The hemp industry is undergoing rapid change.  This isn’t news to Hemp Bulletin readers, many of whom are “living it”. There really is no parallel in recent history, though there are similarities to the dot-com boom of the nineties.  Investors were flooding into the hemp space in 2018/2019, unaware of the volatility that would characterize the upstart sector in its first year as a legal crop, with accompanying collapse of CBD hemp prices.

That volatility was one factor in the precipitous losses seen with publicly traded companies, some of which are shedding hemp assets while simultaneously acquiring them, as seen with Aurora’s acquisition of US CBD brand Reliva.  The $40 million stock deal shows Aurora’s ongoing belief in CBD markets, and has prudently focused on an actual retail product rather than supply capacity.  Reliva is marketed in convenience stores for a price point below $20.  Aurora had lost up to 90% of its share value in the year leading up to this acquisition announcement but jumped from its May 13 low of $5.80 to a high of $17.10 last week.

There is some attrition on the part of investors, evidenced in bankruptcy filings for a number of entities, but a new round of investors is at the table now, with far more information than was previously enjoyed.  Another significant development is the increase in bank finance, previously unavailable to hemp companies by-in-large.  Private investment is still looking for opportunity in hemp and MJ, and we are aware of a number of well-funded entities eager to carve out markets both domestic and international.

A key dissimilarity with the dot-com phenomena, hemp has unique policy issues that drive a range of ancillary industry, notably legal.  The complexity of hemp and CBD policies from state to state, compel national operators to factor this into their planning.  Risk tolerance varies with companies, but overall, operators in the hemp space are exposed to more risk than early dot-commers.

It isn’t just location that creates risk.  With a wide range of product categories, some are less troublesome, but this is dependent on location.  Hemp flower is a good example, with some states like South Carolina taking a strict legal position on the product. At its simplest, the topical and ingestible derivatives categories have very different risk profiles.

Litigation is rampant in hemp, par for the course in an emerging market, but exacerbated by a regulatory outlook that is dissonant from highly charged markets.  A large portion of litigation is internal conflict between growers, their contracted buyers, business partners, or seed companies.  Other litigation stems from consumers claiming damage solely due to labeling and regulatory issues, with no personal damage.  Such is the case with a plaintiff from Arizona, who has launched a class action suit against California based CV Sciences, due to inconsistencies with the companies labeling and the FDA’s position on CBD.  A federal judge in California has put that trial on hold, pending further guidance from the FDA.  This judge is not alone in their position.  This was also the case in January, when a federal judge in Florida ruled that the FDA has offered insufficient guidance for them to effectively rule.

FDA regulatory guidance continues to be the most pressing issue in hemp derivatives markets.  Markets are charging ahead in many cases, while the FDA swats at a number of companies buzzing around with inappropriate product health claims, but has pulled up short with any meaningful oversight of CBD product safety.

Hemp Flower Markets Gather Momentum

The hemp flower market continues to strengthen. We are hearing reports from producers that the wholesale market is heating up, as select inventory of 2019 crop starts to dwindle.  Some readers will no doubt question this statement, having large inventories of 2019 hemp flower in storage.  This new market is highly fractured, with countless channels for distribution, leaving many excluded from lucrative markets.

One successful channel has been brick and mortar CBD shops, of which many have been forced to close their doors due to state or local pandemic policies.  There is a brisk online trade with countless vendors selling flower in small 1-3 gram quantities, as well as ounces and quarter pounds in some cases.  Prices for ounces, as a reference point, are typically in the $100 range, and premium vendors charge up to $300 for exceptional product.  What makes an exceptional product?  The wholesale market is wrestling with this very same issue, as hemp flower quality is highly subjective.  This is a challenge for markets and commoditization, but hemp flower lends itself more naturally to craft markets.

This lack of standardization in the industry limits wholesale growth.  Hemp flower pricing is relatively stable though, with the vast majority of transactions within our published range.  Premium product easily trades $50-$100 higher than the $275 ceiling for product meeting The Jacobsen’s specifications below:

Hemp flower is priced by the pound. The Jacobsen’s published pricing is for bucked, machine trimmed, mold free, bright green flower with a minimum 10% CBD content, below 13% moisture content. Product may be quick dried but retains a desirable terpene profile or “nose”, with abundant trichomes. Slow dried and cured flower will be represented at the top end of our published price range.

Conversely, a great deal of product is also available at a discount to published pricing.  An example of this would be untrimmed product, and examples of premiums are hand trimmed and slow cured product.  Much of this premium product is found in Oregon. The state has certainly established itself in national markets, but Colorado product is also desirable, and California will no doubt achieve a generous market share as their production increases in coming years.  Generally, the states with a mature MJ industry are more active in these premium markets, but new hemp producing states are increasingly supplying local demand.  Some of this is from indoor crops.  This will be a growing trend as hemp flower markets continue to expand throughout the US, also allowing for multiple crops.  In more humid areas of the country, where pest pressure is also higher, only the best growers will be able to produce premium product outdoors.  A quick look at Google Trends shows hemp or CBD flower to be most popular in the Southeast now, with few queries from the Northern Plains.

Marketing channels aren’t the only fractured aspect of this marketplace, policy also varies from state to state, with some states taking a draconian approach to regulating the marketplace.  Georgia is well on its way to adopting a policy that treats hemp flower like MJ.  This measure has passed the Georgia House and is now in the Senate.  Some online vendors have shipping restrictions to certain states, but many will ship anywhere.  For now.  South Carolina has interpreted their hemp legislation to require a permit to possess raw hemp, and quietly moved to curtail sales in retail establishments last year.  Indiana’s ban was overturned by a federal judge, but the state has appealed, and a 3-judge panel heard arguments in April, with a ruling forthcoming.  North Carolina also moved to ban smokable hemp as part of a broader policy move, prompted by the State Bureau of Investigation’s concerns about law enforcements ability to enforce existing MJ laws.  This is at issue in all of these states.

Certified organic production of hemp flower will expand in 2020, but lack of consistent supply has made retail operations reluctant to add the category yet.  Hemp flower retailers estimate demand at 1 gram/day for typical consumers.  Brightfield Group estimated the 2019 retail flower market at $70.6 million.  If this number were correct, overall retail volume for 2019 would have been 15,565 lbs hemp flower, based on $10/gram retail pricing.  There is no accurate account of sales of hemp flower, but we estimate it to be several times more than the $70.6 million figure.

Just a few weeks ago, Georgia and South Carolina hemp companies Verde Leaf and The Alpine Hemp Group announced their collaboration to produce smokable product on as much as 1000 acres to supply up to 46,000 gas stations.  This one regional operation would then produce far more flower than the above theoretical market of 15,565 lbs, even if only high grading 100 lbs/acre.  The majority of producers did high-grade their crops this year, harvesting their best colas for the flower market.  For simplicity, a 100 million lbs theoretical yield in 2019 would generate up to 5 million lbs of flower when high grading 5% of the crop.  Many producers do have several hundred to several thousand lbs of flower in storage, but quality varies, and overall production is unlikely to have reached 5 million lbs.

Demand is not there yet either, but flower remains a bright spot in the hemp economy, helped by recent events, as people spend less time in the office and seek new ways to address a range of issues like anxiety or insomnia.  The product is incredibly popular in pre-roll or cigarette form, and is easily accessible to consumers in convenience stores, many of whom are replacing some of their tobacco consumption with hemp.  The tobacco companies are taking notice and will likely join the fray in coming years.

Commoditization on Horizon

As the hemp industry expands and normalizes, the participants become more diverse, and large multinational food, cosmetic, or dietary supplement companies – among others – are strategically exploring market opportunities, and monitoring policy developments.  Some of the multinational agricultural companies like Syngenta, Cargill, and ADM are actively lobbying for pro-hemp and CBD policy, poised to play a role in the hemp value chain. The volume of product needed for large rollouts like a nationally distributed beverage from one of the many big players cannot be easily met with today’s infrastructure.  Agriculture has a mature, comprehensive supply chain to bring raw food or fiber commodities to large scale product manufacturers.

For this to happen, products must be uniform, with detailed standards and specifications, fostering confidence in buyers.  This creates liquidity in the marketplace, and key infrastructure facilitates efficient movement through the chain.  A buyer anywhere can buy a carload of Bleachable Fancy Tallow, No. 2 Shelled Corn, or Heavy Native Steer hides to supply footwear or auto industry and know exactly what to expect.

This is not the case for hemp and derivatives.  Some industry participants bristle at the idea of commoditization, citing the collapse in hemp pricing and hemp derivatives prices in 2019, but this supply and demand imbalance occurred prior to any widespread commoditization of the crop.  Regardless, if the hemp industry is to grow at levels forecasted in recent years, it will include a scaled segment that utilizes the same assets as those used elsewhere in agriculture.  Terminals for all kinds of products exist, grain elevators being the most common, are strategically located with rail or port access for efficient, high volume transportation.  Much of this is invisible to the US populace, but rural people are far more familiar than their urban counterparts with this agricultural supply chain and are far more likely to be involved in some capacity.

There are regional “co-ops” that have formed to facilitate marketing hemp biomass and flower, but this model has yet to achieve lift-off.  Part of the problem is expectations in a poorly defined market, one with segmented retail demand, with the masses supplying a niche or luxury market.  These upstart, disjointed markets have a number of nationally and internationally distributed brands, often vertically integrated with in-house farming resources, but some also use a co-op style model, providing plants, inputs and agronomic support.  Others operating at this scale contract production and supplement with spot buys.  There are also a large number of regional and local brands, with franchising activity driving their growth.  Other brands are on an artisanal scale, producing craft product for local farmers markets or a brick and mortar store, but also maintaining an e-commerce presence.  Much of this activity relies on tolling, but a significant part of the value chain are formulators, buying bulk extracts to use in manufacturing.    Relative to other agricultural production, these are all niche markets.

Singapore-based Denare Group is serving an essential role in creating commodity scaled markets here in the US.  Denare Group specializes in trading physical commodities such as base metals, specialty oils like avocado or hempseed, and hemp biomass, distillates, and isolate.   Denare USA is offering a wide range of services to farmers, processors and manufacturers.

Their New York terminal facility is a former grain elevator, with rail and port access, and a 300,000 sq. ft. facility on a 200-acre site.  The terminal facility can receive freshly harvested biomass, at 2 million lbs/month, and offers drying, bucking, sorting, milling, blending, and homogenization.  The facility gives Denare the option to pivot, as hempseed and fiber demand grow.  They are actively exploring opportunities in hempseed and oil, another segment that will likely grow if reliable supply exists to instill the confidence manufacturers need to add hempseed or oil to food or industrial products.  For the time being, they fill an essential role in the CBD hemp economy, by creating consistent product standards, and offering the services that are fundamental to preparing that product for market.  Their biomass handling services are the best illustration of this.

Denare has formed a network of assets in the hemp space, developing collaborations with extractors who are operating at very competitive price points.  The company has focused on products with reliable demand, THC free products like CBD isolate and NDT Broad Spectrum Distillate.  Minimum quality specs help facilitate transactions, giving buyers confidence to purchase in volume, with logistical capabilities to move products in bulk to domestic or international customers.  This will be essential to the development of mass distributed product, which has been stymied to date by FDA policy.

Denare is one of many players in the hemp economy, a sector with immense diversity in terms of scale and transaction volume.  Consistent, high volume trading has yet to occur, and efficient hemp production practices are still in the early stages of development.  There are enormous gaps in the efficient production of hemp from seed to shelf.  From the seed that kicks it off, through harvest, drying, transporting, extracting and packaging, there are weak links that will require multiple seasons to address, and the pace of innovation will be brisk over the coming decade.

We do have some hempseed handling infrastructure in select locations in the US, but facilities that can adequately handle, store, and crush hempseed will be an essential need for farmers who will vary in their capacity to handle the crop properly with existing perforated flat-bottom bins and augers.  Fiber terminals will also be a critical need. We will see varying scaled approaches to decortication, but it will likely resemble gin infrastructure in cotton country, in terms of an economically feasible geographic scope for aggregating product.

More about Denare Group:

https://www.denaregroup.com/