What marijuana companies can learn from federal legalization of hemp

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(This is the second in a series of stories from Marijuana Business Daily considering the current U.S. federal marijuana reform landscape. Click here to read the first part that focused on the expected progress in 2020 and hurdles that remain.)

(Scroll down to take a poll about which takeaway from hemp legalization is the most important for marijuana businesses.)

The nationwide legalization of hemp in 2018 offers marijuana companies lessons in preparing for a highly scrutinized, commodity-driven industry that likely will reward nimble, well-run companies.

“While there’s a lot of talk about hemp and marijuana being different industries … (marijuana) can definitely learn from how hemp has rolled out nationally,” said Michael Bronstein, co-founder and president of the American Trade Association for Cannabis and Hemp.

Even though federal legalization of marijuana still might remain a few years out, experts advise companies to anticipate changes now by becoming more professional and adopting standards from other highly regulated industries.

“The coin of the realm going forward is going to be following best practices and be a responsible industry participant, whether you’re a hemp company producing CBD or a cannabis company with THC products, or a company involved in both markets,” Bronstein said.

“Expect constant change and more regulation,” added Diane Czarkowski, co-founder of Canna Advisors, a Colorado-based firm that provides a range of consulting services for marijuana and hemp companies.

Here are some lessons from hemp legalization that marijuana companies should bear in mind:

1. Federal rulemaking will take a long time

Like hemp, marijuana policy development is likely to drag on well after federal reform is enacted.

“It’s going to take years for (hemp) policies to be put in place,” said Geoff Whaling, chair of the National Hemp Association in Washington DC.

It took the U.S. Department of Agriculture 11 months to finalize interim hemp rules, and the agency is still taking public comment.

“It took us seven months to get credit unions to accept our business,” Whaling added. “It took (the U.S.) Treasury (Department) almost a year to tell the banks they could serve us.”

And the reality is that some banks still view the hemp industry as too risky to serve, so issues linger over access to financial services.

Adrienne Snow, co-owner of Nevada grower Western States Hemp, said that given protracted rulemaking, it’s best to go “slow and steady” – unless a company has deep financial pockets.

“If you are well capitalized and you have a great team of lawyers and strategists and a team with every skill set, I’d just throw the pedal to the metal” once initial regulations are published, she said.

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Which of the following aspects of hemp legalization offers the most important lesson for your marijuana business?
Which of the following aspects of hemp legalization offers the most important lesson for your marijuana business?
Which of the following aspects of hemp legalization offers the most important lesson for your marijuana business?

2. Expect both federal and state oversight

Scrutiny from a number of federal agencies, such as the U.S. Food and Drug Administration, likely will occur after federal marijuana reform – although how quickly will depend on the kind of legislation that passes.

“We know that all the various operations along the supply chain might have unique oversight from the federal government,” Czarkowski said.

Marijuana companies should anticipate how federal oversight might impact their business and implement those changes now, “because they will become a mandate,” she said.

Bronstein said his trade group is working now with state regulators to participate in standards development for testing, devices and appliances, transport, quality management, security and track and trace.

The development of standards will help “smooth out” regulatory bumps that inevitably will come with federal legalization.

Some standards are potentially applicable to both hemp and marijuana – for example, lab protocols or product sampling.

Another important issue to anticipate: What happens when business can be transacted across state lines?

Interstate commerce won’t be a sudden, seamless exchange.

Even after federal legalization occurs, marijuana businesses should expect a continued patchwork of state laws and regulations, which will complicate cross-border commerce in some regions of the country.

For example, states such as Colorado, Kentucky and Texas are taking a keen interest in hemp, while others are more cautious and still others – Idaho, Mississippi and South Dakota – have yet to legalize the crop.

3. Prepare for ‘green rush 2.0’

The marijuana industry already has experienced a “green rush.” If hemp is an indicator, another rush might come with federal legalization.

Take it from Caren Wilcox, executive director of the U.S. Hemp Growers Association: “The industry immediately in January 2019 experienced what some of us called a gold-rush mentality. Everyone wanted to plant hemp.

“The same thing might happen in the marijuana space.”

Survivors and thrivers will be individuals with strong skills and business savvy.

For example, Western State’s Snow said she saw growers flood into the hemp industry without a horticulture background. That’s a problem.

“It’s like anything else in life,” she said. “You have to have a skill set that’s applicable within that industry, because all the money in the world and all the best intentions are not going to create a fruitful product and project in the end.”

4. Expect legalized marijuana to become more of a commodity

“Companies should prepare for retail and wholesale prices to fall because of commoditization of the product,” said David Wunderlich, senior attorney at McAllister Garfield, a Denver-based law firm specializing in hemp and cannabis law.

CBD oil, he noted, has plummeted from $6,000-7,000 per kilogram to as low as $1,000-$1,500 since hemp legalization.

Experts have long predicted marijuana will become more of a commodity after legalization and interstate commerce but at the same time will offer business opportunities for high-quality niche players. The analogy used often is the craft beer industry.

Wunderlich said marijuana companies should build a variety of assumptions into their business models “and not overinvest their capital assuming that current pricing will remain” after legalization.

Falling prices could disrupt supply chains.

Wunderlich said he’s seen cases where suppliers honored only a portion of a contract, for example, of CBD isolate.

Many companies don’t have money to litigate a breach of contract, and besides, the delivery might have been time sensitive.

Michael Bowman, co-founder of First Crop, a Santa Fe, New Mexico, enterprise that works with small hemp farmers, expressed a similar sentiment.

He said his organization has seen growers “who might have done all the right things” but can’t enforce contracts to sell their biomass.

“We have a chokepoint in the extraction capacity in the country, and then the collapse in the prices has created a challenge for the industry,” he said. “It’s just cycles of a new industry, whether it’s hemp or any other agricultural commodity.”

The bottom line, Bowman said: Understand your contracts, and “don’t invest any more money than you’re willing to lose.”

Jeff Smith can be reached at jeffs@mjbizdaily.com

Hemp Industry Daily Editor Kristen Nichols contributed to this report.