Michael A. Deliberto
The 2018 Farm Bill cleared the way for the commercial production of hemp within the United States and, in so doing, established hemp as a row crop alternative with the potential to be economically lucrative for U.S. producers.
Within the provisions of the 2018 Farm Bill, each state that was interested in the cultivation of hemp had to submit an industrial hemp production plan to the U.S. Department of Agriculture for preliminary approval before any hemp-related activities could begin. Louisiana’s state industrial plan for the production of hemp was approved by the USDA in December of 2019. Upon federal approval of Louisiana’s plan, the Louisiana Department of Agriculture and Forestry (LDAF) was tasked with the responsibility of accepting and vetting license applications for the production, transportation and processing of industrial hemp within Louisiana. Industrial hemp can be planted or cultivated in a field, in a greenhouse or in indoor growing structures.
As of April 2021, there were 100 licensed hemp growers, 14 licensed hemp carriers (people who transport from field to processor), 18 licensed seed producers and 36 licensed processors in Louisiana. In Louisiana, there were 932 acres of industrial hemp reported to the LDAF in 2020. Only 172 acres (18.5%) were harvested, with 756 acres (81.1%) being destroyed by either weather conditions or disease.
The economic consequences from these threats are dependent upon the scale of a grower’s investment in the crop prior to crop failure. In the absence of varieties uniquely suited to Louisiana’s growing climate, environmental factors represent a large hurdle for the industry, but this is expected to change with ongoing research.
The potential for industrial hemp production was greeted by potential growers with a mix of both optimism and excitement. Industry advocates tout the crop’s sustainability and versatility, stressing their view that hemp should be seen as an environmentally friendly alternative to a wide variety of other crops and synthetic products. Fundamental questions, however, remain surrounding the feasibility, deliverability and profitability of this new crop enterprise. Oftentimes, cost of production can pose as a barrier to entry for those interested in a new crop or business endeavor. Differences in end-use applications for industrial hemp is a principal factor in driving the cost of production. Industrial hemp flowers cultivated for cannabidiol (CBD), a chemical used in the health industry, is the most attractive end-use for industrial hemp because early net return estimates per acre have been attractive.
From production, marketing and regulatory guidelines, significant risks are still associated with the production of industrial hemp and serve to foment market volatility for CBD. This uncertainty extends throughout the production chain as retail markets for CBD are not yet fully understood and CBD demand remains unclear.
Economic modeling to estimate the cost of production for CBD are categorized for both labor-intensive, small-scale production and large-scale production coupled with mechanical harvesting. Recently, the overproduction of CBD depressed prices. Growers are developing production systems using current equipment lines to address challenges encountered during field cultivation and harvest operations. Fiber production models may be the latest sector to develop, but underdeveloped infrastructure in the disjointed supply chains remains a barrier.
Those in the industry describe the disjointed supply chain as a “chicken-and-egg scenario.” Farmers won’t grow it because they cannot find processors to buy it, and few processors have emerged because most cannot find a steady source of supply from farmers. Nevertheless, once everything has been ironed out and the hemp market and supply chain mature, hemp fiber holds tremendous promise for the industry. Brands such as Georgia-Pacific, Nike and Patagonia have announced initiatives to make hemp-based fiber products. Once companies with market-ready products seek out contracts for raw hemp fiber, acreage could increase dramatically in a short period of time. Interest in hemp production has been transitioning from CBD to fiber production, especially as prices for CBD are declining, according to industry groups.
Production costs for industrial hemp are greatly influenced by end-product usage. For example, industrial hemp destined for grain and fiber production are estimated to range from $240 to $320 per acre. Hemp produced in a row crop production system for CBD and grain can range from $370 to $490 per acre. The most expensive production system for CBD, which uses raised plastic-covered beds with fertigation, ranges upwards of $9,000 per acre. The cost of transplanted plant slips is estimated to range from $5,000 to $7,500 per acre (56% to 83% of total cost).
The hemp market was strong in 2019. However, with more states coming on board with the authorization of production, the market corrected itself in 2020 because surplus from the previous crop year was met with expanded acreage (and resulting biomass) in 2020. Prices were then sent in a downward trend. Some in the industry point out the fact that the 2020 price decline may have removed some of the irrational exuberance of the market entrants seen a year earlier, tempering the get-rich-quick element that likely saturated the market. As of March 2021, robust inventories of CBD biomass and extracted products coupled with reports of increasing demand have not yet translated into any significant recovery for prices.
With the planting of the 2021 crop, U.S. growers are entering their third season of federally legal commercial hemp cultivation. It is not surprising that prior years have seen missteps by new growers as they familiarize themselves with the crop while also working to build markets from hemp and hemp-products. To operate on a larger scale, some growers have invested in machinery or used existing row crop machinery (field cultivators, disking implements, etc.) with the latter placing a stronger emphasis on traditional commercial farming practices to produce hemp. Differences still remain between commercial row farming and hemp farming — namely the lack of herbicides and insecticides.
Another challenge in the seemingly constantly changing arena of industrial hemp is research. Several companies have entered and exited the business space in the past couple of years. This makes trying to establish relationships with them difficult. At the university level, getting access to the same seed sources can also be difficult. But as seed certification procedures are put in place for hemp varieties, this will facilitate research. With the passage of each additional growing season, more information regarding the production of hemp, variety selection, planting, harvesting and other best management practices will become available and serve to furnish producers enhanced knowledge and insight, ultimately enabling them to make better informed decisions.
Vertical integration has prompted many producers in the hemp industry to combat the disjointed supply chains. By integrating their businesses vertically, farming, manufacturing, marketing and sales fall under the same roof. This could serve as a means for growers to lower their costs and improve their operational efficiencies that may not necessarily be within their core competencies.
Emerging trends for 2021 could include more hemp products geared toward health with CBD’s growing presence in the medical industry, hemp food products and biofuels production. But market volatility surrounding hemp makes any economic projections difficult.
Although the production of industrial hemp in the U.S. and Louisiana continues to be met with its share of challenges, the multifaceted opportunities for industrial hemp provide a degree of optimism that it can gain a foothold in the agricultural landscape of the Midsouth. Should grower-driven, university-led research efforts yield trial data results that corroborate the claims of advocates, the market for industrial hemp could expand, signaling a demand for increased production, thus placing industrial hemp in a place where it would compete for production acreage.
Michael A. Deliberto is an assistant professor in the Department of Agricultural Economics and Agribusiness.
(This article appears in the summer 2021 issue of Louisiana Agriculture.)
Research on hemp at the LSU AgCenter is focusing on identifying optimal production practices to help farmers make this crop a viable economic option. There are as yet many unknowns about how to grow this crop successfully in Louisiana. Photo by Anna Ribbeck
There are two types of industrial hemp: essential oils (cannabidiol, or CBD) and hemp for fiber and grain. Photo by Anna Ribbeck
Samuel des Bordes, graduate assistant, examines hemp plants at the LSU AgCenter Plant Materials Center in Baton Rouge, Louisiana. Photo by Anna Ribbeck