The State Of Hemp 2020-2021

The hemp industry is:

• A vast expanse of opportunity
• In its youth
• Unforgiving
• Exhausting
• Not for the faint of heart
• Growing (pun intended)
• Under regulated, over saturated, unenforced

Chances are you've used similar descriptions when having conversations about the hemp industry with your peers. Some may use more or less flattering adjectives when describing it. The past 4 years have no doubt been a whirlwind for many. Some finding fortune, some losing it, others still seeking it.

As I sit here putting together my hemp economics presentation to be given at the 2nd Annual Golden Grow Awards in Oregon on January 30th. I simultaneously type my collective conscience flow into this article. My goal here is to touch on the many factors affecting the hemp space at this time and over the last couple seasons.

Supply, demand, pricing, disruption, innovation, and supply chain will all be discussed in no particular order. Rather than outline the article I felt like taking an approach of discussing topics as they were fresh on my mind during the creation of my presentation, so I apologize in advance if it feels a little scattered.

Taking a look back at 2020

To get an idea of whats to come, let us first take a glance at how 2020 panned out from the perspective of wholesale hemp flower distribution. Amota does not currently participate in retail sales, but are active participants in the wholesale distribution and processing service sectors of the industry.

Our entrance into wholesale distribution was a soft one in January of 2020, our sales team was hired in late February, and for all intents and purposes we were "actively participating" by March.

The chart above should not surprise anyone who is in the space. Spring and Summer, widely recognized as "the hot period" saw heavy increases of sales at volume for the flower sector. There was a noticeable drop off at the end of July. Conversations with clients/buyers confirm that this downward slope was cause by a couple factors. The first was preparation for the harvesting of light deprivation crops, the second was the Delta 8 market's emergence into the mainstream.

For those of you unfamiliar, the Delta 8 market has, and will continue to make a large impact of the CBD/CBG markets for an indefinite amount of time. The Delta 8 market is a market that I shall refer to as an "alternative market" within the hemp space. It both helps and hurts certain sectors of the hemp industry. The term of "alternative markets" is something I will use to describe markets that emerge within the hemp sector that have little to no regulation, enforcement, or mainstream attention. There isn't much information available on them from a market or economic standpoint, but they are disruptive nonetheless.

I will touch more on Delta 8 later in the article, but for now the take away here is that it will negatively affect the flower space from the perspective of a business selling CBD and CBG flower only. Few conversations are had about CBD/CBG flower without Delta 8 products coming up. The sheer number of inquiries and requests for products at this point has found us incorporating an entirely separate entity for the service of this sector. Should you need assistance in pivoting, navigating, or sourcing these products, please reach out to me.

Another important trend to take into account regarding consumer behavior in 2020 was the consumer fatigue of Oregon CBD genetics, as well as the over cultivation of Kush and CBG. There is a large demand for strain diversification heading in 2021, just as the THC flower industry offers thousands of strains, the consumer wants a variety in the CBD/CBG space as well. Yes, there is such a thing as strain fatigue, and it is becoming more evident now more than ever.

Digital retailers and brick & mortar stores insist on offering a wide variety of selections for their customers,. If you don't have a unique offering you may be waiting in line behind 5 other Lifters or 3 other Sour Space Candy when it comes to distribution. Sure, your product is probably better than the others, but price speaks louder than anything at this stage of the season.

But Damian, certainly that won't be the case in the long term. Surely buyers will gravitate towards the highest quality flower for a more fair market price right?

The phenotype of Harlequin Tsunami in the above picture sold out instantly at $250 - $350/lb on volume no questions asked. It was even paid for before it was done being processed, somewhat of a rarity in this biz and certainly something we all aspire to get done with our crops.

So my answer to the fair market price question is yes, with a but. I'll explain.

I strongly believe the market will divide into an industrial hemp farm Vs. craft/boutique farm segmentation. A comparison that would be easy to follow would be a Budweiser Vs. craft breweries. I do think the market will split this way, but I don't see it taking hold for another 3 to 5 years.

A lack of strain diversification, inconsistencies with processing, poor quality control, and poor inventory management are a large part of the reasons why. These are plagues of the supply chain and market standardization.

During 2020 Amota had the pleasure of working with many suppliers across the west coast. I'm fairly confident we purchased inventory from some of the largest producers of hemp in the country, I am also confident we purchased inventory from some of the "hidden gems" of the hemp space. At times the industrial hemp farms were as low as $150/lb on a hand trim finished product. That number is something unfathomable to a smaller grower. Yet, it existed, and whether in was a profitable number or not (it was), in the end the massive producers need to move inventory just like everyone else.

The simplest reasons behind why we won't see the market split for some time are:

• Buyers will continue to be price driven due to lack of strain diversity
• The market will not recognize "craft" Vs. "mass produced"
• Putting words like "greenhouse", "light dep", or "indoor" in front of a strain drives the price up more than a true inspection for quality (this is the most pathetic thing in our industry).
• Buyers are not as cannabinoid or terpene driven as they should be
• Retailers have not segmented into their own markets i.e. Gas Station Hemp Vs. Vape Shop Hemp Vs. Boutique Lounge Hemp

That being said, the difference in quality that I see from 2019 to 2020 crop is highly noticeable, so kudos to all of you hardworking farmers out there beginning to see the bigger picture.

The bigger picture consists of a few key elements:

• You absolutely have to process the flower like a pro (Amota can help with this), if you take it that far and fumble at the finish line, shame on you.
• Seed presence, quality of processing, strain diversification, proper curing, and quality control make you standout above the crowd... significantly
• Bud size and bud structure, remember you can't bring the size of bud back up, but you can always break it down
• Working with strategic partners (like Amota) to help with processing, distribution, packaging, and logistics
• Inventory management and awareness, "Around 1000 lbs" should never be an answer a buyer has to hear, "450 bucked pounds, 342 machine trimmed pounds, and 47 hand trimmed pounds as of yesterday" is sooo much sexier for a business.

The gap between industrial hemp farmer and craft farmer exists. Where that gap can widen, and MUST become immensely more noticeable to the buyers, is in the processing. Quality control, strain diversification, and curing also will be big differentiators. It's common sense, as quantity goes up quality goes down. It is too difficult to catch every browning, seeded, or moldy bud when you are dealing at massive scale.

Sorry to say it to my massive industrial hemp farmer friends/suppliers, but you cannot stop your crop from being seeded until genetics dictate the impossibility of having a male in your field. Even then the sheer numbers of the plants that you are growing can still garner hermaphrodites.

The hot word in the genetics world right now is triploids. Oregon CBD is working to produce infertile plants with pollen that won't pollinate. I am not a scientist by any stretch of the imagination, but I'm going to take the side of my man Dr. Ian Malcom here and say "life finds a way." Yes, I just quoted "Jurassic Park" in a hemp article.

I think these remarkable plants can find a way to hermaphrodite no matter how they are bred. Do I hope to find us in a world with seedless hemp, believe me I do, I'm disgusted when we lose a sale because 1 single seed is found in a bag, but it happens, and it stings badly every time.

To conclude my analysis on segmentation in market pricing I will give a finishing thought. Industrial hemp farms cannot produce, control quality, process as well, nor control seeds to the degree craft farms can. These factors are the single most important elements as to how this market will create a $200 - $300 sun grown, and a $300 - $400 sun grown.

Gone must be the times where producers and distributors must add "greenhouse" to the front of an unbelievably well crafted sun grown hemp flower to garner an extra $50 - $100, quite frankly, it makes me sick that buyers can't respect the flower for what it is Vs. what it is called.

What to expect in 2021

I don't have a crystal ball, but I do have data. We like data at Amota. It's what we are most proud of. The fact that we can come within 1% - 3% on yield estimations of farmer's post processed weight speaks volumes to how far we have come as a company. Shout out to our COO Michael Owens for building what I believe the best SOPs and IP in the state, maybe the country, when it comes to processing flower, inventory management, and data aggregation. An additional shoutout to our staff that works hard to continuous learn the processes needed to make it all successful.

The first thing I can speak towards is the faint glimmer of consolidation beginning to take form in the industry. A client of ours with whom we've built a wonderful relationship with recently merged with a very well to do processing lab. This merger was a sight for sore eyes after seeing many of our peers fall by the wayside and bow out of the industry. The unbelievably sad phone calls from families that have been torn apart because of the high expectations of a hemp project gone wrong, or the friends that no longer talk because of their failed hemp partnership, have been heartbreaking. It is truly disheartening at times, but just as we till the remnants last years crop into the earth to give way to the sprouting of new seeds, we will raise each other up and work together to bring some degree of stability to the marketplace.

The shear number of clients we are processing for this time of year compared to last tells me many things.

First, it tells me that there is optimism in the marketplace. Farmers believe the market is on the up and up, and they should. The cannabinoid business will only get larger and larger. For now, making smart decisions about what to bring to market, and when, allows you to navigate the turbulent waters of the industry. This is something Amota excels at, and it's knowledge we gladly share with all our clients.

The next thing it tells me is that farmers are beginning to make the ever so important decision about whether they see themselves as a producer, a processor, a distributor, or somewhere in between. We hear them loud and clear when we are told, "I never intended on needing to process this stuff for 9 months after harvest only to be replanted and about to harvest again before its all done." We intended on being here to do that, and do that we shall.

Make a decision on what you want to be in this industry, and stick with it. Becoming a successful vertically integrated company is an enormous endeavor that requires unimaginable amounts of time and just as much capital. I see many people enter the space as a grower, but quickly get pulled into other sectors because of FOMO. Do what makes you happy, and do it incredibly well.

Strain Diversity

I expect strain diversification to really emerge onto the scene in 2021. Amota i already actively engaged with producers that are coming onto the scene in a disruptive way with genetics. I expect a wide variety of Kush E1 crosses to hit the market. I expect OG and Diesel genetics to being to sprout (pun intended). I see a future of CBD/CBG genetics that is reflective of the THC "exotics" markets. I'm especially excited for a Purple Punch and Forbidden Fruit cross I've been hearing about from a small breeder project.

Strain diversification will help the industry take the first steps towards the segmentation I've discussed previously. Industrial hemp farms will always grow whatever is the most pest resistance, mold resistance, highest yielder, and quickest finisher. This paves way for the craft grower to grow the s*it out of some craft boutique exotic hemp strains.

Delta 8

What is Delta 8?

It is exactly what it sounds like, a minor cannabinoid very close in molecular make up as Delta 9 (the psychoactive compound in cannabis). The arguments to its legality are many. What I'll tell you here is that because it is derived from CBD distillate and CBD isolate through a chemical process, those who choose to, consider it legal under federal law. You will hear an argument that is it not psychoactive like its Delta 9 sister compound, that is false.

Which brings me to a very interesting question.

Don't people who enjoy CBD not want to get a psychoactive effect from it?

This hemp industry participant is of the notion that everyone wants to have some kind of effect from medicine they're taking, what exactly that effect is? Well...

Anyway.

Just when you thought it was safe. Another disruptor. As I mentioned before Delta 8 is coming onto the scene like a bat out of hell. Distributors, retailers, and consumers want anything and everything Delta 8. Take a look at the last two months, the first two months we've decided to take part.

Delta 8 is represented in red, as in red hot. Extracts such as isolate and distillate, which are used to produce Delta 8, are represented in yellow. Notice they both grew. December numbers aren't in yet but hear me now when I say they are greater than November. This trend will continue. Many hemp professionals will meet a fork in the road here.

Give in to consumer demand?

Or keep the straight and narrow?

I am not a lawyer nor fit to give any kind of legal advice when it comes to Delta 8. What I can do is direct you to a memo off a website that openly sells Delta 8 products. The decision to enter or take part in this space is entirely yours hempster.

What are the advantages or disadvantages?

Here are is how the industry perceives Delta 8 as being helpful:

• Infusing and kiefing 2019 flower to move distressed inventory
• Taking CBD distillate and Isolate from prior or current grows, converting it into Delta 8, and wholesaling the distillate (it must be Delta 9 compliant)
• There is no argument that it is a sleep aid, a pain reducer, and an anti anxiety medication from the user. Science will say what it will.
• Taking biomass to Delta 8

Here is how the industry sees Delta 8 as not being helpful:

• More bad brokers with more opportunities to muddle things up
• Fake and inconsistent test results (truly compliant distillate is very hard to come by)
• Dirty product, more opportunity for pesticides, heavy metals, and other harmful things to get into the supply chain (this is possible in every sector of cannabis in my opinion)
• Direct competition for those who don't participate, its taking market share from CBD and CBG flower producers

No matter how you chop it up, it's a very interesting dilemma. One that is here to stay for 2021 and possibly beyond. MADOMA Ltd., our sister company is available to discuss any of your Delta 8 needs. We can supply bulk wholesale oils, flower, cartridges, gummies, and more. All compliant with proper lab testing done. Reach out at [email protected]

Consolidation

I don't mean this as literally as it might sound. At best I see a few farms, distributors, processors, and extractors merging under one umbrella. Entities similar to Flow Kana should begin to emerge. At worst I see farmers having more faith in processing as a service and distributors/brokers. I've always been an advocate of brokers, but they must have a good track record, an incorporated company, a place of business, contracts, references, and fair terms. If someone doesn't have at the very least an EIN number, tell them to get lost.

As mentioned before, Amota Processing has seen a steady cycle of clients, since harvest, that have opted to process part of their product either on a fee schedule or on splits. They want to have some product ready for fall buyers. Unfortunately the volume purchases have been few, we expect this to turn around after the New Year and as fall approaches.

I bring this up in the consolidation segment of this report because although it may not be literal consolidation, it shows that we are working together. That in and of itself is very important. We have to work together to overcome the challenges that this industry brings us every week. That means having more trust, more information sharing, and more discussion about how we can work together to building this industry up.

Here at Amota we advise having 100 - 200 lbs of material hand trim ready at all times, with an option to produce another 100 quickly. If you do decide to take your entire crop to bucking, machine trimming, or hand trimming, it is important that you are working with distribution channels that can find outlets for different products. The sales will come, they always do, but this industry has patterns and trends.

In the end, exercising patience, and more important having a realistic expectation for how the market flows will help you keep your sanity while growing as a business. I had a client grow impatient because 400 lbs they left with me have only sold 20 lbs over the last 6 weeks. They grew 80 acres! Let's exercise some patience my friends, if you grew 80 acres you should have some of your product sitting in distribution centers all over the country!

Fall and winter are historically slower and prices are lower. Spring and Summer are go time, don't get stuck with inventory, this is the single biggest mistake you can make. In commodities trading you will never win on every single trade, the idea is to come out on top though. In a market that is saturated with 2019 product in addition to 2020 product, you better trade wisely. I think back to the times in spring of 2019 when farmers told me to "pound sand" when I offered them $30/lb for biomass. Well, I won't go into who is wishing they took $30/lb.

An advantage that you have processing with Amota is that we have an extensive global footprint for your product, we track every gram the whole way through, we know the markets, we have a high traffic wholesale website, and we are on the forefront of all cannabis trends. We are also the best priced on services in the marketplace.

What Is Selling Best?

The chart below shows the top 10 best selling items on a wholesale level over the last several weeks.

As mentioned previously the best selling items are kush strains, rare/exotic strains, and greenhouse/light dep/indoor. Compliant Delta 8 distillate is high on the list as well.

I don't expect this chart to change much over the course of the winter/spring. Consumers want new exciting strains and products.

Terpenes

Someone asked I touch on terpenes. I don't have much to say about them even though I do love the potential of this sector. Terpenes play a far more important role in cannabis than anyone gives them credit for. Myrcene being the most prominent terpene we come across.

The market for terpenes is quite lucrative, but Amota doesn't do enough business in the terpene marketplace to be able to speak towards the economics.

The range in terpene content that you want to be looking for in your cannabis is +2%. Some of the strains we represent are +4%, the highest I've seen.

Terpenes should be studied and taken into consideration when buying and selling, but you won't often come across a buyer that is buying something based on its terpene content. If anything they'll comment on how good the bud smells, without realizing it is terpene content. Or they might make an off comment about terpenes. Terpenes don't raise price in this market, hopefully sometime in the future they will.

Emerging Cannabinoids

This year seems like it will be a big year for Delta 8, CBN, and CBC. There are the cannabinoids that seem to have the industries attention at the moment. Delta 10, CBDV, THCP, and CBT are drawing back room conversation as well, but realistically I am not sure there are advanced extraction methods to isolate these cannabinoids in high volume just yet.

Be sure to keep an eye out for exciting new blends coming to the tincture, softgel, and beverage spaces. Although it is hard to say whether they will catch on with consumers quickly, or get lost in the flood of products being shoved in the faces of the general public. With so many choices all the time, sometimes consumers stick with the basics before they move on to other products.

More To Come

Before I sign off I'd like to thank you for getting this far into the article. I hope that the information is of use to farmers, processors, extractors, distributors, and retailers. I will go a little further into several of these topics at the 2nd Annual Golden Grow Award on January 31st. Follow the link to register.

Attention will be put more on COGS across many of the hemp sectors, where they need to be for best success, and how important it is to keep them as low as possible. I will also advocate for market segmentation and dive a little deeper into why it is so important that the industry take on an identity when it comes to producers, distributors, retailers, and their relationships with each other.

Finally, I'll go over how the first month of the year has gone, more Delta 8 updates, and strategies for staying ahead of the curve for 2021 harvest. Strap in because this roller coaster has literally only left the station.