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USA - Hemp Business Conditions Survey results: profitability


USA
April 15, 2022

By Beau Whitney, NIHC Chief Economist

Three in ten businesses that operate in the U.S. hemp industry reported profitability, per the Whitney Economics Q1 2022 Hemp Business Conditions Survey. Below, we take a closer, more nuanced look at this finding. Despite some negative trends, there are some powerful reasons for optimism.
 
Have Any Hemp Industry Operators Been Making Money?

  • We knew that hemp farmers were struggling based on falling biomass prices over the last two years. We also tracked a significant decline in overall hemp cultivation licenses and licensed acres. It is no wonder that hemp cultivators are struggling.
  • We knew that hemp processors were also having a difficult time, based upon low reported rates of processing capacity utilization of 42%, as captured in the 2021 Whitney Economics Hemp Processor Survey. Additionally, there were some high-profile exits from the hemp processing market that acted, to us, like canaries in a coal mine. 
  • Despite our knowledge, we didn’t anticipate how few of the remaining operators would report that their businesses were performing profitably. 

Reasons for U.S. Hemp Farmers Struggles to be Profitable Were Clear 
 
Fewer Farmers are Obtaining Cultivation Licenses

We knew farmers were struggling based on how many actually left the industry. Overall, cultivation licenses declined yearly from 23,680 to 13,658 (a decline of more than 42%). Based on plummeting biomass prices, it was challenging to assess whether cultivators could even sell their crops above their production costs.
 
Declining Acreage for Hemp Cultivation 

Additionally, based on data from state departments of agriculture, licensed acreage declined 53% year over year. Only 253,000 acres were licensed for hemp cultivation in 2021, which is sharply down from roughly 500,000 acres in 2020. 
 
Shrinking Hemp Cultivation Capacity Utilization

With so many exits and so few acres licensed, those remaining cultivators either had leftover inventory or had adjusted their operations to align with much lower wholesale prices. Even with this diminished amount of licensed acreage, not all farmers planted a hemp crop, and those who did only planted approximately 42% of their licensed acreage.
 
U.S. Hemp Processor Woes Continued in 2021, Impacting the Value Chain, Profitability 
 
There is also a Declining Pool of Hemp Processing Licenses

Despite having too little capacity in 2019 and ramping up in 2020 after the passage of the 2018 farm bill, processors had to adjust to the declining market in 2021. Processing licenses declined from 7,301 in 2020 to 5,388 in 2021. Whitney Economics cautions that not all processing licenses are defined the same, so we had to look more in-depth at this indicator.
 
Unsustainable Momentum Evidenced by Reduced Processing Capacity Utilization

One of the reasons behind industry participation was the overall hemp farmer to processor ratios also declined in 2021. How can a processor survive on an average output from 43 acres? The answer is that it cannot survive on that level of output. In fact, despite there being more than 200 million pounds of excess hemp biomass inventory heading into the 2021 planting season, hemp processors actually reduced their capacity utilization from 42% to 34% in 2021. 
 
Product Manufacturers are Not Deploying Products Quickly Enough for Processors

U.S. hemp processors also do not have enough customers. Hemp processors are dependent upon product manufacturers to buy their processed goods. Without stable revenue from reliable customers, processors reported challenges in paying cultivators and covering overhead. Rather than run their plants and build up inventory, processors have chosen to stop processing altogether or run lean. This lack of orders and income impacted processor profitability.
 
There Are Four Big Reasons for Optimism in U.S. Hemp

  1. Price Floor - In a period of decline, after decline, there are reasons to be optimistic because biomass prices are stabilizing, and a floor has been established. 
  2. Declining Biomass Inventories - Another hopeful data point is that excess hemp biomass inventories are declining at a rapid rate. Whitney Economics reported that there was a 70% decline in excess inventories industry-wide. 
  3. Diversifying Customer Bases - Processors are diversifying, adding fiber and grain capabilities to their operations in addition to CBD, while collaborating with new product manufacturers. 
  4. Evolving Views of Hemp by Investors - Investors are beginning to realize that hemp is not a drug and are beginning to see the vast market potential for hemp fiber and grain.

For Hemp Operators to Survive, Regulatory Support is Critical 

One major factor that will determine the pace and direction of the hemp industry in the coming year is the status of federal regulatory reform. If reforms are deployed that nurture the industry, the U.S. hemp industry will continue to stabilize and grow. Prices will remain stable, and operators will have a greater opportunity to make profits. If regulatory murkiness persists and operators are not supported, the market will face continued risks, and profitability will remain a challenge. 
 
2022 is Another Defining Year in the Making

2022 will be a defining moment in the evolution of U.S. hemp. It is looking more and more like those who have survived, have weathered a massive storm. While there are still some significant challenges, there is a growing sense of optimism throughout the hemp industry. 

 

 



More news from: National Industrial Hemp Council


Website: https://hempindustrial.com/

Published: April 15, 2022

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