Commercial hemp is a new U.S. agricultural market, but as happens with all agricultural crops, the market will continue to grow, and eventually hemp will become a commodity crop, just as wheat and corn are, for example. But where does the hemp market currently stand as far as value and production volume compared to more mature physical markets? And what can we expect to see in the near and long-term future for this fledgling U.S. crop?
Perspective: Volume and Price
To give some context to the U.S. hemp market’s current size, we can look at the current volume of more mature markets.
The U.S. market for specialty sand (proppants), which is required for the extraction of oil and gas, is approximately 120 million tons per year, based on PanXchange data. In comparison, according to the U.S. Department of Agriculture (USDA), world corn production in the 2017-2018 crop year was 1 billion tons (337 million tons from the U.S.), and world wheat production for the same period was 927 million tons (75 million tons from the U.S.). Production estimates for U.S. hemp still vary widely, but if 437 million pounds were harvested with a 50% crop loss (based on Vote Hemp’s estimation of losses in 2019 due to THC overage, mold, etc.), that would bring the U.S. hemp market production to 218.5 million pounds (109,250 tons) in 2019. Note that corn and wheat trade internationally in 60,000-ton bulk Panamax vessels, so just two global market transactions would total 120,000 tons—more than the entire 2019 U.S. domestic hemp market by volume.
Granted, a substantial price differential exists, as higher valued crops naturally trade in smaller transaction sizes. Using the values of exchange-traded futures (commodities traded on market exchanges that are promised to be delivered in the future), corn and wheat traded at around $136/ton and $178/ton USD, respectively, in the second week of December 2019. If hemp biomass is trading at $8/pound, 1 ton would be valued at $16,000. This should give you good insight as to how much non-CBD, non-specialty industrial hemp will be trading in terms of both price and volume.
Customs of the Trade
Many differences between hemp and other commercial agricultural crops stem from the hemp market’s immaturity.
In the most mature markets, the number of market participants has long since experienced a dramatic consolidation. This is most noteworthy in world markets versus domestic-only markets. Research from Oxfam, for example, shows the ABCDs of agriculture (ADM, Bunge, Cargill and Louis Dreyfus) move more than 75% of world market grains. Mature markets are thus consolidated and insulated with extremely high barriers to entry for new participants. All major players are known to one another.
In hemp, the challenges are very different, including:
- Oversupply. There are scores of farms in the U.S. with 20 to 40 acres and a dearth of large industrial buyers.
- Attempting vertical integration “from seed to sale.” One initial challenge in building a liquid physicals (cash) trading market in hemp is connecting buyer with seller, as the independent farmers described above have less open market demand. It’s noteworthy that the ABCDs, most of which have been around since the 1800s, didn’t significantly expand into vertical integration until early this century in U.S. and world ag markets.
- The lack of credit and performance history among U.S. hemp businesses. Many sellers were duped in 2019 by companies that invested significantly on branding, yet by harvest time, stories poured in about purchasing companies’ financial distresses. Purchase agreements were scrapped due to a lack of working capital and falling prices.
In mature cash markets, one’s word is one’s bond, and it’s why traders say, “You’re only as good as your last trade.” The adage refers to the insulation of these larger markets. Trades are negotiated “on spec,” meaning on a cited specific quality. Quality is tested by the buyer, and any variances are usually negotiated in the final price. Defaults due to quality are exceptionally rare. Payments between trade houses or with producers are usually made at the time of document/title transfer (“cash against documents”) and by letter of credit for ocean-bound destination buyers. Moreover, if you intentionally default on a trade, the industry will learn of it quickly and will see your business as too high of a risk.
In contrast, today’s hemp market is at least three to five years from this consolidation and level of trust among players. In 2020, most buyers will not accept an offer without a certificate of analysis and sample. Sellers will rarely accept a bid without pre-payment, yet that still doesn’t guarantee success in today’s buyer’s market. This is the single biggest obstacle to more liquidity in today’s cash market.
Supply, Demand & Price
In mature markets, a good trader has up-to-the-minute estimates of total market supply and demand. It is essential to assessing current market values and forward prices. In today’s hemp market, too many unknown variables exist to paint a clear picture.
In early 2019, hemp production was estimated by licensed acres, a far cry from actual physical tonnage brought to market. Today, we’re getting a clearer picture of that, but instead of relying on the USDA for forecasts based on decades of data aggregation, the USDA is turning to industry journalists and analysts for help.
The demand side is murkier still; until recently, estimates were only quoted in terms of retail consumer packaged goods’ (CPGs’) value, not supply. These give little to no indication of biomass and refined products demand. It’s the tail wagging the dog and all part of the hype that hemp will be the panacea to farmers’ losses in traditional crops. (See “December 2019 Hemp Market Update: PanXchange Benchmark Pricing.")
Based on that report, we believe demand for hemp refined products will be significantly lower than most had hoped, but we won’t have a clearer picture for six to 12 months.
Evolution to a Mature Market
The hemp market has many challenges yet to overcome in its march toward maturity and liquidity. (See the “Commodity Market Evolution” chart above.) More transparency is needed into true supply and demand, and long-term reliable suppliers and buyers need to emerge. The market is in desperate need of working capital coupled with proper storage.
We are two or three years away from the big trade houses coming into the hemp market to provide working capital and take the risks that provide much needed liquidity. It’s needed and likely inevitable.
In the meantime, these tactics can help you weather the market’s early growing pains:
- Hope is not a strategy. Do not rely solely on dollar-based estimates of the CBD market. Consider that in Charlotte’s Web end-of-September 2019 financial statements, the only hemp products sold were grown on their own 891 acres, which speaks to vertical integration and how few acres are needed for $95 million in sales.
- Look for whole-hemp-stalk uses whether you’re a producer or processor. I predict that in the long run, by volume, CBD products and smokable flower will be specialty markets dwarfed by demand for industrial fiber applications, many of which are not yet developed.
- Think higher volume and lower margins if you are not already carving your niche as a CPG products supplier or buyer.
- Keep your options open with as much working capital and storage as possible.
- Establish larger and long-term agreements to add stability to your crop-year planning, but also aim to diversify in the cash market, avoiding reliance on any one trading partner.
Julie Lerner is the founder and CEO of PanXchange, Inc., which provides physical commodity markets with benchmark pricing services and an institutional grade electronic trading platform.