This Ain’t No Loophole – Hemp Economics And The Market (Part 3/5)

When Congress enacted the 2014 Farm Bill, it defined “hemp” as distinct from “marihuana” for the first time under our U.S. Code. This legislation was intended to create an incentive and policy directive for the agricultural sector as a whole to consider hemp as a viable cash crop for a multitude of uses. The 2018 Farm Bill reinforced and broadened this agriculture policy decree. The forthcoming Farm Bill is expected to continue this pathway. In doing so, Congress intended to create a market for hemp and its downstream uses.

While I will generally discuss the various sectors and industries that utilize hemp, sometimes I ponder whether hemp is, in and of itself, an industry or merely a commodity intended to service existing (and nascent) industries. I have written about this previously and am still internally conflicted. My good friend and cannabis industry beacon, Morris Beegle, would say “Yes, Bob, there Is a Hemp Industry.” And he is not wrong, but it’s the downstream uses that are the promise of hemp. And many of them are centered, at least presently, around cannabinoids – Intoxicating Hemp Derivatives (IHDs’) in particular.

In terms of the legal framework that has created this “market,” let’s set the record straight – the legality of hemp-derived cannabinoids is no “loophole.” As previously stated, a loophole is defined as “an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded.” Rather, Congress was very intentional in selecting its words. The way to determine Congressional intent (or any legislative intent) is well-settled under the so-called rules of statutory construction. As such, it’s necessary to look at the plain language of the legislation. It states that the following downstream components of the hemp plant are legal and no longer subject to CSA controls:

- all derivatives

- all extracts

- all cannabinoids

- all isomers

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- all acids

- all salts, and

- all salts of isomers.

There is no room for legal debate here. Those words govern to this day and they include IHDs, whether we like it or not.

When an investor assesses a market, he or she concocts a thesis, which is typically defined by a combination of existing facts and projected market trends. In this scenario, both the facts (the legal framework) and the market trends (data) work closely together to shape the modern day hemp market. For purposes of defining the market, we must accept two essential theses:

1. Non-cannabinoid uses (i.e., grain, fiber, hurd, and seed) of the hemp plant generally require a great deal of costly infrastructure and corresponding broader (corporate) adoption to become widespread (and that is coming).
2. Cannabinoids are merely ingredients and, as such, the most significant federal cannabis reform has already occurred in the outright legalization of cannabinoids under the prior Farm Bill(s) (which removed all of these compounds from the Controlled Substances Act so long as they are derived from hemp). Read that again because it is true!

As such, the marketplace has two distinct pathways (with multiple subsectors) for an investor and/or business operator. There are great companies developing these pathways on an ongoing basis. Yet, the non-cannabinoid pathway will necessarily take longer.

If you accept Thesis 2 as true, then any company seeking to produce, market, and sell cannabinoid products, including intoxicating ones, already has a legal federal pathway. There is, therefore, no need for further federal legalization of marijuana, but for much-needed criminal justice reform, the removal of the prohibitive 280e tax problem, and to facilitate the sale of highly concentrated marijuana-derived Delta 9 THC derivatives/products and high (> .3% D9) THC flowers. In my learned opinion, this is best accomplished through something akin to the States Act. We do not want the federal government overseeing the production and distribution of marijuana.

This assessment does not seek to undermine the cannabis flower market, but looks at cannabinoids as ingredients for therapeutic/pharmaceutical products (medicines, creams, balms, and lotions), consumer products (candies, beverages, and foods), and supplements. Essentially, if a cannabinoid is extracted from the cannabis plant, it is combined with other materials, compounds, and ingredients in order to form a finished good. This is only one segment of the modern-day hemp marketplace – the cannabinoid submarket. I will detail the numbers below.

Let’s start with the non-cannabinoid, industrial hemp marketplace. This segment of the industry involves fibers, grain, seeds, and hurd/woody core. These segments have long been in existence and have seen marginal market-based economic success over the last several decades. Yet with a renewed focus on hemp production due to its generally positive environmental implications and that it utilizes significantly less water than most other cash crops/commodities, it has moved to a greater position of emphasis. This began with the 2014 Farm Bill and its focus on energizing the American farmer with the wide-ranging promise of hemp.

The hemp plant serves a number of different industries: apparel/home textiles; personal goods; advanced electronics; aerospace and defense; agriculture; automotive and assembly; capital projects and infrastructure; chemicals; consumer packaged goods; electric power; financial services; healthcare systems and services; metals and mining; oil and gas; paper, forest products and packaging; pharmaceuticals and medical products; private equity; public sector; retail; semiconductors; social sector; technology; media and telecommunications; and travel, transport, and logistics.

We’ve seen innovative products such as hemp drywall, hemp plywood, hemp flooring, hemp proteins, hemp personal care items (such as toothpaste, deodorant, and the like) expand in the marketplace in recent years. Pioneering companies like EnviroTextiles have substantially developed and advanced the hemp textiles industry. Mainstream companies like P&G have advanced the personal care products sector. Victory Hemp and EvoHemp have advanced the food/nutritional product category. Further, innovative companies such as Trace FemCare have revolutionized the feminine hygiene products sector. Hemp is widely noted for its 50,000+ uses and it’s just getting started.

While we’ve seen great strides in these non-cannabinoid uses, progress has been slowed by the lack of infrastructure in various regions of the world as well as in the U.S. Infrastructure is costly and essential, including machinery such as decortication, degumming, spinning equipment, and a wide array of other mechanical processing units that assist in separating and preparing the plant for wide-ranging beneficial uses. The market for these uses has increased greatly in recent years, but does require substantial long-term investment. That said, the USDA reports that fiber and food uses for industrial hemp are growing rapidly and have increased over 300 percent in the past few years.

For thousands of years, industrial hemp was utilized in building projects and there’s tremendous promise for hemp materials used for construction today. The U.S. Hemp Building Association, through some its visionary leaders, such as the late great Dion Markgraaff, Drew Kitt, Ray Kaderli, Alex Escher, Nick Walters, Joy Beckerman, and so many others — has made great strides in providing foundational standards in all construction-related hemp uses and hemp houses/buildings have been very popular in a number of regions around the world. Poland, which houses the longest-standing hemp institute in the world, has evidence suggesting that hemp was used as a building material following World War I and II.

Our good friend, Sergiy "Dr. Hemphouse" Kovalenkov of Hempire has been driving global portions of the hemp building industry forward in significant ways, especially with his native Ukraine. This is extraordinarily prescient because we see in Russia's war against Ukraine the complete destruction of regions, cities, and neighborhoods. Kovalenkov recently addressed an audience at the Rebuild Ukraine conference in Toronto, Canada, and noted the promise of hemp’s role in doing so. This is very important because Ukraine has been a significant ‘player’ in the global hemp supply chain for a long time. In a post-war scenario, hemp will likely be utilized in any “New Marshall Plan” for Ukraine.

For better or for worse cannabinoids have been the cash component of the hemp plant over the past decade+. Some believe that this will “kill” the plant’s other uses and that these cannabinoid uses are giving hemp “a bad name,” creating a stigma and preventing the full range of uses that Jack Herer projected in his manifesto, The Emperor Wears No Clothes. This notion is supported by data, as Whitney states that “with state and federal regulators so hyper focused on hemp-derived cannabinoid policy (and using blunt instruments to shape policy instead of precisions instruments), other aspects of the hemp industry are experiencing collateral damage and unintended consequences…the fiber and grain industries experienced $20 - $25 billion in lost potential due to state and federal regulatory uncertainty… [as] “states are enacting prohibitions, restrictions and moratoria that are limiting economic revitalization programs, economic development and export opportunities for U.S. Farmers.”

However, if hemp is truly the efficient, environmentally-friendly, and water-friendly plant that we know it is, then it's only a matter of time, effort, investment, infrastructure, and energy before these other uses come to widespread fruition. I don't see cannabinoid uses “killing” the traditional non-cannabinoid uses, but it may delay the inevitable. The inevitable requires substantial infrastructure investment, which is slowly happening in real time. As legendary sportscaster Dan Patrick would say, “[y]ou can't stop [hemp], you can only hope to contain [it]."

Now, for the market numbers you have all been waiting for — IHDs. Let's turn to those cannabinoid uses. As I said above, if cannabinoids are merely ingredients, then federal law has already changed substantially enough to permit those compounds to enter into commerce as legal substances. While the FDA (per usual) has moved at a glacial pace, the states have once-again filled the void with robust and scientific production standards to ensure the safety thereof – Colorado’s program is a shining example. In addition to well-developed consumer safety regulations, courts have largely and consistently held that those compounds, including all derivatives from the hemp plant, fit comfortably under the Farm Bill language.

I would posit that hemp is actually the “backbone” of the global cannabis supply chain. Hemp contains the very same cannabinoids that we find in marijuana plants, but they are simply present in different ratios. If I grow 100 acres of hemp (at ~$1000 per acre), I can yield between 10-12 metric tons per acre of biomass. Think of all the D9 THC that could be captured in that biomass — .3% of 10 metric tons is over 65 pounds of D9 THC, and if we multiply that by 100, we have a substantial amount of D9 THC. And that's just D9 THC, which is required by law to exist at a very low threshold in these plants. Imagine all of the other cannabinoids that can be sourced, derived, and/or converted into marketable, lawful, cannabinoid ingredients.

Leading international global economist Beau Whitney of Whitney Economics indicates that the Total Addressable Market (TAM) for IHDs is $28.4 billion with a range from $21.3 billion to $35.8 billion. Whitney submits that, “Much of this TAM has already been realized in terms of retail sales - $21.3 billion - and approximately, $7.1 billion of demand is from states that have enacted prohibitions.” That demand does not disappear if a state elects to prohibit IHDs — it only makes consumer safety a bigger issue.

Whitney Economics produced its 2023 National Cannabinoid Report, which is both comprehensive and quite revealing. Among other things, the report concludes that the employment impact of this industry in the U.S. is $13.2 billion, and that the state sales tax potential (without the over-taxation found in marijuana) is $1.5 billion in revenue.

Whitney indicates that he “was very surprised at the results of the survey, the economic analysis and the enormity of the market…we kept checking the numbers and methodology, but every time we did, the numbers were affirmed.” He has “reached out to multiple analysts and industry experts to challenge the methodological approach, but, so far, while some may not agree with the enormity of numbers, the methodology is sound."

Industry-leading trade association, the Americans for Healthy Alternatives Coalition, under its dynamic and uber-intelligent President J.D. McCormick, and numerous leading companies such as MC Nutraceuticals have sought to bring real time data to Whitney Economics. MC Nutraceuticals CEO, Bret Worley, indicates that “we work extremely hard to have as many cannabinoid companies as possible from across the country provide real time data to Beau, and we have been very successful in that regard.”

Of course, dollars drive markets. And consumer behavior drives dollars. It is important to note that the data suggests that consumers want these sorts of products. The Brightfield Group’s 2023 report entitled The State of Delta-8 – Hemp Derived THC Update notes that Minnesota has effectively legalized D9 THC edibles/consumables. That state extended its ‘marijuana’ program to include hemp derivatives, which can now be sold in all locations where liquor is sold and served. This effectively validates the “ingredient argument” that I set forth above, as wider spread cannabis uses will require this sort of treatment. Brightfield further notes that the IHD market has skyrocketed over the past few years and that IHD consumers have risen to nearly 10% of the population. Importantly, it says that consumers seek out these products, and that “[t]he majority of THC users still prefer [marijuana]-only products, but a notable 20% are dual users, leveraging both [marijuana] and hemp- derived THC. This highlights a significant cross-utilization in the market, with hemp-derived THC gaining traction due to its broader availability in non-dispensary outlets like convenience and smoke shops.”

This data shows that IHDs aren’t destroying the marijuana sector, but are merely a contributing factor to its decline. Larger factors are in play, including that the majority of “regular” marijuana consumers do not purchase from the commercial regulated marketplace (i.e., dispensaries), except in limited instances. The stigma is alive for marijuana, but not necessarily for hemp.

So, why do consumers want hemp products? Brightfield notes that “64% of users fall within the millennial or Gen Z cohorts.” At some point, you have to follow the lead of younger consumers, not attempt to dictate their desires. They do not wish to walk into a dispensary setting and like products that are not overtaxed. Not always, but generally speaking, IHDs tend to present a less potent form of cannabinoid ingestion. Millennials and Gen Z folks prefer this.

From an Economics-101 perspective, it’s axiomatic that a successful business sells more things, not less. So why wouldn't marijuana operators want to produce and sell marijuana products in Blue and Purple States and sell IHDs in states that have “Red State Weed?” Why wouldn’t they avail themselves of the tax advantages of hemp? Why would the marijuana operators, who sell in the face of federal illegality, claim that a federally legal industry is the problem? It’s only a problem if you don’t adapt, as the only thing constant is change. These company’s investors and their consumers want them to sell more things. How does it make sense to spend millions of dollars lobbying against hemp to sell less things, when consumer behavior dictates the opposite (and their investors demand the opposite)? We saw the failure of Canadian markets due to over-taxation and overregulation. Can’t we learn from that?

The cannabis market (including the hemp sector and the marijuana sector) is ever changing. Those that do not adapt and evolve will get eaten.

• Part 4: The Law Come to Get You If You Don't Walk Right – Hemp Policy and the Courts (December 9, 2023)
• Part 5: I Can Tell Your Future, Whoa Just Look What's in Your Hand – The Future Merger of Systems (December 16, 2023)