By Chase Nobles, Co-Founder at Kush.com
If you’re farming hemp this year, it might be a good time to panic. The US can only reasonably consume 22.5M lbs of 10% CBD Hemp in a year, and we’re currently growing closer to 180M. That’s 8X what we need which is leading to a massive price crash.
It’s time to do some simple math to outline the situation. These numbers are rough estimates used strictly to make a point. If 50% of the US population (327M) consumed 10mg of CBD per day then we would consume 596,775 kg per year as a country and those consumption numbers are generous.
According to HempBenchmarks.com, there are over 400,000 acres of permitted land for hemp farming in the US. Let’s assume that maybe 30% of that acreage was actually planted. Which would mean around 120,000 acres.
Let’s conservatively assume each acre produces an average of 1,500lbs / acre. This would yield 180M pounds of biomass. 1lb of 10% biomass at 8% moisture yields around 0.026kg of isolate. This means that 180M lbs of biomass would yield 4.7M kg of isolate which is around 8x more than we need or can consume.
The processing capacity of the industry would need to be ~500,000lbs of raw material everyday for a year to extract that much material. Fortunately, the processing capacity is already there in the US which means that we should be able to process this year’s harvest strictly looking at the numbers. The real elephant in the room is why would you. The price is going to drop through the floor on biomass and farms are just now starting to realize it.
In July, we saw an average price per percentage point of $3.94 on 10% raw CBD material through our wholesale trading platform, Kush.com. Current purchasers on the platform are expecting the price to drop below $2.30 prior to harvest season due to early harvests, and then things are going to get ugly starting around October 1st.
How We Got Here
This isn’t the first time we’ve seen this in the Hemp and Cannabis industry. In recent memory, this happened on the Washington and Oregon cannabis market, and we’re seeing the exact same thing in the hemp industry.
Here’s the standard sequence that leads to the price crash:
Legalization occurs suddenly
Prices spike due to immediate increase of demand and limited supply
Farms raise capital and universally increase production based on inflated prices
Due to the seasonality of farming no one knows how much other farms are producing Unfortunately, everyone ramped production at the same time
Harvest occurs, prices crash
Farms go out of business
The price crash should only happen for around 18 months. Unfortunately, in Oregon and Washington price crashes tend to last around 36 months. Prices in the Washington cannabis market only started to stabilize this year after 3 years of consistent price decreases. The reason it takes so long for price to stabilize is because after suffering losses the first season, farms grow a second and third year and focus on efficiency in order to dig themselves out of a hole and survive.
In this cycle, or should we say death spiral, many farms go out of business, but in that process they are typically bought by a naive purchaser who repeats the same mistakes of over production without building downstream demand or growing under contract.
Who Has The Power?
This is simple. Brands with distribution own the market. The brands that land large purchase orders control the market. Their purchase order prices don’t tend to change, but decreasing their input costs (COGS) increase their margins.
What Will Happen Next?
Prices wholesale input prices will crash. This means everything from raw biomass (extraction mataria) to crude extracts and distillate / isolate prices will crash.
Currently the spot price for bulk CBD Isolate is around $3,500/kg which is down from $5,400 in May. Currently the spot market matches the contract market as well at $3,500/kg which means suppliers are already squeezing the price as low as possible in order to make sales. We consider those data points to be a telling forecast for the future, and it’s not good for suppliers. Additionally, we’re seeing this price drop across all hemp product categories.
The USDA has provided guidelines for the importation of seed stock to the United States, but has yet to create guidelines for export. The USDA MUST prioritize creating exportation infrastructure else crops and material will become a total loss for many farmers in the USA.
If US suppliers can export, prices will raise across the hemp industry setting us up to be a global leader.
How to Handle The Fall Out
As a farm, you should aim for securing purchase contracts now. We know the prices are currently high, but if you can afford to undercut the current contract market then you can lock up demand now rather than wait for the price to crash below the cost of production. Additionally, we recommend looking deeper at tolling and split contracts for extraction. This way your raw material has a longer shelf life and is easier to store incase liquidity is hard to find in the short-term.
As an extraction company, we recommend staggering your purchase contracts to ensure quality supply while hedging your supply chain with the coming price crash. This means contracting 10-15% of your annual supply needs to get you through the end of the year with quality guaranteed supply. Then as the prices continue to decline as we get closer to October continue contracting 10-15% more every 2-3 weeks until you’re at 30% of supply under contract. Once October gets here we recommend contracting another 15-20% of your supply needs per month through January. This will fill your annual supply needs with top quality raw material while at the same time limiting your risk to the falling prices.
As a brand and finished goods manufacturer. We recommend quarterly contracts for wholesale inputs. This will guarantee quality supply during a volatile market while at the same time not locking you into a long term price point that will be dropping.
We expect prices to fall starting in October, but traditionally prices hit the floor in February as the market takes time to realize and adjust to a surplus.
This price crash is going to hurt many hemp farmers who increased production on their farms. While some are harvesting early and capturing a great price, many farms have been pushed into a late harvest with the increased rain in many of the premier production regions.
To combat falling prices, we at Kush.com are focused on supporting farmers through liquidity in addition to advice. The best thing we could do is refine the platform to provide liquidity faster and give feedback on what the price point currently is and how to capture the best price.
This means over the next 3 months we’re focusing the platform on tools that make purchasing easier than ever. This includes a fully managed supply chain solution for large buyers, real-time price analysis tools, and contract purchasing features to lock in long term deals.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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