The Hemp Industry's 'American Dream' Is Getting Nipped In The Bud
This story is Parts 1 and 2 of a four-part series on the hemp industry in Colorado. Read and listen to Parts 3 and 4 here.
The Colorado hemp harvest began last week. After 80 years of prohibition, building an industry from the ground up is anything but the “American dream” for hemp farmers, and last year it came to a disastrous crash. It turns out supply and demand rely on a supply chain – which doesn’t exist yet for hemp. And demand? No one knew the demand of a product that had been illegal for decades.
Hemp is the less potent cousin of marijuana. Both come from the cannabis plant. And even without THC — the legally restricted compound in marijuana — hemp has a variety of potential.
“It sounds weird, but there isn’t really another plant out there that I’m aware of that has such diverse uses; from medicine to construction. It just sounds crazy to even say. But it exists,” said Chuck Winters, the owner of the online hemp retailer OrganaHempUSA.com, based out of Northern Colorado.
“It’s a dream of being self-sufficient,” said Mike Workman, the owner of New Earth Hemp Company, a seven-acre farm in Northern Colorado. “Of taking these things: fiber, trees, paper production — you know? — clothing, textiles, protein, animal feed. You could change feed lots.”
From basements to farm fields
The 1937 Marihuana Tax Act relegated hemp to basements and garages where it would be grown in secret for the next 80 years. The plant made a brief appearance in World War II when the government encouraged farmers to grow it for rope. But in 1971, cannabis (the plant) — which contains tetrahydrocannabinol, or THC — was listed as a Schedule 1 drug where it remains today, despite legalization.
In 2000, Colorado became the eighth state to legalize medical marijuana. 12 years later, Colorado and Washington state were the first to legalize its recreational use. In 2014, Colorado farmers began growing hemp in their fields.
According to the Colorado Department of Agriculture, only about 100 Colorado farmers grew hemp the first year. These numbers doubled each year. But after the Agricultural Improvement Act of 2018 (also known as the “Farm Bill”) passed in December of 2018, the number of Colorado hemp license registrations tripled and nationwide production increased 455%. As of spring 2020, 37% of all U.S. hemp transactions occur in our state.
“The hemp bill dropped, and they were like, ‘Go for it,’” said Workman. “The dream was, ‘What if in one season you could pay your farm debt, you could pay off your combine.’ You know, for the first time in four generations of farming, be free.”
But the reality was that many farmers didn’t know what they were getting into.
“A lot of folks are just buying hemp licenses. But what are you going to do with it after you plant it? No one knows the answer to that question,” said Workman.
Building a hemp supply chain
When a farmer grows corn, the entire supply chain is already set up. They buy seed from a seed company. They plant, grow and harvest using equipment specifically designed for the crop.
“There’s an elevator I can take it to. It gets weighted, and I get paid. Right? Hemp doesn’t exist like that; there’s no hemp elevator,” said Workman. “It’s the wild West.”
There are businesses that help fill in some of these gaps for hemp. Two weeks ago — just in time for the 2020 hemp harvest — a Northern Colorado-based collaborative, Farmer’s Revival, announced a “soil-to-oil” solution for hemp farmers. Chuck Winters’ friend in California put together a business like this.
“He goes out and contracts with farms. ‘Hey, when you’re ready my harvest crew will come in and harvest these plants for you. We will go and cure this stuff for you in our processing facility. We have distribution for you, so I’m solving all of your problems,’” explained Winters. “All you have to do is put your head in the dirt, with the plant, and grow.’”
As it turns out, the story is even more complex.
Massive investments were made in the hemp supply-chain in 2019 — to the tune of hundreds of millions of dollars. But many of these companies are now going bankrupt.
When you legalize a crop, what’s the demand?
With a 455% increase in supply, one would hope for a balanced increase in demand. But we’re just beginning to learn about CBD and the other cannabinoids that come from hemp, like CBG and CBN.
Winters believes in the medicinal power of the cannabis plant, but he just learned about the effect of non-THC cannabinoids, like CBD and CBG, six to seven years ago.
“(CBD) just wasn’t a thing,” said Winters. “We used to make fun of it. And that shows how foolish even I was, because I didn’t have any respect for it, because I was uneducated.”
And not only that, if you want to make topical products — like creams or lotions — the oils from the hemp flower have to be processed by certified extractors. It’s not as simple as growing it and using it.
Ian Laird is the chief financial officer of New Leaf Data Services, a commodity price reporting agency that produces the monthly industry report, Hemp Benchmarks. He confirmed that there were many problems with the harvest, but there were also problems downstream.
“We thought that there was going to be a bottleneck in processing, in the extraction side of the business,” Laird said. “Well, it turns out that there was hundreds and hundreds of millions of dollars invested in processing and extraction last year.”
According to Laird, Mile High Labs in Denver has been a pioneer in cannabis extraction from the beginning. After the 2018 Farm Bill passed, they raised $100 million to expand their facility. But as Laird noted, “Nobody really knew what the install base was to begin with or what the demand was, so people just threw money at processors.”
As Hemp Benchmarks reports, the wholesale price for hemp dropped between 50% to 90% -- depending on the product -- over the last year. Many large processors are now filing for bankruptcy or liquidating.
“The surprising thing,” Laird noted, “is we haven’t seen much of an impact on the retail prices. CBD’s still crazily overpriced.”
Even if the processors had not overextended, the path to the consumer is not established and it’s fraught with legal risks. Two lawsuits have been filed against the retail chain PetSmart for making misleading claims and selling hemp products — for use on pets — that were not approved by the Food and Drug Administration.
So, from the consumer to the producer, here’s the market summary: Retail prices have not dropped to incentivize demand. Distributors are wary of legal recourse and aren’t buying from processors. Processors are overextended and can’t afford to buy material from farmers. Farmers can’t sell material for what it cost them to grow it.
As a result, material is sitting in barns, decomposing. Laird said farmers are giving the biomass away for animal bedding.
What’s stopping consumers?
Apart from needing to learn about these products, consumers want to know if they’re safe — they’re waiting on the Food and Drug Administration.
And the FDA? Laird said, “they’re being extraordinarily careful. Which, I mean, they are the FDA. But there is a category of wellness products called ‘Generally Recognized as Safe’ that requires a lot less regulatory oversight and approval.”
You’ll find vitamin D, acetic acid (also known as vinegar), soy sauce, caffeine and corn syrup on this list. Laird said that there was an assumption within the hemp industry that products like CBD distillate would have been put on this list — which they call “GRAS.” And to be clear, we’re not talking about “grass” — that’s marijuana.
“The FDA came out last fall and said that CBD was not GRAS, which was, I thought, audacious,” said Laird. Today, hemp is neither grass nor GRAS.
In 2018, the FDA approved one hemp product for pharmaceutical use: Epidiolex. It’s a pure CBD isolate prescribed to treat seizures. According to a Gallup poll last fall, 14% of Americans reported using CBD — 40% used it for general pain and 20% for anxiety.
But some struggles can’t be helped by analgesics. Workman was shut down at multiple large banks last year when Chase, Wells Fargo, Citi and US Bank cancelled basic business accounts used to pay employees.
"Don’t say bomb on an airplane. Don’t say hemp in a bank."
“I have lost four bank accounts,” said Workman, “and now we had to find other banking solutions. Now we’re running ourselves as an agricultural company and trying to distance our self from anything, you know, it’s sort of like, ‘Don’t say bomb on an airplane. Don’t say hemp in a bank.’”
In June of this year, the Financial Crimes Enforcement Network of the U.S. Treasury Department reminded banks to treat hemp businesses like any other business.
From farm to pharmaceutical… to farmer?
With a dearth of supply, some farmers are getting creative.
A number of hemp companies are staying afloat by vertically integrating – where the farmer is also the processor and distributor. Workman has started three businesses: a farm, an extraction and processing lab, and an equipment design company while also managing product distribution as far away as eastern Europe.
“My niche is to make those connections, and turns out, I’m pretty good about building supply chains,” he said.
Brett Eaton is the owner of the vertically integrated company Green Cherry Organics in Fort Collins, and said, “the way the market crash hit last year, it’s pretty much if you don’t go some sort of direction and capture other pieces, you’ll be out of business.”
Winters, who owns OrganaHempUSA.com, is also vertically integrated.
And, it turns out a non-existent supply chain isn’t necessarily a bad thing.
“If I grow a stand of corn, I have no idea what that turns into. That turns into maltodextrin and something in Cheetos and something over here,” said Workman.
Winters echoed that sentiment: “You can’t call up Pfizer and say, ‘Hey, what’s in my Valium?’”
As Workman said, “old boys got bad knees.” Maybe farmers will find some use from their own product.
With so many issues, why would anyone keep growing hemp?
Workman said, “What would you do if you were convinced you were changing the world and yet it was the hardest, craziest, messiest thing you’ve ever done, and you had all these bad players, and you had a virus going on, and you had a new industry that could rival oil, natural gas, textiles? You know? I guess you’d just keep going. Right? Until the bottom totally falls out.”
It’s a modern-day version of the American dream. But until the dream becomes a reality, many farmers are going back to what they know. According to the Colorado Department of Agriculture, hemp license registrations are down 50% this year.
Editor's note: A previous version of this story incorrectly stated in a photo caption that growing hemp indoors doesn't require a hemp license. This statement has been removed.