On January 19, 2021 the USDA published the final rule, “Establishment of a Domestic Hemp Production Program”. The rule includes a valuable estimate of costs for those considering hemp production. For a review of the legal aspects of the final rule, check out this Texas Ag Law Blog post.
Dates and Deadlines
4/13,15,20,22/2021 – Developing a Drought Management Plan for the Ranch Webinar Series ***Last Week to Register***
4/23/2021 – Cattle on Feed
4/27/2021-4/28/2021- Hemphill County Beef Conference
4/29/2021 – Swisher County Spring Meeting
What I’m Reading
New video series aids Texas hemp producers – AgriLife Today
Forage producers face high input costs, drought – AgriLife Today
Decline in consumer beef supplies begins – Farm Progress
Is carbon your next new crop? – The Farmer
Online Hemp Video Curriculum
A few weeks ago I wrote a post on Texas A&M AgriLife’s new Online Hemp video series . In this post we cover economic and legal considerations for hemp production in Texas. The series covers a wide variety of topics including the basics of hemp production, laws and regulations, hemp budgets, and crop insurance.
Estimated Costs for Hemp Production
One of the challenges for economists is the lack of data available for predicting prices and costs for hemp production. With hemp margins appearing to shrink since legalization, this data is important to predicting profits. USDA’s final rule includes estimates from several years of data collected on nationwide production that can provide some clarity.
The most common question about hemp that I get is, “How much money will I make?” What those folks actually mean is, “What is the price I’ll get?” This is one of the more difficult pieces of the hemp profit equation to estimate. Markets are different in every region, sale packaging is different (lots, pounds, bales) depending on the buyer and seller, and there really isn’t a lot of information overall. USDA’s final rule provides an estimate of assumed prices for 2020 and 2019, citing earlier studies. In Table 5: Calculation of producer sales attributable to the rule, USDA lists a price per pound for CBD.
First, the table lists the price of cannabinoids as $3.90/lb. during 2019 and 2020. I should note that processors have recently suggested that price per pound is the more common pricing structure now as opposed to the original structure of price per percent of CBD per pound. The listed price of $3.90/lb. is likely higher than real prices at the moment. Anecdotally, we are seeing offers of approximately $0.35/percent CBD/lb. If we assume 6% CBD per pound of hemp, we come to an approximate price of $2.05/lb.
Second, the table also lists prices for fiber and grain. Long term, I see these as potentially profitable opportunities for our High Plains crop mix. The USDA Final Rule estimates a price of $0.09 and $0.53 for fiber and grain, respectively.
Testing and Disposal Costs
Two aspects of production unique to hemp are testing and, depending on compliance, disposal. These unique costs have been a big question mark in forecasts of profitability. Up to this point, little data existed. As of the publication of the Final Rule we have the first estimates of these costs nationwide.
First, sampling and testing. If you’ve kept up with hemp production news you’ll know that ‘going hot’ is a big concern. Any hemp plant with THC levels in excess of 0.03% is technically ‘hot’, and noncompliant. Testing methods and responsibilities vary by state, but all costs are borne by producers. USDA’s Final Rule estimates sampling and testing costs at $565/lot. A more useful figure is the cost per acre. Total testing cost for U.S. hemp production in 2020 was $3.2 million across 159,102 acres of hemp grown for cannabinoids, fiber, and grain. That means that the average testing and compliance cost of hemp in the U.S. was approximately $20/acre in 2020.
Second, there is the concerning cost of noncompliant hemp disposal. Again, methods vary by state, and a few states have reportedly relaxed constraints and destruction costs for the last year as a sort of ‘grace period’ for noncompliant crops. Still, the cost of destruction is worth factoring in to budgets, particularly for hemp grown for cannabinoids. Evidence suggests a correlation between higher CBD levels and higher THC levels, which means pushing your CBD crop to yield more profit may bring you closer to noncompliance. With that in mind, the USDA Final Rule lists average cost of disposal across all methods at $14.25/acre. USDA approved methods of disposal include plowing under, mulching or composting, disking, bush mowing, chopping, deep burial, and burning.
Record Keeping and Reporting Costs
In addition to the costs of physical compliance and, in some cases, destruction there are increased record keeping and reporting burdens to consider for hemp production. For Texas specific record keeping and reporting procedures, visit this post from the Texas Ag Law Blog.
These costs are measured using the total hours to comply and the value of those hours. USDA reports an estimated 2.14 hours per producer for record keeping and compliance annually. Across the U.S. reporting and record keeping costs totaled $2.56 million in 2020. When we divide that by the 159,102 acres grown that year, we come to an approximate record keeping cost of $16.09/acre of hemp produced.
While we don’t have a publicly available pricing tool available for hemp producers at this point, we are beginning to see more data on costs. So, what should you do with this data? If you haven’t checked out our video series from the first section, give it a watch, and take the survey to let us know what else you need on hemp. The series is a good place to start. Then, when using the budgets be sure to consider the compliance costs for compliant crops, which average $36/acre nationwide, when forecasting your returns from producing hemp. Long-term, I don’t know that we’re going to see hemp be the agricultural revolution it was sold as two years ago. However, I do believe with some planning and learning, hemp has the potential to be a profitable part of the High Plains crop mix over time.