Farmers Hope for Hemp Riches Despite Risks

This story was originally published by Stateline, an initiative of The Pew Charitable Trusts.

LONDON, Ky. — Michael Calebs begins feeling nostalgic standing in the airy barn on his rolling, 400-acre farm. He recalls the hard labor of his youth: climbing up to horizontal beams to hang floppy tobacco leaves to air cure so the leaves could develop a sweet taste.

Calebs places a small amount of Kodiak snuff between his cheek and gum on a recent afternoon while walking about the barn in dirty work boots over blue dress pants and an argyle sweater, having just come from his day job as an engineer with the Kentucky Transportation Cabinet.

Bucking tradition, Calebs, 56, is transitioning the land from generations of tobacco farming toward a new crop: industrial hemp. He used to grow about 30 acres of tobacco, but cut back to 22 acres in 2017 when he started growing hemp.

While there are risks in moving away from his family’s lifeline of 70 years, Calebs is confident.

“We’ve got the labor market here; we’ve got the land; we’ve got the infrastructure, so we have the upper hand,” said Calebs, who wears a clean gray cap emblazoned with the green upside-down V logo of the company that processes his hemp, Atalo Holdings. “I can produce it as cheap as anybody. I have the expertise.”

“That’s a fact,” chimes in Kim Henson, Calebs’ farm manager.

Kentucky was the country’s greatest producer of hemp in the 19th and 20th centuries. But two legislative efforts limited production: A 1937 marijuana taxation law characterized hemp as a narcotic and required growers to hold a federal registration and special tax stamp. And the Controlled Substances Act of 1970 made hemp illegal to grow without a permit from the U.S. Drug Enforcement Administration.

The farm bill, which President Donald Trump signed in December, makes growing hemp in the United States legal again. Now Kentucky, which the Brookings Institution called one of the best places to cultivate hemp in the world, is returning to its roots.

Farmers across the country looking to move away from tobacco have big expectations that hemp can keep them in business. But experts and some farmers worry that without tighter regulations in place, farmers may overproduce a lucrative form of hemp and the market will crash.

Since Kentucky is further along in the transition, thanks to its five-year-old pilot program, many other states will look to the Bluegrass State to see how well its policies work.

Before December, federal law had treated hemp as a quasi-controlled substance, due to its relation to marijuana. Farmers couldn’t grow hemp at all until 2014 when the farm bill allowed limited cultivation under tightly regulated state research and pilot programs.

Kentucky that year began its industrial hemp pilot program to study hemp’s environmental impacts and potential as an energy source for biofuel.

Now hemp is treated like other agricultural commodities. Hemp producers are eligible for federal crop insurance and U.S. Department of Agriculture research grants.

Some farmers and experts say hemp can be a lifeline to those who struggle under declining commodity prices. Corn, soybeans and tobacco are among Kentucky’s top agricultural exports whose prices have remained persistently low.

For some, tobacco farming is a tradition and at the core of farmers’ identity. But amid falling prices, labor shortages, declining demand and other factors, many tobacco farmers are desperate for a replacement.

“This is hard times in agriculture, and every farmer out there is hunting for that magic bullet that’s going to save his farm,” said Donn Teske, president of the Kansas Farmers Union, which advocates for the economic interests of farmers in the state.

New Rules

Kentucky has been a leader in developing an industrial hemp sector, taking a highly regulated approach that it revised during the test phase.

Growers and processors will continue to apply for a license. The state approves growers for a certain number of acres. They must submit GPS coordinates of growing locations that the Kentucky Department of Agriculture and law enforcement may inspect. Workers must submit to background checks.

“We’re proud of the program we’ve built here, because it’s a model for the nation in how to bring everyone on board,” said Sean Southard, director of communications for the Kentucky Department of Agriculture.

Kentucky’s hemp grower application asks farmers to describe their marketing plan for the crop, and to indicate whether they have a partnership with a company to process the hemp. The state recommends such partnerships, but some farmers say doing so may discourage independent growers’ cooperatives.

“It limits the unaffiliated farmers’ opportunity to what the companies currently in Kentucky are hoping to do with this product,” said Joe Schroeder, a former hemp farmer from Lexington who has served as an industry consultant. “It also limits the growers’ ability to negotiate and compete in existing markets.”

Other states are following Kentucky’s lead in encouraging hemp.

Forty-one states have enacted legislation to establish industrial hemp cultivation and production programs, including 19 that grew hemp in 2017 under special pilot and research programs and four that started in 2018, according to the “U.S. Hemp Crop Report” from the advocacy organization Vote Hemp.

Among the states that continue to outlaw growing hemp, Georgia, Idaho, Iowa, Mississippi, New Hampshire, Ohio, South Dakota and Texas have introduced hemp bills this legislative session to align themselves with federal law. Hemp farming also remains illegal in Louisiana.

With the passage of last year’s farm bill, states allowing hemp farming must submit a plan detailing how they will license and regulate hemp to the USDA. Otherwise, hemp farmers in those states will have to comply with the USDA’s regulatory program, enforced by the U.S. Department of Justice.

U.S. Sens. Mitch McConnell, a Kentucky Republican, and Ron Wyden, an Oregon Democrat, have asked the USDA to quickly issue regulations to end uncertainty the banking industry might have with financing hemp farmers and to minimize any interference from law enforcement with the interstate transportation of hemp products.

Kentucky was the first state to submit its state hemp plan to the USDA. The farm bill gives the department 60 days to approve Kentucky’s plan, which the recent federal government shutdown may have delayed, Southard said.

Seeing Dollar Signs

At this month’s National Farm Machinery Show in Louisville—the Super Bowl of the agricultural industry—business owner Evan Ogburn and his colleagues touted to curious farmers the benefits of cannabinoid or CBD oil, an extract from hemp with the potential to reduce inflammation and anxiety, boost the immune system and more.

Ogburn is the co-founder and owner of Production Hemp Agriculture Research Management, LLC in Trimble County, Kentucky, northeast of Louisville and along the Ohio River.

At the farm show, he displayed a table full of “Pharm CBD” products, hemp oils with a proprietary blend of organic compounds, “terpenes,” which are found in the essential oils of plants.

“People are just flooding the market right now, and I think the quality is going to rise to the top,” Ogburn said. “The people that know what they’re doing, they’re going to be able to maintain long term. All these other people, they see dollar signs.”

Kentucky, along with most states except West Virginia, defines hemp as cannabis plants with a concentration of less than 0.3 percent THC, the psychoactive compound in marijuana. Authorities will destroy the crop if the THC exceeds that amount.

In 2018, 62 percent of Kentucky’s 210 hemp farmers grew the crop to have it processed into CBD. While the latest farm bill makes hemp eligible for crop insurance, CBD is still under the purview of the Federal Drug Administration, which could put CBD back on the list of scheduled drugs, said Tyler Mark, a University of Kentucky agricultural economist.

The hemp-derived CBD market in the United States is expected to grow from a $390 million market in 2018 to a $1.3 billion market by 2022, according to estimates from the Hemp Business Journal.

During Kentucky’s first year of the industrial hemp pilot program, in 2014, the state Department of Agriculture said it received reports of prices as high as $1,000 a pound for CBD’s dried material. In a 2018 report, the agency warned that prices continued to decline rapidly and could drop to $5 to $10 a pound.

“How long is that market stable?” Mark said. “I don’t think any of us know that answer right now. A lot of it is going to depend upon how many acres come into production. Do we have the processing capacity to handle that?”

There is also little information on how much demand will increase for CBD products as prices decline, Mark said.

The state’s Department of Agriculture has approved 42,086 acres of industrial hemp for 2019, up from 16,000 in 2018, plus 2.9 million square feet of greenhouse space for hemp cultivation.

Licensed processors paid Kentucky growers $7.5 million for harvested hemp in 2017 and took in $16.7 million in sales.

“We’re convinced here in Kentucky that there’s value to it,” Southard said. “We think it’ll be a huge thing.”

Managing Expectations

No one has done a good job of managing farmers’ expectations, said Mike Lewis, a farmer and businessman who is the director of Third Wave Farms, 20 miles north of London, Kentucky.

“I have farmers expecting to make $35,000 to $40,000 an acre,” Lewis said. “Nobody’s really making any money right now.”

Calebs said he’s getting $6.50 a pound from his processor, Atalo Holdings, and a yield of 600 to 700 pounds an acre.

In contrast, he earned roughly $2 a pound on burley tobacco in 2018 at a yield of 1,900 pounds an acre. So that’s $3,900 to $4,550 an acre of hemp compared with $3,800 an acre of burley tobacco, which Calebs said is far more labor-intensive.

Calebs said he’s no longer making a profit on tobacco. After growing 18 acres in 2018, he plans to cut back further in 2019. He’ll grow 36 acres of hemp. As producing CBD becomes more efficient, Calebs agrees that CBD may not be the long-term cash cow people are envisioning.

“Yes, it’s risky,” Calebs said. “There’s some risk to great gain.”

Atalo consultant Brent Cornett, a seventh-generation tobacco farmer, works the land 30 minutes north of Calebs in Laurel County, Kentucky.

“It’s fixin’ to be the end with me. I’m dropping the torch,” said Cornett, who plans to phase out his burley tobacco production this year to farm 150 acres of hemp.

“It’s a wild card at this point,” Cornett said. “Markets are definitely expanding and demand is increasing, but at the same time, every farmer nationwide is looking at this crop as a possible opportunity, and what farmers do best is overproduce.”

Mary Berry, executive director of the Berry Center in New Castle, in northern Kentucky, which advocates for small farmers and healthy regional economies, is concerned that there is no supply management, production controls or parity pricing for hemp.

“We’ve got to take a step back from capitalism and think about the lives of people who produce what we’ve got to have,” Berry said.

Berry pointed to the federal tobacco program, which ended in 2005. The program offered tobacco farmers parity in the marketplace and put in a quota system that assured farmers grew what was needed.

Besides, she pointed out, several agricultural fads have failed to live up to expectations: Ostriches, emus and Jerusalem artichokes were investments and crops touted as ways to diversify farm income.

Hemp is another tool in farmers’ toolbelt if managed appropriately, said Mark of the University of Kentucky. “If you don’t have money to lose, this may not be the crop for you, just because there’s so many unknowns.”

In the past, small and midscale farmers without industry connections and access to land never stood a chance of participating in Kentucky’s hemp economy, though the field is widening, said Schroeder, the former farmer and consultant.

“In the early years, it was an option for people who are well-positioned financially, well-positioned with state politics, and had enough land that they could endure the opportunity cost of growing other products while they take this risk,” Schroeder said. “And now, because of legalization, it’s going to be a lot more accessible nationally.”