Commercializing the Hemp Industry

Executive Summary

Introduction

The 2018 Farm Bill has opened new avenues for the farmers to be a part of the thriving 800 million hemp industry. The long-standing love-hate relationship of hemp with the government gradually came to an end with the President signing the bill. The hemp industry needs structure and the farmers need support with compliance, carbon trading and selling raw hemp resources in a standardized marketplace. Using competitive analysis, I have showcased a strategy to monetize the hemp industry by commercializing the hemp products and providing a platform that provides compliance and consulting to the farmers.

Market Research

The Research is sub-divided into 6 parts starting with understanding the problem and the need for Hemp production for the good of the society and to keep the interest of hard-working farmers who are victims of drastic climate changes and geo-political issues. I introduced hemp by listing out its uses like phytoremediation which is better than bioremediation, carbon sequestration and by enlisting how each part serves a unique value proposition. In the 3rd part, I have highlighted the legality of the 2018 Farm bill by enumerating what is legal and illegal under this bill. In the 4th part, I have briefed about the 5 tenets of carbon sequestration as this is the basis of a crop being qualified or disqualified for carbon trading. In the next part, I have explained the current carbon trading practice and how different geographies follow the different trading standards and the differences in prices. In the last part, the role of farm bureaus is highlighted by taking an example of the North Carolina Farm Bureau to highlight the potential of these bureaus to accept an innovative solution.

Market Analysis

In the market analysis, I started by understanding the industry using PESTEL to know the business opportunities and understand the warnings of potential threats. I have analyzed the industry using the extended porter forces to understand the relative strengths and weaknesses and to strategize to combat any future profit limitations. As the industry is new in the US and there are fewer players in the market, I conducted the Jobs, Pains and Gains analyses to work out a solution closer to what customer wants. In new business, there is always high assumptions than data, hence it is imperative to research what user wants as there is no reference document.

Recommendations

The recommendation is centered around creating a blue ocean and maximizing profits by increasing our capabilities. The recommendations are subdivided into 3 horizons, horizon 1 aims to make minor changes to the current system and structuring the value chain to provide end to end solution for farmers to monetize their hemp production via our platform. The second recommendation is to create a marketplace to connect the producer (farmer) and consumer (buyers) through our marketplace to enhance buying and selling experience. The Third horizon illustrates the usage of advanced technology to automate the compliance structure using the Internet of Things, Machine Learning to help farmers concentrate on farming and the rest is taken care of by our Intelligent platform. In the last recommendation, I have illustrated pricing and the revenue streams for a consistent cash inflow depicted in the business model in Exhibit I.

Introduction 

With Government now deciding to legalize selling and production of hemp due to its affiliation as a savior crop, the farmers, who were struggling to combat the dynamics of changing market and geopolitical issues can now freely grow and sell Hemp - A variety of cannabis that does not entice the psychoactive effects of marijuana, hence paving the way for a crop that has faced numerous hardships due to its sister crop.

 This situation surrounding the enactment is suggestive of the fact that the Government is aware of the potential of hemp and is cognizant of the drastic effects of climate change on agriculture. North Carolina farms have lost millions of dollars due to the lack of tobacco demand and this announcement is a boon for many farmers who were going through depression, unemployment, and contemplating leaving this industry. Although, there is still a tussle between the state and the federal governments over what can be legalized under this bill. The farmers with profound compliance support can monetize hemp production and meet the demands of the customer. Hence, there is an opportunity to support the endeavor of the farmers by introducing a value network platform that enables them to stay compliant by not worrying over the intricate details of the process and enabling them to do what they are known for – Farming.

Market Research and Findings 

Understanding the Problem

“Climate change increasingly poses one of the biggest long-term threats to investments.”

The above quote by Christiana Figueres (former secretary of the UNFCCC) summarizes the gravity of the problem and the socio-economic impact of climate change. Among several problems like rising in temperature, rise in ocean levels, increasing pollution, changes to climate impacts agriculture in a drastic manner. As per USDA, agriculture, food, and related industries contribute to $1.053 trillion to U.S. gross domestic product. The agriculture industry is usually the first responder when it comes to the impact of climate change as it gives you a “ground” reality check. Exhibit A shows how climate changes affect agriculture and the dichotomic impact of how agriculture contributes to climate change is depicted in Exhibit B. [1,19]

Hemp – The nature purifier

Hemp grows in diverse soil types and does not need much investment to maintain as it adapts to conditions and improves soil structure. With the advent of global climate changes, hemp is seen as a protector that sequesters carbon back into the soil by the process known as sequestration. Hemp extracts toxins from the ground and achieves the same result as bioremediation by phytoremediation (shown in Exhibit C) without using bacteria. Besides, being used as crop hemp is used to make hempcrete, a fiber-reinforced material made from hemp and lime which is used for construction. Exhibit D depicts the Industrial Applications of Hemp. While leaves and flowers are the first things people consider while considering hemp, as the usage ranges from medicinal to recreational other parts of the plant, are useful as well. Stalks are often overlooked for people but it is one of the most versatile components in the plant. It uses ranges from animal bedding, rope, insulation, bedding material, textiles, paper, etc. Seeds have numerous uses as well like cooking oil, milk, and dairy. Fuel is another major use that is being researched for commercial use. [2,3, 4,5]

2018 Farm Bill and legal restrictions

Historically, Americans were legally bound to grow hemp and it is one of the oldest industries on the planet, dating back to 10,000 plus years. Hemp was first made illegal in 1937 under the Marihuana Tax Act and formally made illegal in 1970 under the Controlled Substances Act—the latter banned cannabis of any kind. With the Farm Bill reformation of 2018, it is true to believe many of the restrictions are lifted on the growth and commercialization of hemp. But, there are still several exceptions. Hemp cannot contain more than 0.3 percent THC any cannabis product with greater than 0.3 percent THC is not protected under the current law. Secondly, there is a shared federal and state regulatory power over hemp production. A state can acquire a license to grow hemp only after USDA’s approval. Lastly, you need a license to grow hemp and any violations qualify for a felony. On a brighter side, the new law treats hemp farmers on the same standards as others and protects them under the Federal Corp Insurance act. Under the current law, the state-legal cannabis program is still illegal under federal law. [6, 7, 8]

Carbon Sequestration

Carbon sequestration is a process of capturing carbon back in the soil. There are five tenets of Carbon Sequestration:-

·      No-Till – Tilling mixes soil with air and releases carbon rather than capturing it. Using perennial crops or No-Till seed drilling helps in capturing carbon.

·      Organic Mulch – Cover the soil with hemp, or wood chip to prevent carbon losses

·      Compost – Compost is abundant in the stable form of carbon. Farmers sprinkle compost on the crops to retain the carbon content. A hemp is also a good form of compost.

·      Livestock rotation – Rotating the livestock to forage on a single large area is the preferable way of carbon sequestration.

·      Cover Crops – Fast-growing species like hemp, clover, and vetch keep the soil covered and prevents carbon from being lost into the atmosphere.[9]

Carbon Trading

Carbon trading works in a top-down structure, International treaties set quota of carbon emission on countries and countries to impose carbon restrictions on industries. As per an EY report, the market for carbon trading was $176 billion in 2011 and is projected to reach $1 trillion in 2020. Every industry has a CO2 cap and if they exceed their allowance, they are required to buy carbon credits from the open marketplace. Certified Emission reduction credits are given to projects aimed to reduce carbon emission in developing countries under the Kyoto protocol. There are greenhouse emission credits as well, they are introduced to cover more pollutants than CO2. As of 2017, the United States does not have an integrated cap and trade program but the nine Northeast states have established the Regional Greenhouse Gas Initiative (RGGI). California has launched an under its principal cap and trade program. European countries have been following the ETS (Emission Trading System) to meet its Kyoto Protocol obligations. As per the research, the cap and trade programs lack structure and there is a question mark on their authenticity and standard operating procedure as few companies receive more free credit than others to start with. There is also a growing uncertainty to meet the per ton Carbon rate, as per California’s low price per ton is $17 which is under evaluation as per the Paris treaty which recommends prices of $40 to $80 by 2020. Moreover, there are loopholes within the system that Oil and gas companies are exploiting and increasing their emissions every year. [10,11,12,13]

North Carolina Farm Bureau

Formed in 1936, NCFB aims to advocate for farmers and rural families. They have programs designed for the upliftment of the farmers and educating and ensuring their rights. They provide marketing to the farmers to sell their productions and hence NCFB has the capability of connecting the source (farmers) to sinks (potential buyers). One of the growing concerns before the 2018 farm bill was the steep decline in tobacco exports. North Carolina farmers exported $162 million tobacco to China in 2017 but the export figure plummeted to $4 million dollars in 2018. The number is further set to reduce as China has banned US agricultural imports. The 2018 Farm bill was announced at the right time giving the opportunity to farmers to be a part of the $820 million hemp industry. [14]

Status since the introduction of the Bill

Since the introduction of the bill last year, there has been an increase in the number of licenses acquired by the farmers and the production capabilities grew by twice of what it was in 2018. The projection for states like Oregon and Kentucky shows triple-digit growth in the next year. As per USDA, Exhibit E shows farmers have quadrupled the amount of land for hemp plantation. The following numbers show the number of hemp cultivator licenses and the number of acres of land acquired for hemp as of September 1, 2019: - 

The purchase behavior also shows promising results, Americans have purchased $1billion in hemp products in 2018 and this depicts a 49% increase from 2016. In another estimation, it is depicted that 50,000 products could be made from hemp. Exhibit F depicts the global hemp market potential with projected compound annual growth of 20%. Exhibit G illustrates the hemp product sales by category.  [15, 16, 17]

Market Analysis

PESTEL Analysis:

Political

The political scenario at a given point of time allows the commercialization of hemp which was banned earlier and was allowed only for industrial experimentation. The political infrastructure was under immense pressure to pass the bill by the farmers who are major stakeholders in the presidential election. With the 2018 Farm bill passed by the Congress, the time is ripe to grow and commercialize hemp products through a channelized approach. Although there is still a tussle between the state and the federal government over-commercialization of CBD.  

Economic

As per USDA, the agriculture industry is projected to contribute $1.053 trillion to the US GDP. Of this, the hemp market is projected at 820 million dollars. With the various uses and the products built using hemp, the contribution would significantly increase. With the decline in tobacco export, the North Carolina farmers could thrive by growing hemp and fulfilling the demand of the market. With about 2 million farms in the US, farmers and ranchers make up to 1.3% of the labor force. Such potential and investment growth and production of hemp could save the crops from climate change effect and mitigate the threats to investments.   

Social

With the question of legality, there was a fear among the farmers growing hemp and it could not reach its true potential due to the restrictions imposed. Since 2013, Farmers and Ranchers have seen a reduction of 50% in their net farm income. The 1-800 Farm aid helpline saw many calls this year with farmer stressed, desperate over the shrinking options of farming options. With the amendment of the bill, the government aims to provide equal opportunities to help farmers, including the insurance cover that other farmers get to safeguard their interest in cases of calamity.

Technical

Farmers were always known to come up with innovative ways to save crops and increasing production. One such case is of Bruce Dietzen, Founder of Renew Sports Car. Bruce made a car with woven hemp imported from China and he believes that farmers will save the world by providing raw hemp resources to trigger innovations. Techniques such as Phytoremediation, carbon sequestration are the emblem of innovation. Hemp-derived hempcrete and composites are bound to give rise to other innovations and wonders. Hence, Hemp is the enabler of innovation.[18]

Environment

Climate change is having a serious effect on the globe. With the rise in temperature, water levels, droughts, floods. There is a direct impact on agriculture as well. The impact is causing both losses of economy and threat to the future existence of the farming industry and mankind. With the advent of carbon sequestration and Phytoremediation, some of these effects could be reversed. Hence, the impact of the environment creates the demand for products made from hemp and catalyzes the growth of hemp crop.

Legal

The hemp industry as a whole is safely protected by laws that are made to please farmers and protect their interests. In the current market different states offers different degrees of freedom to grow and commercialize hemp for different purposes. While the wave of change is in favor of this transformation there is still a lot of restrictions and legal loopholes that could get a farming business in trouble. Hence, the need of the hour would be to adhere to the compliance and know the rules and regulations well.

Porters Forces Extended version (Hopper’s Nine forces)

Porter’s forces give us a general idea of the power exerted by various variables on profit and help the industry to prepare itself to combat these. My analysis of these forces on the hemp commercialization is depicted in Exhibit H. As per the exhibit, Technology and pace of change will help increase profit as new products with increased capability will overcome the threat of substitutes and competition. The Threat of Entrants is relatively high as this is a new market that has been recently legalized, any idea or effort in this direction will not go uncopied and there are multiple players which hemp products. Globalization is a catalyst for profit as there is increasing pressure from international organizations that may be interested in making a currency out of carbon dating or commercializing like the United Nations and the recent Paris treaty also demands regulation of carbon emission. Supplier power is green as hemp is a robust product and can grow in limited conditions. Industry Rivalry is a low/high threat to profit there multi industries serving multiple value propositions and competition depends on the geography and law of the state. Similarly, Buyer power is also a low/high threat depending on whether a buyer is interested in buying carbon credits or hemp products. The Government and changing laws have controlled hemp production since the 1900s and therefore the love/hate relationship makes it a high threat. The threat of substitution is high there are substitutes like concrete for hempcrete and composites made out of plastic, the price war is likely in such sectors. Social and cultural shift favors the hemp production and commercialization of its products because of the rising climatic threat and adoption of clean energy across sectors. 

Jobs, Pains and Gains

The jobs, pains, and gains of a farmer growing or planning to grow hemp are enlisted in Exhibit I. As per the current state, there is confusion in the compliance status, there is a lack of a complete supply chain mechanism to move materials from Producers and Consumers. The process to track carbon footprint is dependent on third party organizations and the process takes a lot of time for the farmers to get carbon credits. While respecting the compliance, the need of the hour is to provide an automated, technology-enabled system which can increase confidence for farmers to grow hemp, give them peace of mind. Remove dependence on external brokers and integrate everything on one platform. 

Recommendation

Creating a compliant carbon monitoring platform (Horizon 1)

Centering the solution to mitigate pains of our potential customer in Exhibit I I propose the value proposition as shown in Exhibit J. The current free web-based tool COMET-FARM provides a basic estimation of carbon footprint and requires verification from third-party organizations like Climate Action Reserve, the American Carbon Registry and Verified Carbon Standard. This is a cumbersome 2 step process and it becomes hard to predict the carbon footprint as carbon credits are captured based on your farm practices. The rule of thumb is that farmers who can drastically change the state of land are eligible for credits. If you have already used no-till cultivation techniques, or enriched your soil with compost and plant cover crops you are not eligible to earn carbon credits. I propose the Farm Bureaus to introduce a tool that completes the activities in the value chain template shown in Exhibit K. The tool should have the checks for carbon credits variables and compliance required to make a farmer eligible for the incentive. The gamified tool would help farmers realize that carbon is their fertilizer and hence drives a healthy system. For example, if a farmer is planning to migrate from conventional practices to carbon-capturing practices the tool should guide them on what to grow and in which order. It would help them to procure materials for capturing carbon, market their efforts to attract carbon credit buyers, getting an appointment for authentication of their practices by third party collaborators. Hence, providing a complete value chain solution depicted in Exhibit K to create a sustainable value network.

Creating a hyper-personalized marketplace to sell hemp-based raw materials (Horizon 2)

The value network is not complete if the raw materials manufactured by farmers do not reach the consumers. Hemp has varied use-cases like hemp oil for relaxation, hempcrete for buildings, animal bedding, woven hemp to make cars. As per Exhibit M, raw hemp is the most hemp product in demand since 2017. Most of the hemp raw materials are not available in the US and as rightly said by entrepreneur Bruce Dietzen, “This is unbelievable”. US hemp product manufacturers are reliant on China and Romania for most of the raw materials. This is a blue ocean and since hemp production and farming are now legal in the US, farmers can grow hemp and meet the demand of entrepreneurs like Bruce. We need to create a marketplace for them to legally sell the products as per their state laws. The platform would also help farmers to understand the demand of the market and sell products that are not as popular as CBD oil. There are states which allow recreational usage of CBD and have no bar on THC content. The dynamic marketplace will guide farmers to position their products as per the law of the land. It will also help to attract buyers before the crop is even grown by letting the buyers know about the potential of the crop and the brand equity of your farm. 

Compliance automation and artificial intelligence (Horizon 3)

Improving upon the improvements listed in Horizon 1, Horizon 3 would aim at automation and reducing the repetitive steps for compliance. I propose the introduction of a device known as a carbon analyzer using which farmers can automate the compliance and monitor the before and after effects of their farming practice. Sample Analyzer would be cloud compliant solution connected to a machine learning algorithm that would access the current state of the soil and suggest corrective steps to the farmer. Using the carbon analyzer, the farmer can measure the carbon released by multiple sources in his farm like livestock, burning of crops, using conventional measures and knowing the corrective action to be taken to mitigate the damage. Using predictive analytics, the farmer can set the target for his farm and the tool would help him monitor the status of the soil as per the target set periodically. Upon subscription, the solution would also provide video consultation with scientists/ successful hemp farmers to help novice farmers innovate and increase the productivity of their crops. The carbon analyzer would be compliant with the third party and government sources to assign carbon credits to a farm and provide certification to the farmers to sell these credits on our marketplace. Hence, completing the 3 Horizon adapted Ansoff model depicted in Exhibit N to transform the hemp business from point A -B. 

Monetizing the Platform

As shown in the Business Model Canvas in Exhibit O, we propose the following revenue streams to monetize the platform. 

• Subscription fees to use our predictive analytics as a service 
• Percentage share from the product sold on our marketplace 
• Percentage share from the carbon trading on our trading platform. 

We would also curate the plans as per the customer needs and we will have ala-carte options like consulting, crop testing, certification appointment. This is necessary as we want to target the unsubscribed customers as well to increase the traction of our platform. The carbon analyzer kit could be leased as well for short durations. For our subscribed customers, a few or all of the services would be available in categories like silver, gold, and platinum. The pricing would be determined by researching the market to know the perceived value of such a product in the mind of the customer and the money lost if the next best alternative is chosen minus the added operating cost due to the introduction of our system. 

TEV = Next Best Alternative + Money Savings – Added Operating Costs 

On top of the True Economic value, we will discount the perceived value percentage on the money savings part of the equation. For example, the customer might think that we are not saving 15% of the cost rather 10% of the cost. Such adjustments would make our solution closer to the customer’s value for our product. 

 Preparing for the price war (Supply greater than demand scenario)

The proliferation of the hemp industry is exciting and the demand is increasing day by day. But with the legalization of hemp and the skyrocketing hemp licenses suggest that there will be at a tipping point where the supply will be greater than demand. Hence, we need to be prepared for jumping the curve at the right time and use the Product Lifecycle demand curve (shown in Exhibit P) to monitor marketing and sales efforts as per the stage of the product and industry. This will save marketing money and help us to channelize the investment and efforts in the right direction. As rightly said by Professor Hopper “Fish where the fish are, not where the boats are.”

Exhibits

Exhibit A:  Impacts of Global Warming on Agriculture

Exhibit B: How farms contribute to Climate Change

Exhibit C: Phytoremediation

Exhibit D: Industrial Applications of Hemp

Exhibit E: Industrial hemp planted in the US (year – wise) 

Exhibit F: The Global Hemp Market Expansion

Exhibit G: US Hemp industry growth by category

Exhibit H: Extended Porter’s Forces [24]

 Exhibit I: Jobs, Pains, and Gains 

  Exhibit J: Value Proposition 

Exhibit K: Value Chain [20]

Exhibit M: Projected growth of hemp products [21]

Exhibit N: The 3 Horizon adapted Ansoff model [24]

Exhibit O: Business Model Canvas [22]

 Exhibit P: Product Lifecycle Strategy [23]

References

[1] https://insideclimatenews.org/news/24102018/farm-bureau-climate-change-denial-farmers-crop-insurance-subsidies-drought-future-at-risk

[2] https://www.sunstrands.com/2019/hemp-the-solution-for-global-warming/

[3] https://hemp-copenhagen.com/images/Hemp-cph-Carbon-sink.pdf

[4] https://hemp-processingsolutions.com/many-uses-of-hemp-plants/

[5] https://headyvermont.com/2019/08/26/vtcna-health-tips-hemp-and-bioremediation/

[6] https://www.brookings.edu/blog/fixgov/2018/12/14/the-farm-bill-hemp-and-cbd-explainer/

[7] https://www.farmaid.org/issues/farm-policy/whats-in-the-2018-farm-bill-the-good-the-bad-and-the-offal/

[8] https://ministryofhemp.com/hemp/history/

[9] https://modernfarmer.com/2016/03/carbon-farming/

[10] https://www.propublica.org/article/cap-and-trade-is-supposed-to-solve-climate-change-but-oil-and-gas-company-emissions-are-up

[11] https://www.brookings.edu/blog/planetpolicy/2015/10/21/the-return-of-cap-and-trade-is-good-news-for-u-s-climate-policy/

[12] https://thehempchronicle.com/topic/cannabis-carbon-credits/

[13] https://www.thebalance.com/carbon-emissions-trading-3305652

[14] https://www.ncfb.org/

[15] https://cannabiz.media/hemp-opportunity-cannabis-market/

[16] https://qz.com/1686276/how-much-hemp-is-grown-in-the-us/

[17] https://cannabiz.media/state-of-the-hemp-industry-in-2019/

[18] https://www.lancasterfarming.com/farming/industrial_hemp/how-farmers-will-save-the-world/article_3aafefb4-1517-11e9-80db-db395dd22962.html

[19] https://www.climatechange-foodsecurity.org/science.html

[20] https://templatelab.com/value-chain-analysis/

[21] https://www.fb.org/market-intel/2018-farm-bill-provides-a-path-forward-for-industrial-hemp

[22] https://strategyzer.com/

[23] https://www.patriotsoftware.com/accounting/training/blog/what-is-product-life-cycle-management/

[24] Competative Strategy Slides