Hemp farmers in the U.S. and Canada have been betting on a financial boost from raising hemp for cannabidiol. But some companies are looking abroad for their CBD, spurred on by cost advantages.
Hemp cultivation laws have loosened in both the U.S. and Canada in the last year, with the passage of the 2018 Farm Bill in the U.S. and the enactment of the Cannabis Act north of the border. In their wake, farmers in both countries have made plans to grow hemp for CBD, a nonpsychoactive cousin of THC that has attracted attention from consumer-goods makers and retailers and that analysts say is set to form a multibillion-dollar industry in the next few years.
Advocates say hemp — and CBD specifically — is a more lucrative crop than soybeans, corn and other traditional commodities.
Initial shipments have been small: U.S. hemp distributor and refiner General Extract LLC, for instance, said in September that it would buy C$3 million worth of CBD isolate from Toronto-based PharmaCielo Ltd., which cultivates hemp in Colombia. But industry experts say that the cost savings of sourcing CBD abroad could give it a leg up over domestic sources in the long run.
Ontario-based Quality Green signed a deal in September with Clever Leaves, a Colombian company, for oils and isolates when it wanted to enter the CBD market in Canada, CEO Robert Dziedzic said in an interview.
Prices for CBD can be volatile, and questions remain about how the substance will be regulated in the near-term, Dziedzic said. But Quality Green's deal with Clever Leaves is a bet that CBD sourcing will move south over time, he said.
"I'd be foolish to consider this a short-term solution," he said. "There are just inherent competitive advantages to being within a few degrees of the equator."
Among those advantages are the country's position along the equator, which provides consistent humidity. Plants grown in Colombia also receive a close-to-constant amount of sunlight throughout the year, limiting electricity costs and extending the growing season relative to North America.
Labor costs are also lower. Weekly wages at Quality Green's Colombian partner are between $20 and $30. "That's an hourly wage for employees in the North," he said.
The result is cheaper hemp. Dziedzic said the company can source dried hemp flower from Colombia for between 5 and 20 Canadian cents per gram — lower than the price of C$1 per gram that the company would pay for a similar product from Canadian sources.
"A cost advantage" for the future
Where companies source their CBD is likely to gain relevance as more players enter the space and demand grows. In addition to cannabis-focused players, global consumer companies including The Unilever Group and Mondelez International Inc. have expressed interest in developing products containing the cannabinoid.
In the U.S., about 30% of CBD products sold are derived from imported hemp, according to Brightfield Group, a market research firm that focuses on CBD and cannabis. While the U.S. is expected to be the largest producer of hemp by acreage devoted to the crop in 2019, China is a close second, followed by smaller producers ranging from Ecuador to Romania.
The number of companies sourcing CBD outside of the U.S. and Canada is likely to increase over the next year-and-a-half as companies learn more about how the U.S. Food and Drug Administration will regulate the compound, said Robert Fagan, an analyst with GMP Securities. While CBD technically remains illegal at the federal level and unregulated by the FDA, several states have passed laws allowing sales of products containing the cannabinoid.
A glut of U.S.-produced CBD and consequent low prices makes sourcing CBD domestically appealing in the short-term, and profit margins at many manufacturers of CBD products are wide enough that reducing the cost of their key input is not an immediate need, Fagan said in an interview. But Fagan expects CBD isolate prices to rise and competition among CBD players to narrow margins over the next 12 to 18 months, providing incentives to cut supply chain costs.
"Ultimately, I think companies seeking to have a cost advantage from the lowest possible input costs they can find" will look abroad, he said.
Looking abroad for CBD comes with challenges. Hemp is no longer a controlled substance in the U.S., and a March district court ruling suggested that U.S. Customs and Border Protection, or CBP, could not seize shipments of dry hemp entering the country.
Still, some lawyers are warning clients that CBP might seize shipments anyway. Dry, unprocessed hemp resembles THC-containing marijuana and CBP does not have reliable tests to quickly determine the difference, Daniel Shortt, an attorney with Harris Bricken, said in an interview.
Even CBD isolate can present problems, he added: Importers have to document that the compound was not derived from plants with a THC content of higher than 0.3% by dry weight. A THC content above that level would mean that the plants are legally marijuana, and that the CBD, even if THC-free, would technically be illegal in the U.S.
A preference for Made in America?
In the U.S., others say using domestically produced CBD is an advantage when pitching products containing the cannabinoid to retailers.
California-based Vertical Wellness sees a benefit in being able to tell retailers about the supply chain for its hemp-derived CBD products, CEO Smoke Wallin said in an interview. The company will produce 4 million pounds of dried hemp from 1,800 acres in Kentucky and Tennessee in 2019, which Vertical Wellness plans to use for wholesale CBD oil sales as well as in its own consumer-ready products, Wallin said.
"The Farm Bill gave us comfort to expand dramatically more than we would have without it," Wallin said in an email.
Some retailers have "a strong preference" for products made with CBD extracted from U.S.-grown hemp, Wallin said, citing discussions he has had with companies.
Large-scale hemp or CBD production overseas will not necessarily rule out the opportunity for U.S.-produced hemp or CBD, Wallin added. U.S. farmers produce soybeans and corn despite overseas competition, and hemp could follow a similar path, he said.
The National Hemp Association, which counts U.S.-based hemp cultivators among its members, is lobbying for a ban on CBD and dry hemp imports from outside the U.S. and Canada. The ban would not have to be permanent, Executive Director Erica McBride Stark said in an interview, but it could give U.S. producers a few years to develop before having to compete with foreign sources of CBD.
"We fought to pass this legalization in the U.S. to benefit American farmers," she said. "They should have the opportunity to be established first."