US hemp industry continues to face problems of oversupply, murky regulation

The US hemp cultivation industry continues to face problems of oversupply and unclear regulation, according to Whitney Economics’ two-year overview of the industry. The economic consulting firm surveyed more than 10,000 licensed operators in 27 states in its 2020 report “Déjà vu: An Economics Analysis of the US Hemp Cultivation Industry.”

The 2018 Farm Bill removed low-THC (under 0.3%) cannabis – otherwise known as hemp – from the Schedule I controlled substances list at the federal level. The bill also opened up legalized hemp farming to federal agricultural grants and other benefits such as marketing and crop insurance.

Hemp can be used to manufacture rope, textiles, clothing, and other products. It can also be used to produce increasingly popular cannabidiol (CBD) products – which lack psychoactive effects due to a low level of THC.

The bill’s passing led to a surge of licenses in 2019 – and then a vast oversupply of hemp and resulting depressed prices. According to Whitney, this situation was caused by a lack of buyers, persistent regulatory confusion, and an immature supply chain.

The largest factor affecting the hemp market is lack of processing capacity. In 2019, there were only 3,179 licensed processors in the US – equaling one processor per 164.26 acres of licensed capacity. If each cultivator harvested 2,000 pounds per acre, each processor would have to process 900 pounds per day. According to Whitney, most processors only had one-tenth of this capacity in 2019. 

The supply chain weakness contributed to a resulting 135 million pounds of excess hemp supply in 2019. That oversupply – as well as inadequate infrastructure – has carried over to 2020, depressing prices.

However, hemp cultivation continues to face another major challenge – regulatory uncertainty – which has led to a lack of buyers and cash at every level. The Farm Bill legalized hemp production, removing it from the jurisdiction of the DEA and tasking the FDA with regulating hemp-derived food and products – including CBD-infused foods, beverages, oil, and tinctures. However, selling CBD products is still prohibited by the FDA, and the agency has only approved one CBD product – Epidiolex – a drug aimed at reducing the frequency and severity of seizures.

Adding to the regulatory complexity is the fact that state and local authorities also have their own laws for hemp and CBD. Hemp is still illegal at the state level in Idaho, Iowa, and South Dakota, for example. This is an inversion of the regulatory environment for THC-containing cannabis, where it may be legal for recreational sale and use at the state level, but remains illegal in federal law.

Even in states where CBD and hemp is permitted, local health departments may choose to bar the sale of CBD foods and beverages.

The regulatory murkiness means there are fewer buyers to convert raw material hemp into rope or CBD oils, and less investment to build the necessary processing facilities.

“The hemp industry is going to continue to be mired with difficulties until regulators can determine if it's an illicit drug or if it was legalized by the 2018 Farm Bill. Confusion across jurisdictions is causing a regulatory quagmire, slowing down growth and suppressing investment, which is critical to building out a proper infrastructure that can support the rapidly growing industry,” said Beau Whitney, founder & chief economist of Whitney Economics.

The report pegged the value of hemp raw material supply at $2 billion in 2020, not including the 135 million pounds left over from 2019. Whitney estimates hemp raw material supply will rise to a value of approximately $5 billion by 2030, focusing mainly on grains and fibers.