By Valerie L. Vantreese
From Foresight, Vol. 5, No. 4
published 1998
The legalization of industrial hemp production in the U.S. is polarized, in part, on its purported profitability. Anti-drug activists argue that low or lack of expected profitability from hemp production would not compensate for the additional costs they believe would come with legalization. Hemp proponents counter that projected profitability has been dampened by "institutional" estimates that are static and shortsighted. They argue that industrial hemp could be profitable if allowed to fully develop as a commercial industry.
Research at the University of Kentucky by Thompson, Berger, and Allen, the "Economic Impact of Industrial Hemp in Kentucky," attempts to derive the demand for hemp and draw implications for Kentucky agriculture. Funded by the Kentucky Hemp Museum and Library, this research paints an optimistic view of market size and price competitiveness of industrial hemp.
This report simply looks at trends in the global hemp market and draws implications for U.S. agriculture. The intent is to provide an objective overview of the hemp market and to increase the factual base of the discussion at hand. They assume that if industrial hemp is profitable, world production will be thriving and trade will be vigorous. Nearly every country in the world has legalized hemp production––the United States is a rare exception. If the U.S. were to legalize industrial hemp production, what type of competition would U.S. farmers and manufacturers face from the international market?
Cannabis sativa l., which includes both industrial hemp and marijuana, contains variable concentrations of tetrahydracannibol (a psychoactive component). By definition, industrial hemp refers to those strains of cannabis sativa l. containing less than 1 percent THC. Marijuana contains THC levels that typically range from 3 to 15 percent.
Individual marijuana and industrial hemp plants look nearly identical and chemical analysis is required to distinguish the two. It would be relatively easy to "hide" marijuana among hemp grown for seed production, but not among hemp grown for fiber due to plant spacing. Cross-fertilization would not be a problem in raising marijuana and hemp together if producers began each season with certified seed.
Research continues to develop high-yielding, low-THC hemp varieties that are high in cellulose content (for biomass fuel production), primary fiber yields (for pulping) and extra-fine fibers (for textiles). Genetic research is also being undertaken to develop varieties with special amino acid profiles (for human and animal feeds), specific components for industrial uses (such as lubricants) and various seed sizes (for easier hulling and assorted food uses).
Industrial hemp grows well in a multitude of climates and soil conditions using moderate amounts of fertilizer and agri-chemicals as needed. Consequently, hemp can be grown all over the world and competitive advantage may depend more on local processing capacity and labor costs. The United States does not appear to have any unique advantage in growing hemp, despite our history of production.
Traditional seeding equipment can be used and harvesting hemp fiber can be done with existing baling machinery. But the height (up to 15 feet) of hemp and the strength of hemp fiber can be very damaging to equipment during harvesting and processing. Grain and oilseed equipment must be modified.
Hemp fiber yields have increased slowly to about 650 lbs./acre with considerable variation around the world. Hemp production on well-drained sandy soils of Southwestern Ontario, Canada, yields about three to five tons of baled hemp stalks per acre (or 6,000 to 10,000 lbs./acre). Hemp seed production averages 876 lbs./acre. In China, the largest producer of hemp seed for crushing, yields average 1,606 lbs./acre. France, the leading producer of certified hemp seed (or seedstock), yields average 595 lbs./acre. Raising hemp for combined fiber and oil production would not maximize yields since high-yielding oil varieties are not the same as the high-yielding fiber varieties.
The major impediment facing the industrial hemp industry is high processing costs. While hemp can be used for a wide variety of applications, other natural and synthetic fiber and oil sources are considerably more cost-effective. In order for hemp to truly compete as a niche product on the world market, new research must be undertaken to reduce processing costs.
Hemp cannot be easily separated into fibers of consistent quality. Dutch research has shown that a chemi-mechanical pulping process may prove to be the most cost-effective for hemp pulp, although this method produces a significant amount of chemical-contaminated wastewater. Germans have introduced other innovative methods of fiber separation using steam explosion and ultrasonic waves, and researchers in Poland have developed a plasma treatment for producing hemp paper.
Due to high processing costs, hemp has never been used for commercial (or high-volume) paper production. The average hemp fiber pulp mill produces about 5,000 tons per year, compared to a minimum of 250,000 tons for a wood fiber pulp mill. The higher fixed costs of the hemp mill suggest that hemp pulp is best suited for specialty paper production (such as teabag and cigarette papers), which are limited to less than 5 percent of the demand for other major grades of paper. However, recent Dutch and German research argues that industrial hemp is not competitive in the specialty paper market, but may be used as a fiber supplement to recycled paper pulp.
As for textile production, competition from synthetic and other natural fibers has reduced the use of hemp fiber. While hemp fiber may be superior in strength, processing costs are much higher. For example, hemp shirts can easily cost $70 to $80 retail.
Hurds, the by-products of extracting the fibers from the stalk, are 50 to 70 percent cellulose, lending itself to animal bedding and building supply uses, such as particleboard. But competition from other cellulose sources and high processing costs have limited hemp hurds to low value uses.
Similar to soybeans, hemp seeds are pressed to yield oil and seed cake (or meal). Hemp seed oil is over 70 percent polyunsaturated and contains amino acid complexes suitable for human or industrial uses (such as fuel and paints). The seed cake contains 25 percent protein and can be used as human or animal feed. However, due to the high content of polyunsaturated oils, hemp oil and meal is fairly unstable and becomes rancid rather quickly unless preserved.
Shampoo, cheese, beer, toilet paper, shoes, laundry detergent and industrial cleaners are but some of the multitude of products made with hemp. But the raw hemp value is low and frequently hemp appears to be added for the novelty in marketing.
Returning to the original assumption, if industrial hemp is profitable, world production will be thriving and trade will be vigorous, what direction has the world hemp gone? Notably, world hemp production has been on the decline, falling from over 300,000 metric tons in the early 1960s to one fifth that level today (Figure 1). In 1998, world hemp fiber production was about 66,500 metric tons, with China producing more than 38 percent of total world supply. China and other significant producers such as Russia, South Korea, Ukraine, and Romania all subsidize hemp production to some extent.
Figure 1: World Hemp Fiber and Tow Production, 1961-1998
The European Union (EU) has subsidized hemp cultivation since at least 1988. In spring 1998, the EU cut the subsidy 25 percent to 537.47 Ecus per hectare ($222 per acre) due to increases in raw hemp production, insufficient hemp processing activity, and increased marijuana production. These subsidies keep hemp prices artificially high in the EU. Last year French hemp fiber sold for about $200 per ton, including the subsidy.
In spring 1998 Canada authorized commercial hemp production, most of which is under contract. The largest contractor negotiated with local farmers to grow hemp at $240 per ton in Canadian dollars (U.S. $160). Although the Canadian hemp industry realizes it may take years for Canadian fiber processors to get their quality comparable with Chinese or European mills, enthusiasm is strong.
What is happening to global hemp trade? World hemp exports have declined over the years, falling from over $12 million in the early 1960s to $3.4 million in 1996 (unadjusted for inflation). Unfortunately, 1997 data is not available.
Figure 2: World Hemp Fiber and Tow Exports
World export prices have grown over the last few years (Figure 3). Although export prices include some transportation costs, hemp prices have clearly grown faster than the rate of inflation. However, most of this growth in fiber prices is due to the additional processing the fiber has undergone prior to sale. Prices for raw hemp fiber are basically stable, with only slight increases in the last few years.
Figure 3: World Hemp Fiber and Tow Export Prices
If the U.S. were to legalize industrial hemp production, U.S. hemp producers would have to compete with imported hemp. The U.S. import price for industrial hemp (processed, but not spun) averaged $1.91/lb. in 1996, compared with $2.33/lb. in 1995 and $2.30/lb. in 1994. Again, these prices include some additional value added to the raw hemp.
World hemp seed production has fallen by half since the early 1960s and has stabilized at around 34,000 metric tons per year (Figure 4). China produces nearly 80 percent of total world production (primarily for oil and meal) and France dominates world production of certified seedstock.
Figure 4: World Hemp Seed Production
In 1996, world hemp seed exports totaled $7 million. Importantly, hemp seed prices have been extremely volatile the last 10 years. As can be seen in Figure 5, export volume increases in the late 1980s increased export sales very little.
Figure 5: World Hemp Seed Exports and Values (1961-1996)
World exports surged during the late 1980s as China began dumping hemp seed on the world market, tripling world trade and depressing world prices from about 25 cents/lb. to 15 cents/lb. In 1991, China ceased exporting hemp seed and prices nearly doubled in 1992. Conversely, in 1995 world export volume fell by 13 percent, while seed export prices almost doubled (Figure 6).
Figure 6: World Hemp Seed Export Prices
It would be very difficult for many farmers to weather this kind of price fluctuation which has important implications for increases in world production in the future. Similar to hemp fiber, the world market for hemp seed is so small that even modest increases in world production can significantly depress world prices.
U.S. hemp imports have grown significantly in percentage terms over the last few years but remain negligible in absolute value. In 1997, the United States imported a total of $2.9 million in hemp products, including woven fabrics ($1.29 million); fiber ($100,000); and yarn ($25,000) (Figure 7).
Figure 7: US Industrial Hemp Imports 1993-97
Finished goods (such as clothing) made from 100 percent hemp, or those with some hemp content (such as shampoo) are combined with other imports and are not reported separately by the U.S. government. According to Jon Gettman’s report Hemp Entrepreneurs and U.S. Public Policy: The 1996 Hemp Business Survey, a conservative estimate for finished hemp product sales was $23.3 million in 1996, consisting of over 11,000 retail sales transactions per week. It is not known what percentage of those products are actually hemp fiber or oil.
Almost three fourths of all U.S. imported hemp fabric is from China, with Eastern Europe also a significant supplier. Although U.S. hemp fabric imports have grown significantly larger in percentage terms, they are still very small in absolute value ($2.2 million).
Annual U.S. hemp yarn imports have averaged $22,000 a year the last four years, but jumped to $630,000 in 1997. Major suppliers include Poland, China, Hungary and parts of the European Union.
Hungary, the Netherlands, China and the Philippines are the largest suppliers of raw or processed hemp (not spun) to the United States. (totaling $105,000 last year). Transportation costs are quite high for shipping a low-value commodity such as raw hemp and fiber imports are typically for testing processing equipment.
In the past few years, the United States has also re-exported small amounts of industrial hemp. In 1997, the United States exported $271,000 of hemp fiber and $99,000 of hemp yarn to countries such as Canada, European Union and Singapore, rendering net hemp imports about $2.5 million.
Cannabis sativa l. is classified as a Schedule 1 Controlled Substance (regardless of its narcotic or THC content). But international treaties signed by the United States declare that hemp with less than 0.3 percent THC shall be considered industrial hemp and not marijuana.
The U.S. Drug Enforcement Administration (DEA) holds firmly that industrial hemp and marijuana are indistinguishable and that hemp advocates have a hidden agenda of legalizing marijuana. DEA is adamantly opposed to hemp cultivation in the U.S.
The U.S. Department of Agriculture (USDA) has been mostly silent on the issue. The 1995 USDA report, Industrial Hemp and Other Alternatives for Small-Scale Tobacco Producers, acknowledged that, unless economic viability is proven, "hemp fabrics and paper uses will likely remain a very small niche market . . .satisfied by imports." USDA also claims that European research has not established the profitability of industrial hemp production, yields must increase to reduce costs, and research is needed to develop modern hemp fiber harvesting and processing methods.
American Farm Bureau (AFB) reversed its 1996 resolution supporting industrial hemp. During their annual meeting in January 1997, AFB voted against the research and production of industrial hemp. The Kentucky Farm Bureau has not endorsed the production of industrial hemp.
Several states are pursuing their own policy initiatives. Since 1995, eleven states have written bills supporting industrial hemp production, nine of which have been introduced as legislation. Only Vermont, Hawaii, and North Dakota have authorized economic feasibility studies. Industrial hemp bills in Colorado, Hawaii, Iowa, Kansas, Minnesota, Missouri, Oregon, and Virginia all failed in 1997.
In 1996, the Vermont legislature mandated the analysis of market conditions that would affect the development of an industrial hemp industry, the agronomic conditions required for production, and analysis of other research regarding THC levels of industrial hemp. In North Dakota, North Dakota State University was mandated to study hemp cultivation, marketing, environmental and law-enforcement issues. Both the Vermont and the North Dakota research will be discussed subsequently.
Hawaii passed legislation in 1996 to investigate the economic, agronomic and legal implications of industrial hemp production. Ongoing research is studying the value of hemp compared to other similar crops, including kenaf and sunn hemp; the interest of Hawaii landowners, businesses and other parties in growing industrial hemp; federal procedures for obtaining permits; and current drug policies that inhibit and prohibit hemp production.
Although hemp legislation in Kentucky failed to get out of committee last year, in May 1998 a lawsuit by six farmers, the Kentucky Hemp Growers Cooperative and the Hemp Company of America was levied against the Drug Enforcement Administration for failing to make a distinction between industrial hemp and marijuana. It is not known when an opinion will be rendered.
In March 1998, the Resource Conservation Alliance filed two petitions on behalf of the North American Industrial Hemp Council. One petition calls for DEA to end its classification of hemp as a Schedule 1 drug and the other asks USDA to develop a regulatory framework for legalized hemp cultivation.
Industrial hemp must be competitive not only with other fiber and oil substitutes, but with other production alternatives (for example, corn and hay). While production costs should be similar across agronomic regions, the lack of hemp processing facilities in the United States makes demand and profit projections speculative. It would require significant amounts of investment to make the U.S. hemp market globally competitive. However ,any investment in the U.S. hemp market would most likely be technologically up-to-date.
Research from the University of Vermont concluded that the specialty paper and textile industries showed the greatest profit potential, but the lack of processing facilities and other infrastructure required made demand and profit estimates conjectural. The study claimed that "establishing one hemp apparel manufacturing firm and one processing plant appeared to be comparable to establishing one cotton apparel manufacturing firm and one processing plant in terms of GDP and employment based on the assumptions of the study. . . . The economic impact in terms of GDP and employment appears to be similar in terms of growing hemp versus hay, based on the assumptions of the study."
Paper experts agree that specialty papers rely on smaller scale production and product diversity to capture higher profits per unit on a lower volume of production and new entrants would have a chance of succeeding. With regard to textile manufacturing, it is important to note that most cotton production and processing has moved out of the United States as cotton subsidies are wiped out and labor costs are lower elsewhere.
Researchers from North Dakota State University asserted that hemp production could be profitable, but were concerned about the impact of increased production on world prices, the decline in world production, and the ability of law enforcement agencies to regulate hemp production. However, the existence of a state-of-the-art oil-processing facility in North Dakota that can process hemp seed may give that state a competitive advantage.
The results of the University of Kentucky Center for Business and Economic Research (CBER) study have added to the hemp profitability discussion. The researchers talked with hemp growers, processors and marketers to calculate production costs and returns. Although one could argue with specific yield or demand projections, the study does a good job of compiling reasonable estimates.
However, the cost and demand projections were gathered from the "pro-hemp" side of the debate. Industry experts and observers of the large paper, textile, feed, and oil companies were not consulted in assessing the future demand for hemp, which may paint a very different picture of profitability.
The CBER study correctly notes that U.S. hemp production would likely displace economic activity generated by a less-profitable crop alternative (such as hay, soybeans, or wood pulp). Alternatively, the pie for agricultural commodities might get larger if we substituted hemp for petro-based products. Of course, which would expand faster—demand or supply—is a key part of price, thus profitability, question.
One of the questions the CBER study raises is, "Does Kentucky have an edge in the certified hemp seedstock market?" (which is estimated to have a higher return than hemp fiber and oil production). Nearly all seedstock production in the United States is under contract with companies such as DEKALB or Pioneer who diversify regionally to minimize production risks (in the event of drought, etc.). It is reasonable that U.S. hemp would travel a similar path. Further, what premium could hemp seedstock farmers earn over producing hemp seed for grain?
The CBER study forecasts that hemp seed grain would sell for 15 cents/lb. versus 60 cents/lb. for hemp seedstock, or a 400 percent premium to the farmer, which appears to be out of line with other seedstock markets. For soybean, wheat and corn seedstock, farmers typically earn a 10 percent premium above market price. (For example, if corn is selling for $2.25 per bushel, corn seedstock would contract for about $2.48/bu.) Cotton seedstock premiums are quite a bit higher with a 50 percent premium.
Perhaps the biggest uncertainty in projecting hemp profits is that of price volatility. Any changes in supply (such as production costs or the number of producers) or demand will result in price fluctuations. For example, an increase in the market supply of hemp would lower prices, allowing farmers to sell more hemp. Would the reduction in hemp prices be outweighed by the increase in hemp sales?
As discussed earlier, the hemp seed market has endured extreme price volatility over the last 20 years, particularly due to Chinese intervention. As China dumped hemp seed on the world market, prices fell 43 percent to 15 cents per pound, the break-even price for hemp farmers in CBER’s study. A significant part of this price sensitivity is due to the relatively small volume of the hemp market.
Using hemp market data over the last 36 years, a 10 percent decrease in hemp seed prices resulted in a 13 percent increase in hemp seed demand, while a 10 percent increase in hemp seed prices would result in a 6.7 percent decrease in hemp seed demand. Thus, the market is much more responsive to decreases in hemp prices. The CBER study used price information from the corn and soybean markets to project hemp market demand changes which is basically irrelevant.
While hemp fiber prices have been much more stable, recent small increases in world production have caused fiber prices to fall by half in 1996. With the small volume of the hemp fiber export market—only 1.9 million tons in 1996!—it is easy to see how small increases in hemp production could dramatically lower world prices. The current demand for hemp is not sufficient to absorb the production increases.
Despite the merits of hemp fiber and oil, the global market has been on a downward trend and remains negligible in magnitude. Total world trade in hemp fiber and seed amounted to only $10.4 million in 1996! Processing costs are one of the largest obstacles the hemp industry faces. For example, bleached softwood pulp currently sells for about $800 (U.S.) per ton compared to hemp pulp at about $2,100 (U.S.) per ton. New processing technology must be found for hemp to be cost competitive.
Hemp profits also suffer from price volatility. Projected hemp demand, coupled with a low volume market, makes profit estimations adventurous. At current world prices it does not appear that hemp can compete on a large scale and may be confined to a specialty market until processing technology improves.
None of the large multinationals has openly supported hemp legalization in the United States. Why? Corporate America has the capacity to invest in hemp production and processing facilities all around the world. They have access to plenty of raw material and low labor costs (China and Eastern Europe) and a stable economic and political environment where hemp production is legal (the European Union). But investment in hemp processing remains negligible. For example, there are only about 20 paper mills worldwide that use hemp as a fiber source, which produce about 0.05 percent of the world’s annual paper production volume.
Again, it must be emphasized that hemp production is not the problem. It is the challenge of improving hemp processing that will open the doors of cost competitiveness. If the large multinationals can’t make hemp work in the marketplace, what type of costs and return differentials might small farmers and businesses work towards? That is the crux of the great hemp debate.
A complete set of bibliographic references is available from the author.
Valerie L. Vantreese is with the Department of Agricultural Economics at the University of Kentucky.