Key Hemp Sector Activity Stirring for 2021

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

CBD

Regulation 

This looks to be a year for federal institutions to better clarify and solidify rules on CBD. A pro-cannabis Biden administration will likely lead to positive regulatory movement from the FDA, and New Frontier Data anticipates a major policy update from the regulators in 2021. The DEA’s Interim Final Rules — cause of so much consternation for the industry — turned out for the most part to be a paper tiger. They have not yet been enforced to any noticeable degree, and New York, for one state, has proposed legislation to would legalize intermediate sales between processors.

Prices 

Declining CBD prices are expected to continue as extractors battle it out for market dominance. While CBD will survive the price crash, many competing producers will not. Low prices mean hard going for farmers and extractors, but improve accessibility among consumers.  Between dirt-cheap prices and a more stable regulatory environment, CBD products are becoming increasingly common and available in everyday places like supermarkets and gas stations. Large national brands are preparing to get into the action at some point, whether through acquisition or launching their own products, though for now will likely bide their time to wait and see.

Industry Standards 

The industry needs to reach consensus on dosage and use cases if it is to maintain consumers’ trust. CBD offers real medical benefits, and more is being learned about such every day, but the industry needs more affirmative science, and businesses need to be more responsible in their claims. Any company continuing to flout marketing restrictions is asking for regulatory trouble and demonstrated legal jeopardy.

Grain

Import Domestication 

American farmers have begun supplanting Canadian imports of hemp grain to the U.S. American grain and fiber acreage is set to overtake cannabinoid hemp acreage sometime within the next three years as uncertainty in export markets forces U.S. farmers to focus more intensely on the domestic market, and explore the potential of new crops. States such as North Dakota and Montana have already dedicated significant acreage to hemp grain. Both of those are geographically close and possess similar climates to the Canadian prairie, where most of Canada’s hemp is grown.

Animal Feed 

Hemp seed’s nutritional value and protein content make it an excellent candidate for use in the multibillion-dollar animal feed market. Yet despite its potential, current federal regulations make it de-facto illegal to use hemp seed to feed animals raised for human consumption. For hemp to be used in animal feed, it must be approved by the FDA’s Center for Veterinary Medicine, which entails a long and arduous process. Multiple industry stakeholders are attempting to sponsor clinical feed trials and nutritional analyses, but more research into the safety and efficacy of hemp and its byproducts is required. If the animal feed markets do open up to hemp in 2021, it would make grain hemp a significantly more attractive crop for farmers to grow since it would broaden the total addressable market and greatly reduce the risk of unsold crops.

Regulatory Hurdles  

Hemp grain is at risk of being rendered collateral damage in efforts to regulate the CBD market. Despite the nonpsychoactive nature of their products, grain and fiber farmers each face the same strict regulatory requirements which exist for CBD farmers. To many farmers, growing grain hemp is simply not worth the costly testing policies and legal liability of testing hot. Furthermore, hemp grain’s inability to be sold as animal feed significantly narrows the market for farmers, discouraging their engagement.

Fiber 

The Year of Product Development 

The North American hemp fiber market is likely to develop piecemeal as the capacity and quality of the fiber supply chain slowly ramps up. As such, different hemp fiber products will become viable at different times as the amount and quality of fiber being processed increase, and processors become more efficient about producing different quality grades.

The first wave will include products with the lowest processing requirements, i.e., animal bedding and absorbents. The second wave will feature products requiring superior scale or quality to produce, e.g., construction materials, fiberglass substitutes, and non-woven insulation. Finally, a fully matured hemp fiber industry will include products with both highly specialized manufacturing processes and large, continuously available amounts of hemp fiber. Those will include cellulose, industrial and consumer textiles, automotive components, and energy storage technology.

Impact of Canadian LPs  

The Canadian cannabis conglomerates which have dominated higher-THC markets in the past now find themselves both overextended and ill-positioned to achieve similar results in the fiber market. As industry giants like Aurora Cannabis and Canopy Growth are laying off significant portions of their workforces and reorienting themselves to achieve short-term profitability, they are unlikely to be sufficiently agile to deploy the required resources and investment to develop their supply chains for fiber. That presents a significant opportunity for outside financing from private equity and venture capital firms or angel investors.

Vertical Consolidation 

Much of the instability present in the supply chain – including prices, quality, and availability – can be alleviated through vertical integration. In a post-pandemic landscape where access to operating capital has become scarce, expect companies with strong cash positions to take advantage by acquiring distressed businesses and pursuing vertical integration.