Staff Report No. 2020-53, September 2020
Dr. Michael A. Deliberto
Department of Agricultural Economics & Agribusiness
Louisiana State University Agricultural Center
On December 23, 2019, Louisiana’s state industrial hemp plan was approved by the USDA. As of December 27, 2019, the LDAF Industrial Hemp Program began accepting license applications to produce, transport and process industrial hemp in Louisiana. As suspected, the majority of licenses approved were for industrial hemp production (growers).
The USDA identifies the intended use of the hemp being reported. Those uses are classified as Fiber – used for cloth, pressed plastics, ropes, animal bedding, paper, biofuel, packaging, concrete additives, spill cleanup. Processing – grown for extraction of plant resin, which includes cannabidiol (CBD) and other phystocannibinoids to be extracted from the flower. Resin is used in oils, lotions, cleansers, bath or other pharmaceutical or topical products. Grain – used for hemp hearts, crushed seed oil (not CBD), protein supplements (human or animal consumption). Seed – used for propagation stock, hybrids (non-human consumption). The USDA FSA details certified acres of industrial hemp production in Louisiana, by type, as of September 1, 2020 at 375.15 acres in the state. Industrial hemp for fiber production accounted for 231.20 acres (or approximately 62% of total acres). CBD production accounted for 139.91 acres (37%), while grain and seed acres represented less than 5 total acres (slightly over 1% of total acres).
Madison parish commands a significant share of total acreage at 173 acres (of 375.15 total acres) followed by Rapides (48 acres), Franklin (33 acres), Ouachita (25 acres), and Calcasieu (16 acres). Collectively these five parishes account for close to 295 acres, or a 79% share of industrial hemp acres in the state.
Production costs associated with industrial hemp production vary by end-use. CBD flower production is the costliest enterprise to undertake at an estimated cost per acre in excess of $10,000 per acre. Industrial hemp for fiber is the least costly aspect of hemp production to enter into with an estimated cost per acre of $350 per acre. Research is on-going by the LSU AgCenter to explore the production practices and experiences from new hemp growers in the state to evaluate production efficiencies.
Pest pressure has been problematic in industrial hemp production in the form of ants, cucumber beetles, aphids, caterpillars, and fall armyworms. The EPA has approved a very limited suite of insecticides to aid in countering this pressure. Weed control is problematic as no herbicide is labeled for use in the cultivation of industrial hemp. Plastic ground covering can mitigate weed pressure to some degree. Another option has been mowing grasses in-between the rows. Industrial hemp will not tolerate excessive water saturation. Raised beds with plastic can pose a problem when water-logged as they can cause problems for the plant’s root system (mold and blight). Quality of transplants has also been an issue for some growers. Furthermore, seed labeling and seed sources for female only seed lots happened to contain male plants. Greenhouse producers reported water quality issues (chlorine levels) and quick flowering period due to photoperiod sensitivity.
Hemp producers operating in accordance with USDA guidelines are eligible for certain USDA programs in 2020. The USDA’s Farm Service Agency (FSA), Natural Resources Conservation Service (NRCS), and Risk Management Agency (RMA) are updating guidelines on several programs to support growers of hemp, which was reclassified by the 2018 Farm Bill. Once production plans are approved and licenses are issued, hemp producers may be eligible for many USDA programs for the 2020 crop year.
The Whole-Farm Revenue Protection (WFRP) will be available for hemp grown for fiber, flower, or seed. WFRP allows coverage of all revenue for commodities produced on a farm up to a total insured revenue of $8.5 million. Producers can purchase WFRP coverage if they have a contract for the purchase of the insured industrial hemp and meet all applicable state, tribal, and federal regulations. Hemp that has tetrahydrocannabinol (THC) above the 0.3 compliance level will not be covered by crop insurance. Additionally, hemp will not qualify for replant payments under WFRP.
The Noninsured Crop Disaster Assistance Program (NAP) will be available for eligible hemp producers to provide insurance-type coverage due to adverse weather conditions.
Multiple USDA conservation programs will be offered for eligible producers, including the Environmental Quality Incentives Program, Conservation Stewardship Program, Regional Conservation Partnership Program, and Agricultural Conservation Easement Program.
Hemp producers may be eligible for FSA farm loans, such as operating, ownership, beginning farmer, and farm storage facility loans.
Hemp producers are required to file an acreage report with FSA. This is a requirement for growing under USDA-approved hemp plans as well as prerequisite for many USDA programs. To file an acreage report, producers should: Obtain a hemp production license or authorization number issued by USDA, state, or tribe. File an acreage report with FSA, identifying each field or subfield on which hemp is planted, including the license or authorization number.
The absence of data on the size and location of growers, buyers, and competitors in this fast-developing industry is a significant challenge for the market and industry. For example, producers often struggled to identify a buyer for their crop even as processors struggled to identify or contract sources of hemp. While the numbers of planted acres and participants in the U.S. industrial hemp industry increased rapidly under pilot programs and hemp can now be grown legally in nearly every state, the long-term trends for U.S. industrial hemp remain uncertain. Lack of reliable, transparent data and peer-reviewed research and market information continue to be sources of great difficulty in assessing the overall economic viability of hemp. Market dynamics will change quickly, especially during development of a new industry, as producers enter and increase production and demand patterns shift. Hemp is an international market and competition with alternative crops for acreage, relative competitiveness, market transparency, and the ability to manage regulatory and market risks will determine patterns of development in the emerging U.S. hemp industry.
For the budding hemp industry, 2019 was a difficult production season. While many entered the hemp sector with expectations of lucrative returns, expectations have since been adjusted in the wake of significant overproduction. This overproduction in 2019 caused wholesale prices to plummet, leaving many farmers sitting on unsold hemp. Hemp fiber and hemp grain varieties are receiving more attention from farmers and processors but the vast majority of production in the U.S. this year will remain focused on CBD.
Despite reports of difficult experiences last year for some growers, hemp and hemp-derived CBD continues to generate excitement and interest for many would-be cultivators. Overall, at this point the outlook for total U.S. hemp production capacity in 2020 remains uncertain, even when one leaves out any possible industry disruptions stemming from COVID-19, as state agriculture departments are still working to register growers and their sites. In general, early feedback indicates that new entrants to the market may take the place of those who have exited or scaled back their production. Some larger producers have also reported to our analysts that they plan to expand their operations this season.
In July, hemp industry price reporting services acquired updated licensed acreage figures from nearly every state with a functional hemp program. This industry snapshot provides helpful insight into how this year’s hemp crop compares to that of 2019. Results documented almost 400,000 acres of land in the U.S. as being registered for hemp production as of late July, along with over 63 million square feet of indoor or greenhouse space (about 1,450 acres).
Outdoor licensed acreage for 2020 is off by approximately 9% from 511,442 in 2019 to 465,787 acres, while indoor and greenhouse square footage registered for hemp cultivation is down by roughly 64% year-over-year. These numbers suggest that many farmers are taking a more conservative approach to cultivation, if not exiting the sector entirely.
With the number of cultivation licenses nationally being in the neighborhood of 18,000 as of July 2020, indications are that there has been an 8% decline in the issuance of licenses in 2020 as compared to the over 19,500 licenses issued in 2019. This indicates that most growers registered smaller outdoor plots or indoor/greenhouse sites. It should also be noted that many of those who farmed hemp in 2019 are not doing so in 2020 but most of those who exited appear to have been replaced by first-time growers, according to data and comments from state agriculture departments.
A significant majority of U.S. hemp production this year will be for the purpose of producing CBD, as well as some minor cannabinoids, with CBG being the most prominent. However, it is estimated that the proportion of total U.S. production capacity devoted to CBD or other cannabinoid-rich hemp varieties will decline to roughly 75% this year, from around 90% in 2019.
Overall, the reduction in licensed acreage, entrance of a significant amount of new farmers, tough market conditions, and difficulties related to the COVID-19 pandemic suggest that total U.S. hemp production for 2020 could decline substantially year-over-year, particularly in regard to how much CBD or other cannabinoid-rich biomass is generated. Whether a contraction in supply will result in more favorable commodity prices for farmers remains to be seen.
From a marketing perspective, concerns regarding a possible oversupply (surplus) situation further warrant price concerns for 2020. As this year’s crop begins to be harvested, a key question is what impact will the remaining old crop inventories have on pricing?
Prices for CBD and CBG extracts have continued to decline. Many processors are already sitting on sizable inventories of such products, particularly extracted forms of CBD. Hemp Benchmarks, an industry price reporting service, began publishing price assessments for CBG Biomass in November 2019. In the nine months since their initial publication, the price for CBG Biomass has dropped by 82%. This price erosion occurred prior to this year’s harvest, which will generate an increased supply of CBG hemp compared to last year.
With reports that the 2020 harvest is beginning in August for some parts of the U.S., there is significant uncertainty amongst market participants as to how farm gate prices for hemp plant material will respond to the influx of new production. With 2020’s crops not yet dried and processed for sale for the most part, August assessed prices for last year’s CBD and CBG Biomass were down.
Supply chain disruptions due to COVID-19 continue to hamper CBD product deliveries causing shipping prices to remain at elevated levels with demand far outstripping truck availability.
After massive amounts of hemp were grown in 2019, farmers encountered numerous challenges with harvesting, drying, and storing their crops. As many processors were still months away from coming online, considerable amounts of biomass sat in makeshift or converted storage facilities, while some was left in the field and never had a chance to be used. A significant amount of 2019’s U.S. hemp crop was ruined and rendered unsalable. That unhappy result was due, in part, to cultivators and processors struggling to dry and store harvested hemp successfully after U.S. hemp production roughly quadrupled in 2019 over 2018 production. In many cases, methods, equipment, and facilities to meet the challenge of preserving increased volumes of hemp biomass fell short. In others, unsold biomass saw its CBD content degrade over time in an oversupplied market, lowering its value.
The importance of hemp genetics is a key driver in the industry’s sustained success. As with other agricultural crops, the development of hemp varieties with stable and dependable genetics is of primary importance to the industry. A plant’s genetics affect everything: from a crop’s germination rate to its harvest time, yield, hardiness, and, importantly for hemp, whether its THC levels will remain at or below the legal limit of 0.3%.
Determining whether the varieties on offer from hemp seed and clone sellers are as advertised can be difficult to assess in a new industry. Farmers growing traditional crops – such as corn, soybeans, or wheat – know that they can rely on the specifications of a batch of seed being accurate in regard to its variety, germination rate, whether it contains noxious weeds, and other considerations. In traditional agriculture such specifications are included on the label of a batch of seed. Seed labeling is subject to regulation and oversight by state and federal officials.
Interested growers can protect themselves against poor to low germination rates in an attempt to mitigate some of the uncertainty that comes with growing hemp by consulting the hemp seeds’ official label prior to purchasing seed. By a grower directly calling the lab that tested the seed, one can verify that the label’s contents match with the lot number and date of testing, it should provide the buyer with some peace of mind.
Like so many aspects of this new industry, more research is needed. Growing hemp for CBD and other cannabinoid extraction will remain the goal of the vast majority of U.S. producers in 2020. However, there is increasing interest in other end markets, particularly that for hemp fiber, and cultivation for industrial applications will likely constitute a larger portion of total production compared to 2019.
Given the price volatility for CBD biomass and extracted forms of the cannabinoid, hemp producers are increasingly interested in expanding the current primary market for hemp products into other more historical end markets, such as fiber and grains. While almost all recent innovation and investment in the hemp industry have been directed at developing and producing extraction and processing equipment for cannabinoids, there are encouraging signs that other end markets may be gaining traction.
New USDA FSA guidelines could assist the hemp sector’s financial interests in the long run. The USDA FSA memo reads: With the Federal Government now recognizing hemp as an agricultural commodity, our Agency will soon see its presence within both our Direct and Guaranteed case files. While it’s understood that this new commodity will likely produce some servicing challenges because of State and Federal regulations, it should be treated as closely as possible to any other agricultural commodity and serviced in the same manner.
Starting with the 2020 crop year, the USDA FSA will be able to consider applications to grow hemp beyond the provisions of the 2014 pilot program. While the 2018 Farm Bill does allow for production of hemp, there are specific requirements that producers must meet. One requirement, under the 2018 Farm Bill, is that all producers must be licensed under a State or Tribal plan approved by the USDA, or if a producer resides in a State or Tribe that does not have a USDA-approved plan, the producer must be licensed directly by the USDA. Before approving a direct loan servicing action, the FSA must have a copy of the borrower’s current license.
It should also be noted that some banking institutions do not accept financial transactions from hemp operations at this time.
Many hemp growers are primarily producers of other agricultural crops or specialty products and lenders have so far been unable to address capital and credit needs specific to the hemp enterprise. If growers are successful in executing their hemp business plans under USDA FSA financing, it is likely that some conventional lenders who are sitting on the sidelines will begin offering similar services.
However, the short-term picture for hemp is less clear. Hemp will continue to be considered a relatively high-risk crop, financially speaking, even with the new USDA FSA and crop insurance rulings.
For example, default of a purchase contract by a processor or testing above legal THC limits are not insurable causes of loss under the insurance programs. Sales channels for hemp-based commodities are furthermore just beginning to emerge and the amount of product needed to meet demand is uncertain.
Hemp remains a financially-volatile commodity due to some unique issues and challenges. A few years ago, additional cultivation may very well have been a bottleneck to further expansion of the domestic hemp supply chain. However, more recently, an excess supply situation has occurred with a lot of product sitting in storage. This has resulted in volatile prices for both inputs like seed or specialized equipment and products like hemp flower, seed, or fiber. Then, there are other considerations like storage, grading and standards, and import and export possibilities that can also greatly affect markets. These aspects are likely to continue fluctuating for some time as the hemp industry, innovation pipelines, and policy environments mature.