Hop Country Could Accelerate a Hemp Market Crash

Hops and Hemp: Engaged to Be Married

Washington is responsible for 39,000 out of the 55,000 acres of hops planted in the US. The next two largest producers are Idaho and Oregon. The massive infrastructure used to dry, store, and extract hops in the Pacific Northwest can easily be used for hemp, with little or no modification. Just as importantly, the hemp harvest (late September, early October) comes right after the hop harvest is complete. Growers and processors can retain the labor from the hop harvest and process hemp without disrupting their traditional operations. (Disregarding serious legal and regulatory issues, of course.)

For the hop industry, hemp isn’t only a new income source. It is a chance to improve capacity utilization. Washington’s publicly available list of licensed hemp growers and processors demonstrates just how many of the largest hop companies are excited about hemp. If these resources are mobilized for processing hemp, the Pacific Northwest will have a huge advantage over other regions that would otherwise have to build drying and extraction facilities from scratch. That being said, the hemp industry continues to face serious legal and regulatory uncertainty. Companies must ‘do their homework,’ and ensure that they do not to put their business or any of their partners at risk by inadvertently breaking the law.

Hemp Seems to Thrive in the Pacific Northwest

Growers in Kentucky and Colorado – key hemp-producing states – are able to achieve yields of 1000 to 2000 lb/acre. Growers in the Pacific Northwest seem to have the perfect climate for growing hemp for CBD production. Between the long summer and the use of more intensive agricultural practices, growers report yields that are two or three times larger than anything we’ve heard before.

In Oregon – which is projected to plant 20,000 acres of hemp in 2019 – a favorable climate and better management only explain a portion of these yield gains. By law, hemp can only contain 0.3% THC. If the THC concentration of hemp is higher than 0.3%, it is considered marijuana and must be destroyed. The Oregon Department of Agriculture, however, has an outdated method for testing THC. (For an explanation, go to page 19 of this presentation from regulators in Colorado.) The lax regulations allow Oregon farmers to leave crops in the field longer and to use hemp varieties that, in other states, would technically be considered marijuana, boosting yields and CBD content.

The US Will Probably Produce Too Much Hemp and CBD… Way Too Much

Most of the hemp grown in the US is used for CBD extraction. With 20,000 acres, Oregon could more than satisfy the entire US demand for CBD. That is, they could provide 15mg of CBD for every US adult for every day of the year. (This assumes 20,000 acres with an average yield of 3,000 lb/acre, an average CBD content of 6%, and a 25% loss of CBD during extraction. There are 253m US adults (18+).) We estimate that nearly 200,000 acres of hemp will be planted in the US in 2019.

This kind of overproduction will likely lead to a crash in hemp biomass and CBD prices. Making things worse, if prices fall far enough, smaller extraction facilities will not survive, leading to a contraction in total processing capacity. The simultaneous occurrence of overproduction and a contraction in processing capacity could prove catastrophic for farmers. We’ve already heard reports of contracted hemp prices that are 75% lower than last year. Even farmers with contracts will struggle to offload their crop if the company that holds their contract goes out of business.

Given the projected increase in planted acres, growers in Oregon and Washington don’t seem perturbed by such dire warnings of impending doom. They are confident that they will be able to produce hemp more cheaply and of higher quality than the rest of the country. In the long term, that may be true, but, with 200,000 acres planted with hemp, even the most efficient company could struggle to break even.