Trade war advances cannabis as the next big crop

American farmers have taken a hit from soybean sales

Farmers in the United States are facing the bleak reality that their standard crop rotations continue to return fewer and fewer profits each year, which has only been exasperated by the ongoing trade war with China. However, the challenging circumstances have encouraged farmers to take advantage of the expanding opportunities presented by growing cannabis.

After months of speculation and anticipation on whether the trade standoff with China will continue or worsen, the dispute between the two countries may have rounded the corner.

During the G-20 Summit in Osaka, Japan, U.S. President Donald Trump and Chinese President Xi Jinping reached an agreement. The United States will lift some restrictions on Huawei Technologies, Inc., and postpone additional tariffs President Trump had threatened to place on Chinese imports. China, in turn, will buy more agricultural products from the U.S. Specifics will be determined when trade talks between the two countries resume.

While this agreement signals progress on trade negotiations, no changes to tariff rates have been made yet. American industries have already felt, and will continue to feel, the damage done by the trade war. This is particularly true for U.S. farmers.

Soybeans are the largest agricultural export produced by the United States, but sales have taken a considerable hit since the trade dispute began. From July 2018 to April 2019, U.S. soybean exports fell to $14.1 billion — a decrease from $19.3 billion the previous year. In addition to a fall in price and surplus of soybean product, many farmers faced the reality of a wet and cooler spring, preventing the planting of corn. When it becomes too late to plant corn, farmers will often plant soybeans instead. However, the decline in the international market for these products has many farmers wary of resorting to soybean farming.

Enter marijuana and hemp.

With more than half the states allowing medical use of cannabis, state-level recreational use laws rising and the passage of federal legislation authorizing states to regulate hemp production, farmers engaged in dwindling industries such as tobacco are looking for diversity in their agricultural products — and they are looking to cannabis to improve their economic situation.

Corn and soybean farmers facing a loss of income due to the trade war can potentially make up for their decreased profits by producing cannabis. Bloomberg Intelligence analyst Alvin Tai reported in December that a soybean farmer in the United States with an average 444-acre farm and yield of 49 bushels experienced an estimated $43,500 in lost profit from the trade war. According to the report, the profit from 16 kilograms of cannabis using only 300 square feet of planting area could close that gap.

The profit per acre for hemp cultivation varies depending on what the ultimate use for the hemp will be, but each category offers a healthy margin for farmers in the United States. In 2018, hemp grain earned an average of $250 to $300 profit per acre. Growing hemp for fiber netted farmers about $480 per acre in profit. Producing hemp for CBD brought in gross revenue between $2,500 and $75,000 per acre, giving farmers a range of profits depending on their state, circumstances and method of cultivation. A 2017 report from Cornell University identified the gross profit margin on hemp grown in Alberta, Canada as ranging from about $300 to $575 U.S. dollars per acre. Compare that to 2019 projections for the operator and land return rate in central Illinois for soybeans, which is $198 per acre, and corn, which is $201 per acre.

Hemp is presenting corn belt farmers with the lucrative opportunity to incorporate a new crop into their rotation. Last month, the Iowa Department of Agriculture announced that an individual farmer can grow up to 40 acres of hemp once the U.S. Department of Agriculture approves the state’s regulatory plan. Hemp is better positioned than marijuana to become a rotating industrial crop for corn, soybean and wheat farmers since hemp growers already have an understanding of commercial-scale production and processing.

According to surveys conducted by Vote Hemp, licensed hemp acreage in the United States was estimated at 26,000 acres in 2017, 78,000 acres in 2018 and expected to cover 200,000-plus acres in 2019. However, farmers looking to capitalize on this burgeoning industry are still learning the regulatory structure and best methods of harvesting the plant for commercial purposes, causing only a portion of the licensed hemp acreage to be utilized so far.

The U.S. cannabis industry has not been immune to the trade war. Tariffs on U.S. imports of Chinese goods have put a strain on companies that rely on Chinese manufacturing for components of vape hardware, packaging and marketing materials. However, while these companies face increased financial difficulties, the demand for cannabis products has not slowed down.

The domestic market for hemp in the United States is primed for domestic farmers to take advantage of the expanding legal avenues for hemp cultivation. Hemp seeds and hemp products are also subject to the tariffs on Chinese imports. China is the world’s top hemp producer, boasting 400,000 acres of land dedicated to hemp cultivation in 2018 (with Canada’s 100,000 acres at No. 2 and the United States at No. 3 with 78,000 acres). The increased cost to import hemp products from China may encourage one of the goals of these tariffs — to spur the purchase of goods produced in the United States. Hemp imports from countries like China and Canada to the United States have been on the decline. In 2017, the U.S. imported $67.3 million in hemp products compared to the $78.1 million high in 2015.

Vote Hemp estimates that the retail value of hemp products sold in the United States in 2017 totaled $820 million and projects that it will reach $1.9 billion by 2022. Less competition with foreign hemp prices, a rapidly expanding market for hemp products in the United States and the federal legalization of hemp are combining to create a unique moment in time at which U.S. farmers can not only make up for the hits they have taken in the trade war, but also increase their earning potential by cultivating cannabis.

Many farmers entering the marijuana and hemp industries still face the challenges of a newly legalized marketplace, lack of established supply chains and unfamiliarity with these plants. But the chance to capitalize on the hemp boom is there for the taking.

 

Charles Feldmann is a founding partner of Feldmann Nagel Cantafio, PLLC, and head of the firm’s international cannabis team. His full bio can be read at MJBusinessAttorneys.com.

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