With hemp stocks prices tied to regulatory decisions, all eyes are on the US government.
Is it time to buy hemp stocks?
The short answer is that you still might need to wait for a specific catalyst. Hemp stocks were taken out to the woodshed in 2019 as regulation, and overproduction put downward pressure on share prices.
Hemp is a strain of the Cannabis sativa plant that has been developed for industrial uses as well as derivative products. The hemp sector is in the process of evolving from a “wild west” opaque industry to a semi-transparent market.
While there are several public companies that plan to generate returns for investors as the hemp market evolves, only a few are positioned to cash in. These are companies that will benefit if CBD is eventually labeled a dietary supplement.
What Has Happened to Hemp Stocks?
- Hemp stocks declined rapidly in 2019 due to growing supply and soft demand.
- Overproduction came in the wake of the 2018 farm bill.
- Demand for cannabinoid (CBD) did not meet expectations.
By now, you might have predicted that hemp demand was well on its way to creating a sustainable industry. Speculation that hemp consumption and production would accelerate came in the wake of the 2018 Farm Bill.
The new law allowed hemp to be produced for any reason. Suddenly, the hemp sector became legitimate coming out of the shadows.
What Could Help Hemp Stocks?
As hemp immerged as a crop that was legal to grow, regulators unleashed dozens of restrictions.
This backdrop makes policy issues a key focus for investors. Farming and extraction will continue to develop as new legislation are put in place. CBD will likely continue to be the largest revenue driver for the hemp industry.
What Can you Use Hemp For?
Most of us are familiar with Cannabinoid (CBD). Personally, I have found that CBD helps me deal with aches and pains, but my wife does not experience any relief when she uses it. Hemp can be refined into CBD isolate which is nearly 100% pure CBD.
Hemp can also be used for commercial items such as textiles, clothing, and food.
Hemp is generally sold in three forms. CBD, hemp seed grain, and fiber. Fiber has industrial applications like bioplastics as well as superconductors. You can also use fiber to manufacturer different car parts, such as insulation, or mats, as well as textiles. Hemp seed grain is used to create hemp seed oil.
There is likely to be continued unprecedented growth in the CBD sector according to The Jacobsen senior hemp analyst Chase Hubbard. Mr. Hubbard says that CBD could continue to grow by “15% year over year” for the next 5-years.
CBD is currently used as a pain reliever and is the main component of Epidiolex which is an oral solution for the treatment of seizures associated with Lennox-Gastaut syndrome and Dravet syndrome which are forms of epilepsy.
Why Have Prices Tumbled?
The declines in hemp prices have been driven by the overproduction of hemp and the lack of expected demand according to Mr. Hubbard. An increase in beverages that contain CDB isolate could exponentially increase CBD demand according to Mr. Hubbard.
“The Food and Drug Agency says you cannot put CBD into food and beverages”. CBD isolate has declined 38% since July of 2019, which has put pressure on hemp seed grain.
The decline in CBD prices has assisted in eroding the value of companies that produce hemp. Hemp acreage around the US grew by more than 500% in 2019 according to Vote Hemp.
The consulting firm reports in its annual “US Hemp Crop Report” that US hemp acreage increased to 511,442 acres in 2019 up from 78,176 acres last year. The increase in hemp production was largely due to the 2018 Farm Bill which lifted limits on hemp production for commercial use.
What Does the 2018 Farm Bill Provide?
In 2014, the US government passed a farm bill that legalized the production of hemp for research purposes.
The 2018 farm bill propelled production by legalizing the production of hemp as an agricultural commodity for any purpose and had the commodity removed from the list of controlled substances.
In addition, the 2018 bill has made it possible for farmers to purchase hemp crop insurance. Crop insurance is implemented by the Federal Crop Insurance Corporation which worked to streamline the process for developing hemp policies.
Regulatory Influences Will Drive Price Action
Hemp regulatory risk is high. You can experience a situation where your entire crop is deemed unusable because the THC in your hemp plant is above the government’s threshold.
Another issue is that “states have been testing on different standards”, according to Mr. Hubbard. When evaluating hemp, US states could use “total testing” or “delta-9” testing for THC and they would “round down”. The new farm bill only allows “total” THC testing and rounding is no longer used.
The regulatory framework will continue to be a key driver of hemp production and hemp prices. In October of 2019, the United States Department of Agriculture released its “Interim final rule” which governs the production of hemp under the 2018 Farm Bill.
Key Takeaway from Regulation
The key takeaway is that the USDA THC regulations are more restrictive than anticipated. To be classified as hemp, the plant cannot have more than 0.3% THC. This can be “very tricky” according to Mr. Hubbard.
You can purchase a seed that is producing plants that meet standards in one location and it will fail a THC test in a different location.
The tests that are performed generally come from the top of a plant and the samples that are taken are random. The USDA will give you a second chance at a random sampling, but an entire field can fail if the random samples fail.
In this case, a farmer would need to destroy his entire crop on a field. This risk cannot be completely hedged, but there are some solutions, according to Hubbard.
Better Quality of Supply is Evolving
It appears that “2020 seed quality will improve for cannabinoid hemp, as breeding progresses and the segment gains more professional operators”. “Producers of CBG seed say that they have greatly increased quantity of seed for sale this year”. Many farmers are focusing on unique products such as organic hemp.
What Will be the Game Changer?
The “ah-ha” moment will come when CBD can be marketed as a dietary supplement. New legislation has already been introduced by the top-ranking member of the U.S. House Agriculture Committee. The change could require federal food and agriculture regulators to treat hemp-derived CBD as a dietary supplement.
What is clear is that “hemp-friendly lawmakers are lobbying for regulations allowing the sale of hemp-derived CBD without a doctor’s prescription”.
If this change were to take place than beverage giants that have a foothold in the CBD business would be able to take advantage of a new sales outlet.
What Companies are in the Cat Bird Seat?
Canopy Growth
Canopy Growth is one of the two biggest marijuana producers in terms of annual production capacity. In 2017, Constellation Brands, a major alcoholic beverage company and Canopy Growth formed a partnership focused on developing cannabis-infused beverages.
In August 2018, Constellation invested an additional $4 billion in Canopy Growth, increasing its ownership to 38%.
The stock price tumbled in 2019, declining by nearly 30%. If a change were made to view CBD as a dietary supplement Canopy would be in a position to take advantage of this outlet. Canopy is a global company with supply agreements across Canada and a presence in Europe, Australia, and Latin America.
Technically, Canopy’s share price appears to have bottomed. The stock broke out of a reverse head and shoulder pattern and is forming a bull flag continuation pattern which is a pause that refreshes higher.
Charlotte’s Web Holdings, Inc.
They dropped approximately 30% in 2019 but at one point was up nearly up 100% for 2019. The company produces and distributes hemp-based, cannabidiol wellness products in the US. It offers products in the categories of tinctures, capsules and topical products.
This company could experience a boost in revenue if regulation were to change to consider CBD as a dietary supplement.
The company is currently building a 137,000-square-foot facility in its home state of Colorado, more than triple the size of its current facility. Colorado was the top state in acres produced as recently as 2017.
As with every agricultural product, transportation can significantly eat into your profits. Expanding into this territory will likely bear fruit if CBD demand begins to increase. Technically, the stock price has broken out and is hovering above support near the 50-day moving average at $8.7.
Tilray
Tilray’s share price tumbled 77% in 2019, and it appears that prices have stabilized. Tilray has a small footprint in the hemp space having sold $15.6 million worth of hemp products in North America.
The company’s move into the hemp arena was celebrated but this sector continues to make a limited impact on its top line.
Technical Tiray has found support and formed a bull flag continuation pattern which is a pause that refreshes higher. Short term support is seen near its 50-day moving average at $18.85
Bottom Line
There are a few hemp stocks that are poised to benefit from a change in the way regulatory authorities categorize CBD. If CBD were changed to be categorized as a dietary supplement, companies that produce beverages and other consumables could experience a surge in demand.
This would be the impetus that drives the returns of companies like Canopy Growth and Charlotte’s Web.