Hemp Fiber’s Infrastructure Crisis

By Trevor Yahn-Grode, Data Analyst, New Frontier Data

Despite its great potential, growth of the embryonic North American hemp fiber industry is being restricted by a lack of processing infrastructure. Though fiber hemp was once a common crop throughout the continent, during its 81-year-long U.S. prohibition all the facilities capable of processing it either went out of business or transitioned to other materials. As such, nearly the entire fiber supply chain needs to be rebuilt – from scratch.

The overriding gap in the supply chain exists for primary processing, which consists mainly of decortication. Decortication is a mechanical process which separates hemp stalks into fiber and hurd (i.e., the woody core of the plant). It is the most essential process in the entire supply chain, as it creates a steady supply of fiber and hurd which can then undergo further processing, for ultimate use in the manufacture of products.

Historically, North America has had a shortage of processing capacity signified by the lack of facilities capable of decorticating hemp fiber. The shortage had long been attributed to the chicken-and-egg problem – it made no sense to build a processing facility when there was little hemp being grown, while it made no sense to grow hemp without a factory to process it. Thanks to explosive increases in hemp acreage fueled by CBD, however, that is no longer the case. Now, more hemp is being grown than can be processed through existing infrastructure, creating a bottleneck.

Despite the need for more processing capacity, however, risks yet abound.

Extreme volatility in fiber pricing discourages farmers and processors from making large capex commitments, while unsteady and nonuniform supply complicates manufacturing efforts. Fiber processing facilities can also be extremely capital intensive – ranging anywhere from $3 million to $25 million USD to construct – and, due to the economics of transporting raw hemp stalks, are geographically limited to processing hemp grown within a roughly 75-mile radius.

Furthermore, even if the market is less saturated, fiber processing offers small margins when compared with CBD processing. Early entrants into CBD had to overcome barriers in consumer education, government regulation, and logistics, but reaped huge profits prior to the saturation of the market. Early entrants for fiber will face similar challenges, without the equivalent promise of quick and large profits.

Despite the challenges, however, investment in fiber is occurring across all levels of the supply chain.

• In December 2019, Dallas-based processor Panda Biotech announced plans to build, by 2021, the largest hemp processing facility in North America – capable of processing more than 130,000 tons of hemp fiber annually.
• Last May, Collective Growth Corporation – a special purpose acquisition company (SPAC) formed by founder and former Canopy Growth CEO Bruce Linton – announced intentions to deploy $150 million of capital into the hemp fiber industry over the following year.
• Numerous smaller-scale operations have respectively deployed capital around hemp hotspots in Texas, Montana, and South Dakota, among elsewhere.

Due to the large capital investment required, the volume-based nature of commodity processing, and the geographical limitations to raw material sourcing, a significant first-mover advantage exists for primary fiber processors. That market dynamic – regarding geographic limitations in particular – means that the early presence of primary processors in a given area is likely to attract secondary processors, ultimately concentrating hemp fiber production near regional hubs. Such regions will be the first to enjoy returns to scale, and thus enjoy competitive advantages in attracting investment and opening new markets.

The upshot is that due to the considerable barriers to entry, and its importance to the overall fiber supply chain, primary processing remains the principal bottleneck slowing industry growth.