By: Charles Freeman
President Trump signed the 2018 Farm Bill into law, and one provision legalizes industrial hemp as an agricultural commodity. Hemp has a long history, and the recent change could create a revitalization of a resource that has been used in a variety of applications for centuries. First, let’s take a look back in time to see hemp’s journey and then how this legislation is a game changer for the industrial hemp industry.
The earliest known usage of hemp is from a piece hemp cloth found in ancient Mesopotamia dating back to 8,000 B.C. China is credited with the longest usage of industrial hemp, and was the first to recognize hemp could be used in making paper in approximately 150 B.C. Hemp rope is another age-old product with samples found in Russia (600 B.C.) and Greece (200 B.C.). Interestingly, hemp was essential for sailors in the Middle Ages who used “canvas” (derived from the Arabic word for cannabis) as well as rope, given its resistance to salt water.
Hemp was used throughout Europe and eventually found its way to colonial America. Farmers grew hemp from the Southern colonies through New England and Canada. Clothing, ropes, bed ticking, and sacks were the most common products. Benjamin Franklin, as well as Presidents George Washington, James Madison, and Thomas Jefferson, are acknowledged hemp farmers. In 1916, the USDA published findings that show hemp produces four times more paper per acre than trees.
Everything was going pretty well for hemp until the 1930s. Due to its many uses, hemp became the target of a number of industries where it was a competitor of other resources. The cotton, lumber, and chemical companies all had a vested interest in eliminating hemp. Unfortunately, during that same time, Henry Anslinger had been appointed to head the newly formed Federal Bureau of Narcotics. Anslinger was waging war against hemp’s cousin, marijuana. In a quest to outlaw marijuana use, The Marihuana Tax Act of 1937 was passed, which taxed all cannabis sales, including hemp. There was a slight resurgence of hemp production during World War II, but this effort faded after the war.
In the 1970s, President Nixon worked with Congress to pass the Controlled Substances Act. Drugs were tiered according to harmfulness and potential abuse. Interestingly, there was debate over which tier marijuana would be assigned, given studies that showed a disconnect between political opinions and research study results on the matter. Regarding hemp specifically, hemp contains less than 0.3 percent of THC (the psychotropic compound in cannabis). Therefore, it is virtually impossible to get “high” from consuming hemp. So, one could argue, hemp should not have been added to the list at all. Nevertheless, in the end, hemp was included along with marijuana on the Schedule 1 list of Controlled Substances along with heroin and LSD and has remained there ever since.
The most significant impact for hemp with the passing of the 2018 Farm Bill is that it removes industrial hemp from the Schedule 1 Controlled Substances List. This opens the door for hemp to be used as a resource once again. Even back in 1938, Popular Mechanics wrote an article about how hemp could be used in 25,000 different products. (The times have changed a little since then, so who knows how far the potential applications could reach.)
The most immediate and applicable use will likely be in the extraction of CBD (a non-psychotropic compound in hemp) for use in the growing “nutraceutical” industry. This is basically the over-the-counter hemp-based product you can buy for conditions ranging from insomnia to sore muscles. In addition, hemp seeds are being used in moisturizing lotions and shampoos. Companies producing these products have lived in fear of federal prosecution. While almost all states had pilot hemp programs, until the Farm Bill passed, hemp was still considered a controlled substance. This technicality made hemp producers at risk for federal prosecution. The new law abolishes that risk. CBD products are one of the fastest growing trends even with the former legislative ambiguity; now that hemp production is federally legal. I expect this trend to grow even faster.
Other provisions include interstate commerce and access to crop insurance for hemp farmers. The USDA will regulate hemp production, and producers will have to submit plans for approval either directly or through state agencies. The North Carolina Agricultural Extension has a website for industrial hemp as a resource for those interesting in producing the commodity. The website has a wealth of resources, and the agency is hosting a number of county events on the topic. Further, North Carolina State University is set to offer its first industrial hemp course in 2019. Many people I have spoken with believe industrial hemp could lead to a resurgence in North Carolina agriculture.
Even though the Farm Bill has lifted huge hurdles in the hemp industry, there are still a number of factors regarding regulation. The FDA is responsible for regulating how CBD (or THC from cannabis) is used in foods, dietary supplements, and cosmetics. Given the legalization momentum over this year and now the Farm Bill, the FDA is developing procedures for lawful marketing of these products. While procedures at first could be cumbersome, I believe over time the process will become more efficient as the industry becomes more established.
Another investment consideration is that this new law affords hemp companies benefits that were previously prohibited such as access to banking and expense recognition for taxes. Further, general research on hemp (and marijuana) has been limited due to being listed on Schedule 1 of the Controlled Substances List. Again, the removal of hemp from Schedule 1 allows for more studies and research to be done by reputable institutions. This, of course, could be a double-edged sword in that it could legitimize/expand the anecdotal and limited research to date or it could undermine it. Only time will tell.
The most interesting provision is that while CBD from hemp is now legal, CBD derived from cannabis is still illegal. However, at this point (to my knowledge), there is no way to know whether or not the CBD was derived from one or the other. So how would a regulatory official, or DEA agent for that matter, know a company received its CBD extract from hemp or marijuana? So again, there remains a level of risk for hemp companies at this time.
Various cannabis companies are already talking about spinning off the hemp divisions of their companies to take advantage of the new legal status of hemp. With the numerous uses of hemp (CBD, paper, clothing fiber, plastics, etc.), there are many investment implications and opportunities to research.
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Charles Freeman is a Chartered Financial Analyst and President of AdaptFirst Investments in Greensboro, NC. With over 20 years in the investment industry, Charles helps clients find and invest proactively in potential future trends and attractive investment opportunities. Charles has been published or featured in Investor’s Business Daily, The Saturday Evening Post, WXII 12 News, HQ Greensboro, and more. To learn more, visit www.adaptfirst.com