Maturing Hemp Markets

Maturing Hemp Markets

Prior to the 2018 Farm Bill, the hemp industry was entirely fragmented between a handful of states, and hemp prices were very attractive. Colorado, Oregon, and Kentucky were well positioned after some years of developing hemp markets, but these states picked up big acreage numbers in 2019, primarily from speculative growers that had no marketing contracts in place.  This encouraged existing brokers, spawned more, and a feeding frenzy ensued, attracting large schools of sharks eager for a quick meal.  As the hemp industry rapidly scaled in 2019, markets were barely coalescing, mainly on the back of those existing broker networks, often with ties to the MJ industry.

The industry made extraordinary noise, and attracted large numbers of players, us included.  The supply and demand picture one year ago was in rapid transition.  Over a period of weeks starting in June or July, the greater industry looked at developing supply numbers, vis-à-vis licensed acreage, looked at demand – in terms of actual counterparties – and grew alarmed at the prospects of oversupply.  Particularly those that were long on significant stockpiles of hemp derivatives, notably isolate, but crude and distillates also.  Markets tested demand all summer, and prices made a steady decline, on the prospects of oversupply.  This only caused unsuspecting players to be more likely to jump at deals, and many fell victim to long broker chains that were routinely dead ends.  Sometimes money or product had changed hands, other times it was futile, with massive time sucks from 3,4 or 5 brokers in the middle of a transaction.

The industry has rapidly evolved in a year, and hemp markets have become far more subdued, no longer existing in a parallel reality where supply and demand do not dictate pricing.  Companies have had to refine their approach, restructure, and some have disappeared, while others only recently came online.  Markets today are less unruly than they were in early or mid 2019.  Counterparties are finding one another, business practices are more conventional, contracts are evolving.  The development of USDA rules generated momentum towards normalization, and a second round of investment or M&A that is ongoing is much more disciplined, frequently relying on The Jacobsen’s reporting to inform their positions.

Current hemp banking policy forces the industry into a gray area between legally sanctioned and black market.  This is an unwelcome influence from the MJ industry, where duffle bags of cash replace PO’s, checks, and money wires.  CBD is technically not allowed in commerce, as Hemp Industry Daily’s Kristin Nichols reminded us in a piece today on self-regulation in the industry.  CBD continues to be handled by mainstream financial institutions as a Schedule 1 narcotic, despite guidance to the contrary from federal banking regulators.  Operators in both hemp and MJ rue the fact that they are at times pushed to the margins to operate perfectly legal enterprises.

The cannabis industry on both the medical and recreational side attract ne’er-do-wells from around the globe.  The gray area created by the bipolar policy between states and federal government are ideal habitat for fraudsters.   This is unwelcomed by the many professional and well-intentioned participants in cannabis, some of whom are forced to work with questionable companies for private finance. Many of these investors, both domestic and foreign, can move large amounts of cash around in short order.  Last August, the FBI warned citizens about corruption in cannabis states, particularly in western states where licensing is decentralized, and corruption can occur at state or local level. Licenses can fetch half a million dollars, to over $55 million for a cannabis license in Florida, as reported by the Miami Herald. The Soviet born duo and associates of Giuliani, Lev Parnas and Igor Fruman, both implicated in the Ukraine scandal that reportedly involved an influence campaign to damage Biden, Trump’s ostensible opponent in November, were also trying to finance a cannabis enterprise with foreign money.  This involved significant donations in an attempt to influence officials that may hold sway over cannabis policy.

The urgent need for PPE as a result of the pandemic also caused a feeding frenzy. The federal government offered obscenely high prices for masks, allowing for 350% markups.  Unique forces drove the greed and fraud in the PPE segment, including the Defense Production Act.  FEMA was in a position to seize stockpiles of PPE (at cost), giving rise to long chains of brokers, at times 15 deep just to keep the product moving and out of FEMA’s crosshairs, per a recent piece in ProPublica.  Forged documents, including FDA certifications, PO’s on company’s letterhead that had no actual involvement, fake photos and videos serving as proof of life for inventory, and falsified bank statements showing over $1 billion as proof of funds were commonly used to accelerate transactions.  On top if this, was an NDI, to keep people’s mouths shut.  This is all too familiar for some operators in the hemp space.  Many private equity firms or cannabis holding companies with foreign capital have been extremely active in the PPE space, and we will not be surprised if there are current or future investigations by the FBI.

There are plenty of well intention operators that trade in PPE, leveraging their deep supply chain connections to find PPE for those that need it. Profit was made, but there’s nothing unsavory about making honest money.   PPE experienced extreme supply and demand forces moving in opposite directions, and amplified by the gravity of the pandemic.  The frenzied pace, and above S&D scenario, are parallels to the developing hemp industry, but hemp markets have evolved significantly.  The current banking regulations are a cloud hanging over the industry and are an obstacle to pushing unsavory forces out of both hemp and MJ.  It is unfortunate lawmakers do not have the foresight to see the impacts on commerce, but bringing cannabis into the banking fold will help to accelerate normalization in markets.  Make no mistake though, there are people active in the markets that thrive on opacity, some operating above board, and some well below.  Policy changes that allow for regular banking practice will do much to advance hemp markets, and at the same time will avoid chumming for sharks.

 

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