In late 2018, a new farm bill was passed that legalized the production of hemp as an agricultural commodity while also removing it from the list of “controlled substances”. The Gold Rush of the modern farming era was on. The farming industry was buzzing with new information on how to grow and market this miracle plant. Hemp farming was going to not only save the modern row crop farmer but also make him wealthy in the process. Right? Not so fast…
Let me preface this entire article by saying that I am not anti-hemp. I think it’s great to have something new for farmers to produce that can add to their operation’s diversity and profitability. I should also note that the opinion of this article is for the future of growing hemp. I know that many producers did extremely well in the past couple of years growing it. I’ll detail below how the future may be different in that regard. I’m skeptical of how hemp production is going to play out over the next few years. Also, I’m concerned that hemp production is positioning itself as a “get rich quick” scheme for agriculture, and is attracting the same hucksters that flock to any new fad that they think they can exploit for a dollar. So why am I skeptical? I think the major challenges regarding hemp production can be lumped into two main categories: 1) Growing it and 2) Actually profiting from it. Finally, the commoditization of hemp is going to be a major, major disappointment for producers who have gotten used to the profit of growing hemp in the past couple of years.
In early 2019, I attended a presentation on South Carolina hemp production because I was curious to see for myself what others’ experiences were growing and marketing their hemp crops. The first speaker was a Clemson University extension agent who is very well respected in our area. He began his talk by saying that, “Hemp has been presented to farmers as a miracle plant...that it’s extremely tough, drought-tolerant, resistant to pests and disease and requires minimal fertility. Well, the fact is that those statements are downright wrong. It turns out, hemp is just like any other plant and still needs the same management that your other crops need, maybe even more.” Some in the room that day gasped, while others laughed. Some hemp proponents were incredulous that a speaker, especially an extension agent, would put down this miracle plant that was going to save the family farm. However, later, I spoke to other experienced row crop farmers (who also produced hemp) that echoed his sentiments. The same principles of good agronomic management apply to hemp too.
However, there were some restrictions on hemp that made those principles tough in practice to apply. Although legal to grow, there are still no pesticides that can legally be applied to hemp because they don’t yet have a “label” for use in that crop. For those that don’t have an agriculture background, there is a saying that the “label is the law”. You can only apply registered pesticides on the crops that the label allows. Many farmers remember stories from the past of how fast a pest or disease can devastate a crop in the absence of proper chemistries or control methods to use. What about organic hemp? Since one cannot use pesticides on hemp at this time anyway, it may be better suited for organic production. However, organic production provides its own challenges for any crop. Plus, to carry the label “organic”, the land the item is produced on has to be certified organic by being out of conventional agricultural production for three years.
As most know, hemp can be produced for its fiber or its CBD oil. The production practices differ wildly based on what you are growing the hemp for. Hemp production for fiber is actually set up well for row crop farmers because it can be grown and harvested with much of the same equipment we are already using, especially for tobacco farmers. Farmers growing hemp for CBD oil have a more intense management setup and usually require greenhouses and a tremendous amount of “hand” labor. This is another major challenge that I see standing in the way of hemp becoming the panacea that many have made it out to be. Hemp production for CBD is extremely expensive and due to this expense, it will be very hard for traditional farmers to scale the production of it. Estimates vary wildly as far as just how expensive it can be, but a range of $5,000-$12,000 per acre is not uncommon. Much of this is labor, and as we all know, farm labor is becoming a big issue to our industry.
Profiting from it:
My other main concern with hemp is how volatile it’s going to be while it becomes established as a traditional crop to grow. I’ve heard it said before that volatility is the main enemy of the farmer, and there’s a lot of truth to that. One of the main buffers farmers have against volatility has been crop insurance. It’s a great tool that helps us manage the volatility of weather and the commodity markets. However, while the new farm bill does allow for future crop insurance prospects for hemp, it is not currently available at this time. It appears that it could become available in 2020, but as anyone who has ever produced a new crop on their farm can attest, setting up new crop insurance programs is often a (painful) adventure. Much of the southeast was hit hard with hurricanes last fall during harvest season. Those of us with traditional crop insurance were at least covered to the point that it took some of the sting out of our losses. Hemp farmers, however, were forced to bear the full weight of their crop losses. With hemp, many farmers could be just one disaster scenario away from losing the shirts off their backs.
So the previous scenario focuses on the farmer not making a crop and losing based off of that. But what about a nightmare scenario (that is very real) which can occur when a grower does actually produce a nice crop?
The problem with any new crop like hemp isn’t necessarily the production of it. American farmers have shown that we can grow just about anything that suits our soils or climate. The problem that many hemp farmers are going to face is the development of the supply chain to support hemp production. Things that we take for granted with other crops, like finding quality seed or agronomic products, won’t be as solid and consistent with a new crop like hemp. That’s one side of the coin. What about the sale of the product? Developing the infrastructure to buy and process hemp takes capital and time. It’s potentially a very lucrative business and is exactly the type that any enterprising huckster would love to exploit. We take for granted that almost anywhere in the country you can deliver a load of corn and collect a check for that load within a reasonable time period. Selling your hemp is going to be a whole lot sketchier. Plenty of new crops in the past have introduced some fly-by-night characters who were happy to sign a contract with you guaranteeing that they would purchase your crop. These same characters were even happier when you delivered that crop and they subsequently put off paying you until that fateful day where they filed chapter 11 bankruptcy. This has happened in other commodities before, even corn and soybeans. In the mid-2000s, peanuts and switchgrass were new crops introduced to South Carolina (peanuts used to operate under a government quota/allotment program). Peanuts were able to tap into an existing infrastructure and supply chain, while switchgrass was not. Today, peanuts are one of SC’s main crops. I haven’t seen switchgrass grown in years.
The hemp industry may mature into a solid, dependable industry in the future, with well-respected players that growers can be confident in. That’s going to take some time and unfortunately, there are going to be some people that get taken advantage of.
Hemp as a commodity:
Finally, even if none of my concerns mentioned above materialize, there is one resounding reason why hemp isn’t going to be the farm-saver that’s been promised. That reason is simply commoditization. Look up the definition of a commodity; it’s essentially something that can be mass-produced, is unspecialized, and is easily interchangeable with commodities within that same family. In the last few years, hemp was a government-regulated specialty crop. The new farm bill blew the doors off of that and opened the floodgates for the commoditization of hemp. Put another way, the hemp fiber that one person produces isn’t any more special than the hemp fiber his neighbor does. Once something is commoditized, basic (very basic) economics take over: Supply and demand. Pre farm bill, hemp’s supply was regulated by the government. However, the demand (even though it’s growing rapidly!) was not. Therefore, the balance was tilted in favor of producers and offered large profit margins. However, when something is commoditized, supply and demand are basically determined by pricing. Equilibrium is determined where there’s an intersection of supply and demand. If the future supply of hemp increases dramatically (which seems likely due to the government restrictions being lifted), prices will drop. Many of us are only too familiar with the saying that “high prices cure high prices”. The profit margins of the past are going to entice a lot of new producers into the hemp markets. Yes, the market and demand for hemp products are growing. But eventually, there will be an equilibrium reached where those margins shrink to the point that it’s not a slam dunk to grow it anymore.
This will be a welcome thing for the consumer. However, the consequences of commoditization of hemp will be that hemp production becomes just like any other commodity crop...a margin game.
How to get wealthy growing hemp:
In my opinion, there is one way that farmers can get wealthy growing hemp (specifically for CBD oil). The best businesses take a commodity (or commodities) and turn them into a brand. You don’t have pricing power when you are selling a commodity. You do when you have a brand. Coca Cola takes water, sugar, corn syrup, etc (all commodities), mixes them together and then places their logo on a can of this concoction so that it can sell it for significantly more than the sum of the commodities’ costs. This is the definition of a brand. There will be an opportunity to do the same in the hemp markets. How to create a brand from an agriculture commodity is far beyond the scope of this article, but if I haven’t scared you away from growing hemp at this point, I would strongly encourage you to explore a way that you can profit from your hemp production beyond just growing the commoditized version of it. Find a way to brand it and really make a profit from it.
Again, I don’t want this article to come across as anti-hemp. I truly hope it’s another crop that we can add to our arsenal, and even if it is a commoditized crop, that will still be a net win for farmers who are looking to add some diversity and profitable opportunities to their farm. I just don’t believe that it’s going to be the game-changer for agriculture that has been predicted. If the hemp industry develops as most anticipate, there will be profitable opportunities for hemp farmers. It just may not be the production of it...