By Eric C. Thompson, Steven N. Allen and Mark C. Berger
From Foresight, Vol. 5, No. 4
published 1998
Over the past few years, industrial hemp has garnered much attention in the United States and other parts of the world. And in Kentucky, the industrial hemp movement has gained momentum as many farmers, environmental activists, and business people have touted industrial hemp as a viable and profitable crop for Kentucky. But controversy surrounds industrial hemp whenever it is mentioned. Although chemically different from marijuana and incapable of being used as a drug, industrial hemp nonetheless closely resembles it in appearance, and as a result, has inevitably become associated with its drug cousin.
There are numerous reasons for industrial hemp’s growing popularity. Perhaps foremost among them are the many products and applications that can be made from hemp. From papers and textiles to food products and building materials, industrial hemp has been found to have many applications in a wide variety of areas. Research has been undertaken to use industrial hemp in a replacement for fiberglass and as a component in lightweight automotive parts, just to name a few. Moreover, hemp proponents point out that hemp is relatively easy to grow, requires little or no pesticides, and can help return soil nutrients when placed in rotation with other crops.
Regardless of its many uses and benefits, however, industrial hemp also has its detractors. For example, the crop can be costly to produce and process. This fact alone may prevent its widespread adoption by manufacturers of goods that could use hemp. Because industrial hemp must compete with other low-cost commodities, such as cotton, wood, and artificial materials, its higher cost may prevent its use except in some higher-value products. In addition, some opponents fear that legalizing industrial hemp may make enforcement of illegal marijuana much more difficult because the plants look so similar.
With these conflicting viewpoints, the debate surrounding industrial hemp continues to increase. As mentioned, industrial hemp has received widespread attention in Kentucky. But is the potential for the industrial hemp market large enough to justify Kentucky’s experimenting with it? Could Kentucky farmers realize profits from growing industrial hemp? These are some of the questions we attempt to answer below.
There has been substantial debate in recent years regarding the appropriate role for industrial hemp in Kentucky. Historically, industrial hemp was an important agricultural crop in Kentucky. But currently, the cultivation of industrial hemp is prohibited in Kentucky and the United States, although industrial hemp may be imported and processed in this country. Cultivation is prohibited because industrial hemp, while not used as a drug, is a cousin of the marijuana plant. Industrial hemp contains small levels of the chemical THC, which gives marijuana its psychoactive properties. As a consequence, the industrial hemp plant has become embroiled with drug enforcement efforts. This has left some people concerned about reintroducing industrial hemp cultivation in Kentucky. Others, however, urge reintroduction for economic, environmental, and historical reasons. These advocates point to industrial hemp’s history in Kentucky, and its potential as an agricultural substitute for raw logs and plastics. Some have further argued that industrial hemp could contribute to Kentucky’s farm and agricultural processing industries. Advocates also point out that industrial hemp is currently grown in many European and Asian countries and even in Canada.
This article is not an attempt to weigh the relative costs and benefits of legalizing the cultivation of industrial hemp. The authors do not have sufficient expertise to evaluate how legalizing industrial hemp might affect drug enforcement efforts. Nor can the authors evaluate industrial hemp’s historical importance, or its potential environmental benefits. Instead, the purpose of the article is to summarize our recent research into the economic potential of industrial hemp for Kentucky. A full discussion of that research is available in the report by the University of Kentucky Center for Business and Economic Research entitled "The Economic Impact of Industrial Hemp in Kentucky."
Some indicators suggest that the economic potential of industrial hemp is limited and falling. As pointed out by Vantreese, the production of industrial hemp worldwide has been falling over the last few decades.(1) Further, industrial hemp cultivation accounts for a very small share of agricultural production in the countries where industrial hemp is cultivated. These aggregate figures, however, may mask some emerging prospects for the industrial hemp industry. In particular, worldwide figures showing falling production of industrial hemp reflect a declining demand for the crop in developing countries, where much of the world’s hemp production still takes place.
These developing countries may be in the process of switching from agricultural crops to synthetic materials as they move towards greater industrialization. This decline in developing countries tends to mask in aggregate figures the growth in industrial hemp production in wealthier, more industrialized nations in Western Europe. Indeed, as seen in Figure 1, the cultivation of industrial hemp quadrupled in Western Europe from 1990 to 1997. This very rapid growth occurred in part because countries such as the Netherlands, United Kingdom, Germany, and Austria only recently legalized industrial hemp cultivation. Even in France, however, where the cultivation of industrial hemp has remained legal during the last 50 years, cultivation has more than doubled in the 1990s. Thus, the market for industrial hemp appears to be growing in wealthier, more industrialized nations.
The relatively small acreage of industrial hemp cultivated in western European countries as opposed to bulk crops such as corn or wheat suggests that industrial hemp is not a major crop in these wealthier nations. But this fact should not obscure the existence of a number of niche markets where products made with industrial hemp can compete effectively. As discussed later, these niche areas include specialty papers, floor and furniture coverings, animal bedding, cosmetics, and food supplements.
Several factors account for the success and growth of industrial hemp in niche markets in wealthier nations, despite a background of falling industrial hemp production in some developing nations. First, recent increases in environmental concern among consumers may have increased consumer interest in purchasing products made with natural fibers like industrial hemp that can be grown with few or no pesticides. The industrial hemp plant is a good source of natural raw materials for a number of products and is a superior source in some cases. This preference could include a willingness to pay a higher price for these products.(2) This is not surprising since consumers’ interest in paying to preserve the environment should rise as their incomes rise, much like their spending would rise on most other goods. Second, there has been a rising environmental concern among businesses in recent years, both due to regulatory pressures and voluntarily environmental management standards.(3) Third, the demand for industrial hemp may rise due to new potential uses for it, such as in composite materials for automobiles and as a replacement for fiberglass.
Figure 1: Hemp Farming in the European Union, 1984-1997
Before turning to present day calculations regarding the profitability of industrial hemp farming, it is worth noting that Kentucky historically was a good location to grow hemp. Before industrial hemp cultivation was banned in the 1930s, it had been a major crop in Kentucky and grew well in the climate. In the 1800s, Kentucky regularly accounted for one half of the industrial hemp production in the United States according to the 1951 book, A History of the Hemp Industry in Kentucky, by James Hopkins. Kentucky also was the main region for cultivating certified industrial hemp seed for replanting. This was due to Kentucky’s climate, growing season, and soil.
We developed current-day growing costs estimates for industrial hemp straw, grain, and certified seed based by updating Dave Spalding’s estimates that were published in the report of the Governor’s Task Force on Industrial Hemp, and based on yield data from Canada and Germany. We developed current day price estimates for industrial hemp straw, grain, and certified seed based on current import costs from Canada, Europe, or China. Estimates of future growing costs and prices were calculated based on estimates of rising productivity, falling certified seeds costs, and long-run price reductions due to free market competition.
Our calculations suggest that industrial hemp farming could be profitable today in Kentucky. Initially, we estimate that industrial hemp farmers could on average earn higher returns per acre than farmers cultivating other basic crops such as corn, wheat, and straw. We estimate that industrial hemp farmers initially could earn a return to land and management of roughly $200 per acre from growing industrial hemp for grain, $300 per acre from growing industrial hemp for straw, and $600 per acre from growing industrial hemp for certified seed. These returns compare favorably to returns of roughly $100 or $120 per acre from growing most other Kentucky crops discussed in the University of Kentucky Department of Agricultural Economics report Field Crop Enterprise Cost and Return Estimates for Kentucky––1997. These returns, however, are significantly less than the average returns of roughly $1,000 per acre from raising tobacco. In any event, these relatively high profits would serve as a reward to those entrepreneurial farmers that are first to enter industrial hemp cultivation. Figure 2 shows the relative returns to land, capital, and management per acre for hemp and common Kentucky crops.
As this figure shows, however, over a longer time period these high returns would likely fall as competition becomes more prevalent. Indeed, in the long run (LR in Figure 2), we estimate that Kentucky farmers could earn roughly $120 per acre when growing industrial hemp for straw alone or straw and grain. The returns from growing industrial hemp straw and grain would be roughly equal to those from growing most other Kentucky crops. The returns per acre from growing certified hemp seed could be somewhat higher due to the additional work involved. It should be stressed that cultivating industrial hemp could be profitable for Kentucky farmers in both the short and long run, with significant benefits occurring in the short run. The exact number of years until the long run is reached is unknown. However, profits should begin near their short-run levels and steadily move over time towards their long-run levels.
The industrial hemp plant has an appeal to individuals and businesses concerned about environmental issues like pollution and forest preservation. Industrial hemp also is a good source of fiber (from hemp straw) and oil (from hemp grain) for a number of products, and a superior source in some cases. Industrial hemp, however, is a relatively expensive raw material. As a natural material, it is also less consistent than many synthetic fibers, a quality that raises manufacturing costs.
These factors tend to limit the market for industrial hemp at the present time to niche markets within a limited number of product categories. In particular, industrial hemp should be able to compete with more expensive and higher quality products in the carpet, furniture covering, paper, nutritional supplement, animal bedding, and selected other markets. This will be true because of the strength of industrial hemp fiber and the quality of its natural oils as much as any current "fashion appeal" of industrial hemp. Under current processing technologies, however, it does not appear likely that industrial hemp will be able to compete in the bulk, low-cost areas of these markets.
Among the product categories in which industrial hemp should be competitive, the most promising immediate markets are in foods, oils, and cleansing and cosmetic products made with industrial hemp grain. A number of processing firms are already manufacturing and marketing these products in the United States using imported industrial hemp grain. Other potential markets for industrial hemp grain oil may be for use with, or as a substitute for, linseed oil (made from flaxseed) in industrial products such as paints and inks. A niche market for industrial hemp also already exists in the United States is specialty papers and carpets. Finally, additional niche markets could emerge for industrial hemp in the areas of automobile parts, replacements for fiberglass, animal bedding, and furniture coverings. It is worth noting that most of these are established product markets for industrial hemp in western European countries such as France, England, the Netherlands, Germany, and Spain.
Based on these product markets, we estimate that the market demand for industrial hemp in the United States would be sufficient to eventually support roughly 80,000 acres of industrial hemp cultivation. It is important to treat this acreage estimate with caution, however, given the level of uncertainty in making such estimates for a plant that has been banned from cultivation for decades. It is more appropriate to focus on the rough magnitude of this acreage estimate rather than its exact value. This rough magnitude suggests tens of thousands of acres of cultivation or perhaps a few hundred thousand acres (there were several thousand acres of cultivation in Canada in just the first year). This is substantial acreage for a niche agricultural crop. But this rough magnitude does not suggest a need for millions of acres of industrial hemp cultivation, at least given current technologies and uses for industrial hemp.
Naturally, the purpose of making national estimates of the market for industrial hemp was to help make predictions about the impact that industrial hemp cultivation could have on the Kentucky economy. The magnitude of these national figures, however, does not easily lead to an estimate of the size of the industry in Kentucky. In particular, it is unclear how many acres of production would occur in Kentucky.
But there are at least three reasons to expect that Kentucky might gain a significant share of the industrial hemp industry in the United States. The first is because of the market for high-quality horse bedding in Kentucky. Sales of hemp as horse bedding is currently the highest value use for the inner hurd portion of industrial hemp straw, the material that accounts for roughly 70 percent of the straw. Indeed, manufacturers in the United Kingdom have been successful in selling hemp horse bedding as a high-value product in recent years. The ability to locate near the potential market for high-quality horse bedding in Kentucky’s Thoroughbred industry may form an incentive for locating industrial hemp processors and farm acreage in Kentucky.
The second reason that may favor Kentucky is the state’s advantage as a location for growing industrial hemp seed for replanting. As was true historically, Kentucky’s climate, soil, and growing season may again make the state the superior location for seed cultivation. As demonstrated above, growing industrial hemp for the production of certified seed provides the highest return per acre of all the different manners in which to grow industrial hemp.
Finally, the third way in which Kentucky may gain an advantage in the industrial hemp industry is to be the first state, or one of the first states, to legalize the cultivation of industrial hemp. An industrial hemp industry of the size discussed above will be large enough to support only a limited number of industrial hemp processing plants and the surrounding fields cultivating industrial hemp. It may be that those states that legalize industrial hemp cultivation first will capture early investments in the industry. This will build a level of local expertise in processing and farming the crop that may create a local comparative advantage that will supercede lower growing or processing costs that may exist in other areas of the country.
These three advantages suggest that Kentucky may be the site for a substantial share of industrial hemp seed cultivation in the United States and may receive one or two industrial hemp processing facilities. It should be stressed that these outcomes are not certain, particularly the location of multiple processing plants in the state. Still, all are possibilities given the expected magnitude of the industrial hemp industry in the United States. Thus, it is worthwhile to estimate the potential economic impact on the Kentucky economy under each of these scenarios, which is done below.
The economic impact if Kentucky again becomes the main source for certified industrial hemp seed in the United States is estimated to be 69 full-time equivalent jobs and $1,300,000 in worker earnings. The total economic impact in Kentucky, assuming one industrial hemp processing facility locating in Kentucky and selling certified seed to other growers, would be 303 full-time equivalent jobs and $6,700,000 in worker earnings. If two processing facilities were established in Kentucky, industrial hemp would have an economic impact of 537 full-time equivalent jobs and $12,100,000 in worker earnings. If one processing facility and one industrial hemp paper-pulp plant were established in Kentucky, industrial hemp would have an economic impact of 771 full-time equivalent jobs and $17,600,000 in worker earnings.
These economic impact estimates reflect possible outcomes for Kentucky given a national industrial hemp industry that is focused in specialty niche activities that already have been demonstrated to work in Europe. It is important to remember, however, that technologies are under development that may allow industrial hemp products to compete in bulk commodity markets for items like paper and textiles. The economic impacts that would occur if these technologies were found to be commercially feasible would be substantially greater than those identified in this report.
In summary, despite worldwide trends in industrial hemp production, the markets for industrial hemp are growing in wealthier countries in western Europe. As a result, industrial hemp production has risen rapidly in western Europe during this decade, and widespread cultivation has been reintroduced in Canada this year.
There appear to be a number of niche markets in the United States where products made from industrial hemp can be competitive. In fact, existing processing companies using imported industrial hemp have already demonstrated some of these markets to be profitable.
Kentucky appears suited to benefit from the re-establishment of an industrial hemp industry in the United States. Our analysis indicates that Kentucky farmers, and U.S. farmers overall, could profitably cultivate industrial hemp. Initially, profits could exceed those from most other Kentucky crops besides tobacco for those entrepreneurial farmers who enter the market first. Profits in the long run, however, are not expected to exceed those of other crops, with the exception of farmers’ cultivating industrial hemp seed for replanting, an historically important crop in Kentucky. There are also several reasons to believe that Kentucky would be a good location for industrial hemp processing facilities, such as the potential for a high quality animal bedding market to serve Kentucky’s thoroughbred industry. Finally, the economic impact of industrial hemp in Kentucky is uncertain but is expected to be in the range of roughly 100 to 700 jobs.
Vantreese, Valerie L., 1997. Industrial Hemp: Global Markets and Prices. Department of Agricultural Economics, College of Agriculture, University of Kentucky. Return to text.
Mole, Matthew C., 1997. "Willingness to Pay for Hemp Based Products: Evidence from a Consumer Survey." Presentation at the Bioresource Hemp 97 Conference Symposium held in Frankfurt, Germany, in February, 1997. Mr. Mole is with the Department of Community Development and Applied Economics at the University of Vermont. Return to text.
Roulac, John W., 1997. Hemp Horizons: The Comeback of the World’s Most Promising Plants. White River Junction, Vermont: Chelsea Green Publishing Company. Return to text.
Eric C. Thompson, Steven N. Allen, and Mark C. Berger are with the University of Kentucky Center for Business and Economic Research.