The people who made the most money during the Gold Rush of 1858 were not the thousands of prospectors hoping to strike it rich, but the merchants who supplied them with everything from pic-axes to wagon wheels. While gold was discovered, the basic laws of supply and demand (too little gold, too many people searching for it) produced predictable and often disappointing results.
The hemp market today is the latest example of a speculative rush. As the chart below shows, U.S. acreage devoted to hemp production has increased more than three-fold over the last year. While three states (Colorado, Oregon and Kentucky) produce almost 80% of the current total, 24 states are now actively growing the crop.
Several factors have contributed to the recent rush into hemp production. The first and most significant has been a change in the regulatory landscape. While individual states began approving industrial hemp production as early as 2009, federal approval was not achieved until the Farm Bill was passed in 2018. Many farmers across the nation, facing weak commodity prices caused by tariffs and over-production, have been more than happy to add a crop with promising prospects to their planting lineup.
The exploding demand for cannabidoil or CBD products has also helped. First, a primer. Hemp and marijuana are different varieties of the same Cannabis species. Importantly, while hemp contains no more than 0.3% of the psychoactive substance THC found in marijuana, marijuana contains anywhere between 5% and 20%. Because of its strong fibers, industrial hemp has long been used to make rope, fabric and paper. But increasingly, the processed flowers are being used to produce CBD. While the research is not definitive, many people believe that CBD produces calming and anti-inflammatory benefits without the “high” associated with marijuana.
The growing demand for CBD products is hard to ignore. CBD oils, tinctures, and edibles are now popping up at gas stations, farmers markets and even hardware stores. Research firm BDS Analytics expects the U.S. CBD market to be valued at $20 billion by 2024 up from $1.9 billion in 2018. Interestingly, the products today are only loosely regulated and only one drug, the anti-seizure remedy Epidiolex, has been approved by the FDA.
Unfortunately, growing hemp may not prove as profitable as many growers had hoped. Prices for a range of hemp products are falling across the board today. More easily produced biomass and crude hemp oil have seen declines of approximately 25% over the last three months. Meanwhile, an under supply of processing capacity has helped temper the declines for more refined products.
For investors, the hemp market presents some interesting lessons. Identifying solid investment prospects in emerging industries plagued by regulatory uncertainty and low barriers to entry can be difficult. In these cases, rather than try to identify the winners it is often easier (and more profitable) to focus on companies that provide supplies and services to all industry participants. Consider turbine blade manufacturer Vestas. This company has profitably supplied the volatile wind power market for years. Similarly Taiwan Semiconductor has made a very good business manufacturing chips for companies across the very competitive smart phone industry.
Picking winning suppliers in the hemp industry today is tough. Until this Fall, federal regulations prohibited banks from lending to most hemp related businesses. This lack of capital has meant that most equipment suppliers today are either foreign or privately held. A fresh influx of capital should be good news for firms trying to solve the industry’s current production challenges with new technology and equipment.