PanXchange® Hemp: Benchmarks & Analysis – Feb. 2019
Crude CBD's Wide Spread
Regarding the structure of deals, private equity money is having major impact. The float deals that occurred in December and January are becoming a thing of the past as processors have funds available to buy outright on the spot market. Further, the introduction of capital has enabled more large-scale transactions to come to fruition. Looking forward, demand is increasing for farms with a proven track record of producing quality biomass. The new funding enables processors to prepay on future harvests to secure a surety of supply.
Domestic Hemp's Budding Growth
United States hemp production has grown at an exponential rate over the past few years, increasing from 9,770 acres planted in 2016, to 25,713 acres planted in 2017 (representing 163 percent YoY growth), and 78,176 acres planted in 2018 (204 percent YoY growth). 2019 is poised to see another substantial increase in land devoted to the cultivation of hemp due to a) the 2018 farm bill (and subsequently individual states enacting legislature regarding cultivation and the legality of hemp derived CBD), b) an influx of large investments and acquisitions from the likes of Tilray In (NASDAQ: TLRY) and Canopy Growth Company (NYSE: CGC) and c) the expansion of both state-sponsored and private research on the industry.
Hemp Cultivation's Growing Pains
While there remains a myriad of unknowns including transportation and government regulation, it is becoming clearer that the environment in which hemp is planted (soil, moisture, and light) can significantly impact the ultimate yields of the hemp plant. Multiple lab reports have shown that Chinese origin hemp is often saturated with heavy metals, most likely attributed to poor air and soil quality, however, these environmental impacts are not unique to China. Areas that were previously used for corn production have proven to be problematic when switching to hemp as dicot herbicides are commonly deployed to control unwanted vegetation. These herbicides can linger in the soil for periods up to three years and, if present even in small quantities, can severely stunt growth of the hemp plant. The presence of agrochemicals impacting yields of hemp is not unique to corn. Hemp farms near soybean, corn, and cotton farms using dicamba are at an elevated risk.
The use of the dicamba herbicide when paired with the corresponding genetically modified seed has been effective in controlling unwanted weeds, but in recent years multiple issues have arose in the chemical being transported to unwanted areas by wind or water run-off. The issue known as dicamba drift has been an important topic as the EPA has put restrictions on the hours of day, time of the season, and weather conditions in which the herbicide can be applied to limit unintentional drift. The potential negative impact of chemical drift and a lack of proper insurance in the industry are surfacing as two major hurdles for hemp production in 2019.
Overall, the hemp biomass and crude oil markets have been somewhat flat throughout February, with the expectation that prices will continue this trend until significant volume of outdoor hemp is harvested later this year. Due to the expected increase in biomass supply in 2019, the story to watch will be the amount of additional and reliable processing capacity that comes online. If processing capacity remains to be a bottleneck in the supply chain, it is foreseeable that quality biomass will continue to realize a premium while low CBD content biomass will face downward pressure as it will be more difficult to move.