The oversupply of U.S. hemp, which was largely grown last year for CBD extraction, could be significantly bigger than expected after prices tumbled in 2019 and farmers struggled to find buyers, deal-flow calculations by one trading platform show.
Colorado-based PanXchange, Inc., which launched its institutional grade trading platform for hemp byproducts in August 2019, said in its December report that the U.S. CBD industry likely requires just 18 per cent of the hemp that was harvested in 2019. While reliable hemp data is lacking due to the newness of the industry, PanXchange crunched numbers based on deal flows and various scenarios.
Analyzing the financial reports of Charlotte’s Web, one of the biggest CBD product manufacturers in the United States, PanXchange determined that only 500 acres, or 800 kg of distillate, were required to reach US$95-million in revenue.
“If we assume a uniform efficiency in hemp growth to consumer packaged good production, the United States hemp market would need just shy of 20,000 acres,” PanXchange said in the report that was released Thursday.
This compares with Vote Hemp’s estimate for the 2019 hemp yield at 115,000 acres. With 77 per cent of this planted for CBD extraction, this brings U.S. hemp biomass production to an estimated 168 million pounds.
“If all biomass was converted to distillate, this would total 2.3 million kg,” the report said.
“We know that the U.S. current processing capacity is not that large and not every pound will be harvested and converted into distillate. Nonetheless, it illustrates the enormity of the market’s total oversupply.”
In its second scenario, PanXchange used the same math looking at Brightfield Group’s U.S. CBD sales estimates for a market value of US$24-billion in 2025.
“If the same math was used, the 2025 market would be supplied on just shy of 200,000 kg of distillate, which would still be covered by the 2018 harvest,” PanXchange said, adding this does not account for smokable hemp or non-CBD industrial purposes.
In its last scenario, based on 10 per cent of the U.S. population consuming 30 mg of CBD daily, PanXchange estimated the United States would consume nearly 424,000 kg of 85 per cent potency distillate a year. This would require 40 million pounds of biomass, which can be grown on 20,700 acres.
U.S. HEMP PRICES EXTEND LOSSES
“We know that this market will continue to grow at a rapid pace, but for the moment, we are grossly oversupplied with raw hemp ingredients,” PanXchange said.
As the market matures, input and retail prices will drop as volume increases, and harvesting and processing will become more efficient and drive production costs down, PanXchange said.
Not surprisingly, PanXchange’s average price index for the midpoint biomass spot price (per percentage of CBD content per pound) moved below US$1 in December 2019. This is down sharply from more than US$4 in July 2019. In tandem, Colorado winterized crude fell to an average price of US$800 per kilogram in December, from more than US$6,500 in January 2019, while Colorado isolate dropped to US$2,250 from more than US$6,000 in the same time frame.
“Isolate movement continues to be slow, with many producers switching their formulations to distillate due to concerns of pending patent exclusivity,” PanXchange said.
“Isolate has been offered on the PanXchange trading platform as low as $1800/kg, which is dangerously undervalued, and at that price point, it is difficult for any producer to generate a profit.”
Many U.S. farmers planted hemp for the first time in 2019 with the hopes of cashing in on the booming CBD market at a time that other cash crops experienced low commodity prices. But many farmers had difficulty finding buyers and some sold hemp crude oil for “pennies on the dollar,” PanXchange said, adding this drove down prices in this product category for the entire market.
CBG biomass has also garnered market interest, with offers posted on PanXchange’s trading platform between $150 per pound and $200 per pound for near term delivery.