Hemp Industry Must Emulate Mature Markets
Julie Lerner for Hemp Industry Daily
I founded PanXchange, a pricing and trading platform, several years ago to bring efficiency, transparency and increased profitability to various commodity markets.
I have learned a lot over the years, taking my background in mature and international markets to nascent markets such as specialty sand for U.S. energy and of course, U.S. hemp. I’ve spoken extensively on commodity market maturation. So I know what’s coming. Yet it’s requiring a lot more patience than I had anticipated.
For the hemp industry, 2019 can only be described as what a gold rush looks like in the 21st century. We expected chaos, and we got it.
Since then, there’s been a manic rush to chase the new new thing, fueled by social media (what isn’t these days?). Ooh, smokable flower! CBG! Delta-8 THC! No wait, delta-10 THC ! Animal feed!
I’m hoping that those who truly want this industry to succeed will slow down for a few minutes to look at the bigger picture.
We must come to terms with the reality that the cannabinoid market is a fraction of what everyone hoped it would be. It’s an ingredient market wherein profits are mostly captured at the CPG side of the market.
With regard to the major uses of the hemp plant – bioplastics, building materials, textiles and feed/food – well, there too, we need to get real about the infancy of the industry and what has to happen before any of these sectors can be described as “robust.” Most important, if we want this industry to survive and profit, we need to look to mature markets.
Don’t rely on hope
Love of the hemp plant does not guarantee its success. Hemp is a fantastic eco-friendly crop with amazing benefits to humans, pets, livestock and our planet. But in order for a crop to be economically viable, it needs to be financially sustainable.
As I learned over many years working in international agricultural and energy markets, it’s not sustainable to invest in and subsidize a crop unless it is clearly moving toward financial sustainability. In Africa, for example, the U.S. Agency for International Development pours tax dollars out every year for programs in underdeveloped regions, but their agrarian economies are no more efficient than they were decades ago.
It’s time for the serious players in hemp to shift focus from the potential of this amazing plant to focusing on the numbers. Do your homework on the potential prices at harvest time. Calculate costs of production, transport and processing. What can you do to make it work? Again, if hemp is going to succeed in replacing other products (cotton, feed grains, etc), it has to be priced competitively.
Hanging with hemp celebrities is short-sighted
Be smart about who you rely on for data and advice,
Surround yourself with business specialists in agriculture: those who have experience with growing and processing cash crops and specialty crops and bringing product to market. Agronomists and commodity trading specialists understand purchasing power parity, price-risk management, transportation risks and costs and understand distribution.
Also, stop relying on sources who quote the supply, demand and growth projections in terms of monetary value, not physical quantity. Hemp is a commodity. The price constantly moves due to supply and demand pushes and pulls.
If you want to run with the big boys, emulate them.
Observe how grain markets operate. Grain producers:
- Have long-standing relationships with their suppliers and buyers. This is key. A market like PanXchange should be used only for a percentage of your business.
- Hedge their price risks. The first sign of an immature market is when transactions are established on a fixed-price basis. We do not yet have an exchange-traded derivative where we can hedge prices, but you can immediately eliminate price risk by negotiating against a benchmark contract. It’s called basis trading.
- Focus always on economies of scale,whether at the farm or in processing and distribution. How can you bring more efficiency in your harvesting and drying? Is there any value to the byproducts? Can you lower your costs of procurement through a co-op or with a partner?
- Generally align with a couple of industry associations at most– one that protects their interests locally, like a state or regional grower’s organization and one that irons out all the trading terms not covered in the primary trading. There are too many niche associations in hemp today,and consolidation toward mutual goals would be beneficial, such as with the launch of a checkoff program.
Addressing all of the above is going to bring large buyers and trade houses.
Don’t view large trade houses as the big bad enemy. They provide a crucial role in mature and healthy markets, bringing liquidity, (more) patient capital and the ability to take bigger risks with counterparts and transportation.
In sum, your love of the hemp plant and your intimate knowledge of its potential to help humans, animals and our climate isn’t enough.
If you are trying to make it in the cannabinoid sector, it’s a pretty big hike to the top without deep distribution networks and deep pockets. If you’re looking at fiber and grain, focus on the math and what it takes to replace the incumbent material.
For hemp to take its place as a thriving commodity, we need to make better business decisions.