By Chris Janiec, Agri Investor
Promising initial returns in industrial hemp have moderated as expected and significant regulatory uncertainties remain, but progress towards integration into US agriculture continues. In late December, for example, the US Department of Agriculture approved industrial hemp licensing plans for Louisiana, Ohio and New Jersey.
Louisville, Kentucky-based Chad Rosen, founder and CEO of Victory Hemp Foods, spoke to Agri Investor, an affiliate publication of Venture Capital Journal, about the hemp market in the Bluegrass State, his view on the relationship between cannabis and hemp investors, and the role of US institutional farmland managers, who he says are likely to incorporate hemp into crop rotations in the not-too-distant future.
You relocated from California to Kentucky to start your hemp business in 2014, in part because of the strong support for a pilot hemp project in the state. What can you tell us about hemp production plans approved by the USDA?
The Kentucky plan was the first to be submitted ahead of all other states in the country, so we probably gave them quite a bit to think about, having submitted a program application based on four years’ experience. The federal and state governments recognize that it’s going to be a little bit of a sausage-making process, which is never pretty.
For [Kentucky], the question that remains is: how smart is it to be leading in every facet when so many of these things are still getting figured out? We may have made some mistakes in being the first ones out of the gate. Some would say it’s more important we get it right and we should not necessarily rush. There is so much excitement right now around hemp and there is a lot of pain that people are experiencing having rushed in.
What has led to the excitement?
[Hemp] is a commodity crop that is going to rival soy and corn. Maybe not tomorrow or the next day, but we are going to be approaching wide-scale planting and sowing and it will be another commodity crop.
There are a lot of reasons to keep pressing on through what might feel like a mess right now, as rule-makers have more questions than the industry has aligned answers for. This is the first occasion in a long time that we’ve had such a potentially tremendous agricultural resource, that has the potential to be the next commodity crop in America coming into the rotation.
What are its market opportunities?
The characteristics of hemp have so much value from the perspective of there being different marketable parts from the same plant. You have a widely utilizable fiber for domestic industry, whether its automotive, textile or construction; a flower that produces a cannabinoid that is ideal for supplements and wellness; and seeds that can play a major role in the major consumer shift towards plant-based diets.
There’s a great opportunity for farmers to actually keep some of that revenue generated from their farms without having to rely on government programs.
“Hemp is a commodity crop that is going to rival soy and corn”
But it’s not going to happen because of cannabidiol – CBD – oil products alone, and it won’t reach scale without the grain and the fiber.
We see what’s coming, and we see all the attention being paid to CBD, the shiny coin, and that really is overshadowing the big picture.
What has been the relationship between investors and the cannabis and CBD markets, as well as hemp?
Many in the investment community are really excited about the cannabinoids in the plants and few are taking into account where the supply chain is going tomorrow and where the market is today. Expecting CBD – or CBG (cannabigerol) and CBN (cannabinoil) – to have the same unit economics and gross margins as cannabis is avoiding a lot of the supply chain and market realities. Those products are much more controlled and supported in a cannabis market than they are in a hemp market, because its federally legal and products on store shelves exist no matter where you are.
There is a much broader market for CBD from the perspective of customers that can legally purchase the products, but at the same time, it can be grown virtually everywhere, and it can be grown outdoors on vast acreage. In addition, if the most valuable part of the plant is the single molecule, you don’t need to have very high-quality flowers, because they are going to be just thrown into a vat of ethanol or other solvent [to extract CBD].
What is unfortunate is that not a lot of these investors are looking outside the cannabinoid world when it comes to making investments in hemp. The supply/demand curve is far too different to apply the same investment lens and I think many are learning that very quickly.
There are going to be a lot of investments lost this year with CBD-only investments. We are already seeing it. We are seeing companies going bankrupt. We’re seeing companies pull out. We’re seeing farmers’ contracts cancelled. It’s already really ugly and I think we are still going to see more of that. The market continues to oversupply, and demand continues to be stifled by the questions surrounding FDA regulations and what the purview of CBD is going to be in the market.
“For now, the hemp industry will need to rely on venture capital investment to scale”
When the [hemp] food ingredients are being used across, for example, General Mills’ brands and fibers are being used across Toyota’s vehicles, institutional investors will begin to pay attention to and understand that the market is viable for their capital. Those are the most relevant data points for institutional investors. For now, the hemp industry will need to rely on venture capital investment to scale to that point.