Hemp, Hemp and More Hemp CannaBlog by Jim Marty, CPA and CEO

It seems you can’t turn on a radio these days without hearing ads for CBD products.  Hemp, defined as the cannabis plant with less than .3 percent THC, is now legal thanks to the 2018 Farm Bill for the first time since 1937 when it was lumped in with marijuana and made illegal.  Today, thousands of acres of hemp are being planted across the United States.  Colorado has a thriving hemp industry from cultivation to extraction to finished goods.  What is going on here and what does this emerging market look like?

Cultivation

The number of acres of hemp being cultivated in the United States is expanding exponentially, from 25,000 acres in 2017 to an estimated 230,000 acres in 2019.  Some sources predict over 500,000 acres of hemp will be planted in 2020.  However, this crop has a high risk of failure.  Many things can go wrong.

Seeds that were guaranteed to be 98 percent female can turn out to be half male.  Like its high THC cousin, female hemp plants are more desirable for their higher CBD count and other cannabinoids.

Planting the seeds too deep or not deep enough can cause them to not germinate.  Neighboring farms that spray pesticides can contaminate a hemp crop and cause it to fail testing.  Early frosts and snow storms can ruin the plants just before harvest.

And after all this, the crop can fail testing for a number of reasons, including having above .3 percent THC or having traces of heavy metals, pesticides, mold and other contaminates.

Because of all these risks it is estimated that of all the hemp that was planted in 2019, only half was harvested and made it to market as biomass for extraction or smokable hemp.

The market for biomass and smokable hemp

Once hemp is harvested, farmers can sell two main products: smokable hemp and biomass .  Smokable hemp looks and smells like marijuana, but because of its low THC content it does not get you high.  The 2018 Farm Bill, that was signed by President Trump, removed low THC hemp for the schedule of controlled substance.  Thus, smokeable hemp can be shipped across state lines.  Smokable hemp buds and pre-rolled ‘joints’ are sold in gas stations and convenience stores from coast-to-coast.

Smokable hemp is currently selling for $150 to $400 per pound, which is quite a bit lower than high THC marijuana.  In Colorado, with unlimited cultivation licenses, THC marijuana is selling at wholesale for $1,200 to $2,000 a pound.

The other hemp product that farmers bring to market is biomass, which is sold by the ton to extraction facilities. Biomass is made by putting the whole hemp plant, minus the stalk, through a shredding machine.  After shredding, it is stored in large Kevlar bags that hold about 250 pounds of plant matter.

Even here, things can go wrong.  Bagged biomass can attract moisture and get moldy.  Therefore, considerable labor is involved post-harvest.  Bagged biomass has to be rotated, de-bagged, and exposed to dehumidifier machines.  This process is expensive and very labor intensive.

The sooner that farmers can get this product to market the better, and the sooner these expenses stop.

The Market for Biomass

Hemp is harvested once a year in most states.  Southern States like Texas and Florida are experimenting with growing hemp year round, but the hemp harvest is currently an annual event.  This means that once the biomass is sold and extracted, there won’t be any more until the following September and October.

Hemp farmers sell their biomass to extraction facilities that convert it into high CBD, low THC oil.  Because of the annual nature of the hemp crop, in November and December through January and February there is more biomass than the current extraction facilities can handle.  This leads to lower prices during the winter months following a harvest with prices rising in the spring and early summer.

For example, a year ago when the National harvest was much smaller, pounds of biomass were selling for $40-$60 per pound.  This winter prices are $10-$20 per pound, depending on the CBD content.

Biomass prices are determined by CBD levels referred to as points. Buyers will offer so much per percentage point of CBD.  If the CBD content is 10 percent and the offer is $1.00 a point then the selling price is $10 a pound.

As the 2019 hemp crop gets extracted, CBD oil is put into CBD products, and prices are expected to rise steadily until it is all gone by the summer of 2020.

Extraction Facilities

Hemp biomass is extracted into CBD oil at extraction facilities that are similar to food processors, i.e. corn oil companies.  Keep in mind that the modern hemp industry is only three years old in the U.S. and the extraction facilities have not kept up with the increase in hemp cultivation.  There are not enough of them to extract the massive amounts of biomass from the 2019 harvest. Thus, they can pick and choose from the hemp that has the highest CBD content and offer low prices per point.  Some offers to farmers have recently been as low as $.6 (60 cents) per point.  This is below the farmer’s estimated cost to grow and harvest their hemp of $8 per point.

The good news is that more extraction facilities are coming online with massive machines that can process 500,000 pounds of biomass per month. The end product is high CBD hemp oil that is sold to companies that make the CBD products.  CBD oil is then shipped all over the world at $3,000-$4,000 per liter.

There are two ways extraction companies pay farmers.  They can buy the hemp by the point as described above.  The other way is to fee share with the farmer, which is a process called “tolling.”

In a tolling contract, the farmer retains ownership of the hemp that is processed.  As a fee for the process of making CBD oil, the extraction company keeps some of finished oil that is then sold on the open market. A tolling agreement can be more lucrative for farmers because they are  selling a processed product, CBD oil, instead of raw shredded hemp.

In a future CannaBlog, we will address finished goods.  Stay tuned…