Newly Legal U.S. Hemp Industry Sees Early Supply Boom, Wholesale Price Crash

The supply of hemp biomass is skyrocketing in the wake of legalization in the U.S. and with the anticipation of federal regulations late this year. Demand for hemp-derived cannabinoids has helped propel the adjacent extraction market, but analysts and growers are concerned that production is outpacing that consumer interest—leading to a price crash as the 2019 cultivation season has come along.

According to hempbenchmarks.com, there are more than 400,000 acres of licensed hemp cultivation land in the U.S. Not all of that is likely to have been planted this year, but that’s a steep climb from the nearly 80,000 acres licensed in 2018.

Wholesale trading platform and vendor network Kush.com entered the hemp space following the passage of the 2018 Farm Bill. The data that the company pulls in from its exchange can then turn into trends worth watching in the industry. Looking at the hemp extraction market, CBD isolate prices have fallen from a high of $9,470 per kg in October 2018 to $4,133 per kg in August 2019—a decline by more than half in under a year.

“Demand has been growing. It’s been growing a lot,” Kush.com co-founder Chase Nobles says. “The other piece of that is supply has outpaced demand. Vendors aren’t chasing demand. I’d say it’s almost flipped—demand has their pick of which vendors they want to work with.”

Andrew Brown operates Mata Leao Farms and Gunbarrel Organic Extractions, a vertically integrated hemp enterprise in southern Colorado. Last year, Mata Leao Farms grew 35 acres and 130,000 lbs. of hemp. In 2019, the farm expanded to 900 acres. Overall yield has gone down, but so did the farm’s cost per pound.

“It’s nice to be able to grow your own stuff,” he says. “That way, you know how much it costs you to grow it, and that’s hopefully and usually lower than what it takes to buy it.” On the wholesale market, eyeing the remainder of the year, Brown says he’s watching the change in the supply prices and selling futures of hemp. If he can sell his futures now, then he can buy back good hemp at inevitably lower prices this fall.

The market forces track closely with how some cannabis markets fared in the years following legalization. Early-adopter states like Washington and Oregon saw an immediate spike in prices, followed by a dramatic oversupply and subsequent price crash. Only now, in 2019, is the Washington market beginning to feel a shortage in the cannabis market—a correction, of sorts—signaling a stabilizing process.

“The thing that we’re all really waiting for—at the least the thing I’m waiting for on the processing side—is regulations."

- Scott McWhorter, Rocky Mountain Extraction Services

Rapid growth and changing regulations: This is a recipe for a oversupplied market. The U.S. Department of Agriculture has yet to provide its federal hemp regulations, but most states have already begun to develop their own rules (especially those that kickstarted some form of industrial hemp pilot program as early as 2014).

“It’s one of those things where we feel like we’ve seen this movie before, just not at this scale,” Nobles says. “There are so many farmers that are not just experimenting with small acreage but actually planting quite a bit of acreage.” He points out, too, that new hemp businesses picked up investments and planned their build-outs with pre-Farm Bill supply in mind. Now that legalization is here, the game is evolving.

“If you’re a farm, what we recommend is trying to lock in contracts and grow on a contract or grow at least partially on a contract—in the same way that the hops market does,” Nobles says. “That will really insulate you, because then you know at least there’s some guaranteed revenue at a specific price based on your production.”

Jay Stetson secured that downstream demand when he started growing hemp on his Fromberg, Mont., ranch earlier this year. He bought the place in 2014 and began focusing on soil health as a way of consolidating his farming operations to draw the most value from high-prices land. (“Your soil is the foundation of the ground,” he says. “It’s sort of like the foundation of your house.”)

He sold humus and soil to Colorado cannabis growers and quickly learned how the booming industry behaved. Then, as is the origin story for many hemp farmers in the U.S., the 2018 Farm Bill came along and legalized hemp cultivation. Stetson decided that he’d farm hemp under the name Top Shelf Hemp Co. for his cousin’s CO₂ extraction facility in Colorado.

Scott McWhorter, Stetson’s cousin, operates Rocky Mountain Extraction Services. He worked out a contract with Stetson in the early days of the post-Farm Bill hemp market.

“I think the risk for the grower is finding a reliable extraction company,” McWhorter says. For him and Stetson, this was a key to their decision to enter the market.

He says he’s heard the industry chatter and the numbers surrounding hemp oversupply this summer. “That’s probably true, but it’s not nearly as great as maybe people are forecasting,” McWhorter says, pointing out that the number of licensed acres of hemp cultivation may not tell the full story. “Growing hemp is challenging. It’s a big manual process. You convert from growing corn or alfalfa or something like that, it’s a complete shift in how you operate your farm. … There [are] a of technicalities and details associated with the farm side that are important.”

Major issues include pollen dispersal and THC content—the former being an agricultural problem, the latter a regulatory pressure point.

“There’s definitely a lull in the market,” Stetson says. “It’s not where it was a couple years ago, for sure. I don’t know where [the supply-and-demand curve] is going to balance out, but it definitely has to come down.”

McWhorter thinks that it will take two or three years for the hemp market to really settle down and find its groove. “The thing that we’re all really waiting for—at the least the thing I’m waiting for on the processing side—is regulations,” he says. “When we first wrote the business plan, I’d identified FDA regulations as a risk; now I actually view that as an opportunity for an extraction company. Not very many companies will be able to meet the FDA regulations, and we started from day one by designing our facility and all of our processes to meet the anticipated regulations.”

Projected wholesale prices continue to trend downward, and so the industry is very much a long game of anticipation. By looking ahead and meeting the market where it’s growing, new entrants in the hemp industry can find their way.

“We don’t want to be the bearer of bad news,” Nobles says, “but what we do want to do is give people a warning.”