U.S. to learn from Europe on Hemp Fiber Industry
By Trevor Yahn-Grode, Data Analyst, New Frontier Data
Still in its early stages following decades of prohibition, the U.S. market for hemp fiber has so far been marked by unstable supply, inconsistencies in standardization and quality, high transaction costs, and uncertain prices. However the industry clumsily progresses, though, it is instructive to look to Europe, where a much more mature fiber market provides lessons and warnings alike about what the future might hold for hemp in America.
Hemp has been continuously cultivated in Europe since the early Middle Ages, and was the traditional source of textiles and cordage on the continent up until its Industrial Revolution. The 1793 invention of the cotton gin suddenly made cotton far and away the most competitive natural fiber in the world, and marked the start of hemp’s long commercial decline. After the outlawing of hemp in the United States, both the introduction of cheap synthetic fibers, and the agricultural turmoil from two world wars likewise drove a steady decline in European usage and acreage of the crop. By 1993, acreage for hemp fiber was just over 12,000 acres, of which nearly 95% was dedicated for specialty pulp and papermaking.
In the mid-’90s hemp underwent a revitalization on the continent. Market leaders such as HempFlax and DunAgro emerged, finding various applications for hemp fiber in industries such as automotive components, construction insulation, and industrial textiles. Investment in research & development and the modernization of farming methods completely revolutionized dynamics in the European hemp market: It was no longer characterized by a number of small, independent farmers selling their crops directly to specialty papermaking operations, but by a few large, vertically integrated processors exerting control over large parts of the supply chain, and developing broad product lines.
The success of the vertically integrated processor model in Europe depended on through three influences:
1. Large Barriers to Entry
Fiber-processing facilities require intensive capital investment to establish, but once constructed represent a dominating first-mover advantage in a given geographic region. A rival company willing to spend millions of dollars to build a processing facility would logically be better off doing so in a region where no processor yet exists, rather than to compete for supply versus an established buyer.
2. Efficiencies of Scale
Centralized manufacturing reduces transaction and transport costs, simplifies quality control, and allows for high levels of production. To those ends, hemp’s versatile nature allowed for a single factory to produce a wide variety of product lines, resulting in more revenue and profits for the processor. In agricultural processing, volume begets volume.
3. Need for Market Development
Despite hemp’s long history in Europe, the fiber market essentially started from scratch in the 1990s. New products development, scientific research, and public-awareness campaigns were all necessary for hemp to regain its competitive niches. Large, organized companies with long-term visions stepped up to provide the necessary capital for achieving those goals.
As Mark Twain is often credited, “History doesn’t repeat itself, but it does rhyme.” Hemp’s versatile nature may prove to favor large companies in returns to scale, with vertically integrated processors dominating the business model.
Nevertheless, the European analogy is flawed in several ways. It is important to remember that the modern European hemp industry developed and evolved long before the explosive advent of CBD, and did not face either the intense competition or and rapid changes being seen in the U.S. space. Rather, it developed slowly, starting with an existing knowledge base and basic infrastructure before building capacity and developing demand over a period of nearly 30 years. One major downside of vertical integration (apart from its intense capital requirements) is a company’s limited flexibility when forced to follow trends in the market segments which they have integrated. Resultingly, such companies – once accustomed to a stable, relatively unchanging market – may not be sufficiently agile to adapt to today’s volatile, rapidly changing market.
To the degrees that hemp activists have long promoted Europe as a model for the U.S. to emulate, legalization’s arrival now leaves matters up to the market for deciding how the hemp industry progresses. Whether the U.S. will follow Europe’s lead shall soon be seen as companies compete, and market leaders emerge. Toward those ends, the next 20 years’ direction of the U.S. hemp fiber industry will likely be determined during the next five.