The marketing of hemp biomass harvested in the fall of 2019 is turning out to be … a challenge. While we think many thoughtful people could see the handwriting on the wall that it was going to be a processor-favorable year, the overall hemp market dynamics were still a surprise. Here’s our take:
Commodity supply and demand. Fundamentally, hemp, CBD and the other cannabinoids, are all commodities. Our microeconomics classes did a good job of preparing us for what that means: in the absence of some sort of market inefficiency, relative levels of supply and demand should determine price. More supply, lower prices. Less demand, lower prices.
And that is exactly how 2019 shaped up. U.S. farmers were able to jump into the hemp market, and did, processors tried to follow suit, and largely were delayed. As a result, increasing supply dwarfed increasing demand, and prices dropped. HNP expects that the long-term trend will be for lower prices across the entire hemp / CBD value chain, from consumer products all the way back to seed, as the free market’s invisible hand does its thing. Our business is built to support hemp farmers throughout that evolution, but there will be inevitable bumps along the way. This year is shaping up to be a big bump for producers.
Lack of drying and storage. Producers as a group didn’t plan well for drying and storage. As a result, there has been even more pressure on prices during the post-harvest period, as producers are needing to unload biomass that is seen as dropping in quality, and will need to generate working capital to support 2020 farming operations. Again, this should correct in the coming year (and is certainly an issue that HNP has addressed for its customers).
Processor delay. If we had a nickel for every processor who was delayed in the commissioning of their capacity … we’d have a lot of nickels. We diligenced a large number of processors in the second half of 2019, and we heard first-hand about all sorts of challenges, ranging from fire code compliance, to shoddy processing equipment sourced overseas, to unexpected bottlenecks in construction, and more. If these companies have the balance sheets to survive this unplanned period of lack of revenue, then they should ultimately be fine, demand should pick up, and prices should rebound in the hemp market.
Processors lacked working capital. It turns out that even many of the timely processors lacked an essential ingredient in their businesses – adequate working capital. If you buy biomass in October (or earlier), convert it to CBD ingredients and then sell those ingredients in December (or later), then you need cash on hand when you make the purchases sufficient to support your business until you convert your inventory to sales. Apparently many processors didn’t allow for that.
Processors flipped their business models. It would be one thing if these issues facing supply and demand merely affected price. The American farmer is accustomed to that. But the market for biomass was challenged to an even greater degree, and the result was that many processors chose to flip their business models entirely. Rather than treating hemp farmers as vendors (“I’ll buy your biomass”) they treated them as customers (“I’ll sell you my processing capabilities as a service”). This had the effect of pushing all the processor’s working capital issues back on the farmer, as well as ultimate responsibility for marketing the resulting end-product. We’re not aware of a single producer who was planning for that change, and for the corresponding need for substantial additional capital and business capabilities to support their 2019 hemp program. Kudos to any and all who were.
We work with and for farmers, so it’s to be expected that there’s an element of “blame the processor” in this blog post. But that isn’t really the case. The issue is simply that the value chain – and the roles and responsibilities of each link in that chain – is currently so immature and poorly defined, that the result is tremendous inefficiencies. Gradually the kinks will be worked out
But how many hemp farmers who thought they had an arrangement in place with a processor for their 2019 biomass, only to find that the rules of the game were changed come harvest, will go back to that same processor in 2020?