November 2019 Hemp Market Update: PanXchange Benchmark Pricing

Spot Market Updates:

Biomass Spot Pricing:
The price of biomass across the three PanXchange benchmarks (Colorado, Kentucky, and Oregon) has continued to decline on a month-over-month basis, largely due to the outdoor growing season’s flood of supply into the market. For November, biomass transacted in the range of $0.80 to $1.40 per percentage point of CBD content per pound (/point). This is compared to October, which saw the general biomass market transact in the range of $1.61 to $2.71 per percentage point of CBD content per pound (/point.) Although the posted low for the Kentucky benchmark in November is $0.80/point, there were transactions even lower at local auctions such as those in Tennessee and Indiana earlier this month. Buyers were few and far between at both events and prices were not included in the index since they were not indicative of the market, but rather arbitrary sellers who needed to move product (or not return home with it). Additionally, these auctions included various small and off-spec lots that are not concurrent with the PanXchange benchmarks. 

To cope with the massive scale of growth the hemp industry has experienced over the past three years, new innovations have hit the market with the goal of minimizing costs of production and seasonal laborers. While the efficiency gains are apparent when comparing modified grain combines to hand harvesting, hemp producers are starting to realize the unintended consequences of utilizing machines that have not been tested at scale and fine-tuned over multiple harvests.

According to producers and processors in the PanXchange network, the market has seen a flood of product with lower than expected cannabinoid potency in homogenized product compared to expected concentrations from field tests. Some mechanized harvesters, while dramatically decreasing labor costs, have realized significant decreases in CBD concentrations due to the amount of handling involved. While the hemp plant is known for its strength and hardiness of the fibers, the flowers are a different story. As the floral material continues to be roughly handled over time, cannabinoid rich trichomes are being knocked off, reducing concentrations on a dry weight basis of multiple percentage points on a dry weight basis.

Like the harvesting equipment mentioned above, various technologies for mechanized drying have also contributed to the loss of cannabinoids and other unintended consequences. While some mechanized dryers are efficient in reducing hemp moisture content to the low-twenty percentages, stabilizing product near ten percent has proven difficult. Other dryers that employ a “flash drying” system where extremely hot air or steam is utilized for a short amount of time and remove plant lipids and waxes have been seen to decarboxylate the biomass before extraction. This is seen as a positive to some as it reduces the necessity to winterize crude oil, however, heavy smoke clouds have been reported to come from these facilities creating questions on if the biomass is retaining CBD potency while converting THCa to delta-9 THC. In other situations, modified drying barns that utilize hot air have been reported to efficiently dry product, but sometimes too much as tests reveal virtually zero moisture compared to industry accepted eight to ten percent, decreasing marketable quantities.

Clearly, these issues have manifested in this first crop year of significant volume. Even with the decline of input prices, the aforementioned quality concerns and unexpected downtimes of the machines themselves have reduced profit margins. As we progress through 2020, the availability of premium quality biomass exceeding 10% CBD per pound, remains to be seen, especially coupled with reports of acres not being harvested, biomass exceeding the 0.3% THC threshold, and biomass testing positive for contaminants such as pesticides, heavy metals, and mycotoxins.

Refined Product Pricing:
For downstream products, the Colorado winterized crude oil market transacted between $750 and $1,300/kilogram. Competition among extractors and increasing stocks of product as new biomass is converted to crude oil are placing downward pressure on the crude oil market. Compared to October, the Colorado winterized crude oil market transacted between $850 and $1,600/kilogram, accounting for a decrease in pricing of 16% month over month. With tolling arrangements still a prominent deal structure for initial extraction and increasing supply side competition, a continued downward trend is expected.

The Colorado CBD isolate market traded in the range of $1,800 to $3,000/kilogram in November, mirroring the Colorado full spectrum distillate market, which transacted between $2,000 and $3,200/kilogram. Continuing the trend of recent months, THC-remediated, broad-spectrum distillate transacted at a premium as remediation services are now scaling to commercial levels. In November, the broad-spectrum market transacted between $3,900 and $5,000/kilogram. With regard to recent announcements over the safety of CBD and impending regulation changes from the FDA, a lack of large commercial buyers outside of white-label operations and co-packers have contributed to the prices decreasing on both biomass and refined products.

The Agriculture Market:

Comparing hemp to traditional crops:
While there have been numerous stories published in 2019 addressing the depression of hemp prices, it is important to note that traditional agriculture markets over the past five years have also been under pressure.

Soybeans, corn, and wheat markets have seen their pricing slide to varying degrees. For example, soybeans are now priced at $8.92/bushel (as of November 25th) compared to $17.38/bushel in 2012, while corn is priced at $3.68/bushel (as of November 25th) compared to $7.94/bushel in 2012.

To compound matters, severe weather conditions and the lack of a signed trade deal with China are hurting prices in the US, while oversupplied markets are driving supply and demand dynamics. While harvest numbers for corn and soybeans do look positive, nationwide the corn harvest average is at 84% compared to the five-year average of 96% harvested by Nov. 25. A later harvest means that some product will be lost to cold temperatures, but this a far less consequential factor than supply and demand dynamics such as trade deals and global competition.

Fragmentation stunts the spot market
Given the state of many traditional agricultural markets, farmers viewed hemp as a saving grace to recoup losses over the past few years and diversify crop portfolios, thus increasing the number of producers in the market. Comparing industrial hemp to markets such as corn and soy, hemp has an increasingly higher fragmentation of supply as the majority of independent hemp farms are less than 20 acres in size (versus traditional farms exceeding 200 acres on average). While the hemp industry is a fraction of the size compared to domestic corn and soy markets, supply fragmentation is an added challenge to the buyer, especially considering other issues such as waiting for laboratory test results.

In addition, the popularity—if not necessity—of contract farming and tolling splits has stunted the growth of a spot market. While smaller lots can and do move, most buy-side interest is for quantities that are larger than most independent hemp farms’ total harvest, adding to the time spent on procuring product for processing.

The fragmentation and inefficiencies in the market are further compounded by the lack of firms providing storage, with many regions thoroughly ill-equipped from an infrastructure perspective to handle the massive influx in post-harvest supply. Inadequate storage is placing further pressuring prices, with the cash constraints of farmers and the limited shelf life of hemp biomass.

Need for liquidity remains
Against this backdrop, the hemp market is also struggling without the participation of major trade houses. These entities, such as Cargill, Gavilon, and Scoular, play a vital role in bringing liquidity to the market as they cover counterparty and transportation risks and provide enough working capital to store commodities in times of surplus and depressed prices.

Given the current state of many agricultural and specialty markets such as organic grains and produce, growers have been incentivized to diversify their crop portfolios into hemp. Unfortunately, the promises of massive returns on a per-acre basis seem to have been overstated, and the immature nature of market creates volatility that established markets are able to avoid.

Legislation:

On Oct. 31, the U.S. Department of Agriculture’s (USDA) interim federal rule for hemp production was released as part of the 2018 Farm Bill requirement that the agency creates a consistent regulatory framework around hemp production throughout the United States.

While the lengthy document, which is now open for a 60-day comment period, covers a variety of topics from licensing procedures to data collection, much of the industry has been focused on the proposals regarding testing.

The 2018 Farm Bill restricted the amount of THC that could be found in hemp, thus federally distinguishing legal industrial hemp from marijuana. However, the specific chemicals used to test this are not yet consistent state-by-state, and today, a sample may be legal according to one state’s testing standards but may test “hot” in another.

For the continued development of interstate commerce, a nationwide standard is imperative, but also at issue is the proposed move from solely testing for delta-9 THC to total THC (the presence of both delta-9 THC and THCa converted to delta-9 through decarboxylation).

While the move to total THC may be restrictive for hemp producers, the rules also directly mention testing the “THC concentration level reported accounts for the conversion of delta-9 THC into THC,” implying a shift in sentiment from the 2018 Farm Bill. This document says that heat does not need to be applied to the product, but rather a mathematical equation, to account for all THC found in the sample.

Questions over sample guidelines
Many producers are also concerned with the USDA’s sample-taking guidelines, specifically around where their product is to be tested and what happens if that sample exceeds 0.3% total THC. Under the USDA’s interim federal rule, farmers can be found negligent if the sample exceeds 0.5% total THC, and there is little guidance as to where such tests may be performed.

At the same time, a hemp producer is restricted to 15-days prior to harvest to submit samples and demonstrate that the crop is compliant. The USDA believes that a strict timeline is needed to ensure that cannabinoid profiles do not dramatically change between the pre-harvest field test and when the product is harvested. While this concern is valid from a regulatory standpoint, many industry participants argue that this timetable is unworkable. They say that given this short window for testing, it is likely that the mandated labs will be inundated with samples and may suffer from significant workflow backlogs.

Moreover, industry participants have clearly expressed discontent with the USDA’s requirement that laboratories must be Drug Enforcement Administration (DEA)-certified. In the 2018 Farm Bill, hemp was removed from the definition of cannabis, thus moving the jurisdiction of industrial hemp from the DEA to the USDA. At first glance, this was seen as a major change in how the government views the industry, but many have since expressed concerns not only about sample turnaround time but that a DEA-certified lab implies that they will be handling a Schedule 1 controlled substance.

Under the current framework, producers are faced with 100% crop loss if the sample is higher than 0.3%, as well as legal repercussions if that sample exceeds 0.5%. This problem does not solely fall on the hemp producer, as seed genetics are not stabilized on a plant-to-plant basis. Additionally, different climates can change the cannabinoid profiles expressed at maturity.

The heart of the issue is that producers are seeking the maximum concentrations of cannabinoids (% CBD) prior to harvest in order to realize returns on investment. With this in mind, how, when, and where a plant is tested remains arguably the largest debate stemming from the USDA publication.

As of November 21, there have been 738 comments submitted on the online registry. While the number is impressive given the relatively short amount of time since the comment period began, the USDA has requested that data-driven comments be submitted to ensure a foundation for the most commercially viable terms for the long-term health of the hemp sector.

With the comment period for the USDA interim rule closing on Dec. 30, PanXchange strongly urges all parties to make their voice heard, regardless of role and position in the market. If you would like to make a comment on any of the topics covered in the USDA proposed rules, you may do so here.

Industry awaits FDA ruling
Although there has been no formal announcement from the US Federal Drug Administration (FDA) regarding the regulation of cannabis and cannabis-derived products, the industry remains eager for an outcome. The USDA’s interim rules contain some assessments of the market’s current health, with the body asserting that the uncertain regulatory landscape has indeed impacted industry growth, while the FDA remains the key body of interest.

It is PanXchange’s belief that without this clarity, the industry will continue to witness lower demand and depressed prices as large consumer brands wait for FDA direction before launching goods incorporating CBD and other cannabinoids.

Much like the current situation with the USDA, other government bodies seek more scientific data for an informed ruling.

A press release issued on November 20 following a meeting between U.S. Senate Majority Leader Mitch McConnell and FDA Commissioner nominee Dr. Stephen Hahn also echoed this desire for more detailed information. In the release, McConnell stated that “like many Kentuckians who are taking advantage of hemp’s legalization, I am eager for FDA’s plans to create certainty for CBD products.” In response, Hahn agreed that although he sees potential for cannabinoid’s use as therapeutic remedy, there are “unanswered questions that need to be filled in by data and science and research.”

In this time of opacity, three different groups—National Consumers League, Consumer Federation of America, and Community Anti-Drug Coalitions of America—have announced a coalition named the Consumers for Safe CBD, with the goal of educating the public on risks associated with the use of CBD products.

Sally Greenberg, Executive Director of National Consumers League, said in a press release issued on November 19 that “this is a clear and present public health issue.” She continued: “Consumers for Safe CBD is calling for CBD products to pass the gold standard tests that the FDA has put in place to protect consumers. CBD clearly has potential therapeutic benefits, but with unregulated, untested products exploding in the market, consumers are at risk.”

The Consumer Healthcare Products Association (CHPA) is also petitioning the FDA to encourage the agency to develop rules for the CBD industry so that products can be marketed as dietary supplements lawfully. Against this backdrop, industry website Leafly issued a report on Nov. 18, assessing claims made by popular consumer brands as to how much CBD was present in the products being sold. Out of the 47 products that were tested for potency, only 24 delivered within 20% of the cannabinoids that were listed on the product packaging.

With the FDA recently warning 15 companies for illegally selling various products containing cannabidiol at the same time as detailing safety concerns, it is incumbent that the sector aspires to bring the best products to market. As an industry, reliability and consistency in product production are the swiftest path to reaching the reported $23 billion valuation.