This week the AMS published the Interim Rule that established a ‘Domestic Hemp Production Program’. The interim rule provided a section on the costs and benefits of hemp production, and we spend some time walking through their findings.
Unless you’ve been living far away from the internet, television, radio, cell phones, smoke signals, and other people, you have probably heard that the 2018 Farm Bill legalized the production of industrial hemp and removed it from the list of Schedule I controlled substances.
Wednesday, October 30, USDA’s Agricultural Marketing Service (AMS) released its interim final rule entitled ‘Establishment of a Domestic Hemp Production Program’. The purpose of the interim final rule was to comply with the 2018 Farm Bill’s mandate to ‘…promulgate regulations and guidelines to establish and administer a program for the production of hemp in the United States’.
My colleague Tiffany Dowell Lashmet provided an analysis of certain legal aspects of the bill she found interesting on her Ag Law Blog post USDA Interim Final Hemp Rule Summary I highly recommend taking a moment to read her work. In this post, we will be reviewing the section of the interim rule entitled ‘Benefits and Costs of Production’.
What is hemp?
For the purposes of designation by the 2018 Farm Bill, the term “hemp” means the plant species Cannabis sativa L. and any part of that plant, whether growing or not, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3%. Cannabis with a THC level in excess of 0.3% is considered marijuana and is subject to classification and consequences associated with schedule I controlled substances.
Hemp can be used for numerous industrial and horticultural purposes not limited to fabric, paper, construction material, food products, cosmetics, and cannabinoids (CBD). Prior to the discovery of CBD, the use of hemp, though previously produced in the U.S., had declined for a myriad of reasons. The discovery of certain CBD molecules and their purported uses has led to a resurgence in demand for the plant. When we have an increase in demand with a tight supply, we see an increase in price.
Benefits and Costs of Production
The interim rule provided some interesting figures on benefits and costs I thought worth reviewing. I want to stress that a Texas A&M AgriLife Extension hemp budget has not been published, and the figures I will be providing are USDA estimates across numerous pilot program states in widely varying production settings. Do not use these numbers as a budget. I am simply providing them to give some context to the range of possible outcomes in hemp production, and to explain some of the numbers in USDA’s findings.
The interim rule provided an estimate of gross revenues from an average acre of hemp produced in the U.S. up to this point. The estimates were created assuming a random sample of hemp acreage taken from across the U.S. which led to the percentage of planted acres in flowers, fiber, and grain. The estimates of gross revenues were therefore a set of weighted averages per acre assuming the nationwide trend.
For example, to obtain low gross revenue for flowers, multiply ‘Low Yield/Acre (lbs.)’ by ‘Low Price/Lb.), and then multiply that figure by 67%. The low gross revenue figure for flowers comes to $2,333. After following the same procedure for figure and grain, then summing, the weighted average across all production types of ‘Low Gross Revenue/acre’ is $2,443.
The same procedure using an average of high and low yields, and an average of high and low prices would yield the average gross revenue. The same procedure using high price and high yield provides high gross revenue.
The majority of producers are pursuing the CBD model, i.e. production from flowers. We can de-weight the USDA-provided figures to obtain the gross revenue from an acre of strictly flowers. Simply multiply the ‘Low Yield/Acre (lbs)’ for flowers by the ‘Low Price/Lb.’ for flowers to obtain low gross revenue for flowers of $3,500.
Estimated gross revenue per planted acre to producers of hemp products
The interim rule also provided an estimate of variable costs per acre to producers of hemp products using the same methodology.
Variable costs per acre to producers of hemp products
The estimate of variable costs is calculated in the same manner as gross revenue. The percent planted acres to flowers is multiplied by the variable cost for flower production per acre to obtain a weighted value of variable production costs for the average acre of hemp in the U.S., $19,092. When that figure is summed with the variable cost of production for fiber and grain, the weighted average variable cost of production for an average acre of hemp in the U.S. is $19,421.
The variable costs are more simple to de-weight than the estimates of gross revenue. Simply take the variable cost per acre provided by USDA in the table as the variable cost/acre in the U.S. For flower production, which is the CBD model, the average variable cost per acre of flowers planted is $28,638. This does not include fixed costs.
Quick math provides us with an estimate of both weighted production net revenue and net return for flower production only.
Net Returns for Weighted Production and Net Returns for Flower Production Only
Keep in mind, these are nationwide averages over highly aggregated data. Again, these numbers are not for use in a budget. I just found some interesting things in the results provided by the interim rule. First, you can see the variability of the yield is more narrow than the variability of the price. Increasing yield from 1,000 lb./acre to 1,200 lb./acre is a 20% change. Increasing price from $3.50/lb. to $30.00/lb. is approximately a 757% change. That is significant.
The interim rule also points out that the acreage planted to hemp has grown from 9,649 in 2016 to a forecasted 155,688 in 2019, a 1514% increase. The number of licensees has also increased by a forecasted 737% from 2016 to 2019. These are signals of an incredible boom in supply.
Will you make money on hemp? The numbers will vary from producer to producer. There are risks involved and it is important to be mindful of those risks. Having a contract with your purchaser that was reviewed by your lawyer, not the purchaser’s, is critical. We have not even scratched the surface of the costs associated with accidentally exceeding the THC limit of 0.3%, the total regulatory fees (estimated by the interim rule at approximately $1,000/producer), or the potential need for security.
The opportunity for profit is present. It is important to proceed cautiously, and not take on more risk than your financial situation can handle. In a new, relatively untested market, good advice is to not invest more than you can afford to lose. Prepare for challenges while hoping and working for the best.