the reality of the heavily regulated hemp industry today, and while the states and USDA seem to have functional working relationships, it would be expected to find inefficiencies in the processes required to align the two.  Both federal and state agencies have done remarkable work administrating programs, given the circumstances.  The development of the federal hemp program is a good test run for the eventual establishment of a federal cannabis program but we’re another growing season away from the dust settling on the frenzied and complex hemp regulatory environment.