Since Congress approved the 2018 Farm Bill (officially titled the Agriculture Improvement Act of 2018) into law in December and ushered in a nascent era of U.S. Department of Agriculture oversight, a domestic hemp industry has begun to take shape. State regulators are sunsetting the pilot programs that began several years back and working to transition existing and new businesses into this burgeoning federal regime.
At the same time, the cannabis industry is evolving on its own track. The adult-use marketplace hummed to life in the earlier years of this decade, with Washington and Colorado voters leading the way. Now, questions of federal reform and descheduling continue to shape the national discussion—in Washington and across the country. If it’s the inevitability that so many business owners say it is, what will federal legalization look like?
LOOK FOR MERGERS AND ACQUISITIONS IN THE SPACE
Many cannabis businesses are taking matters into their own hands and consolidating the market before the federal government comes to a conclusion. Based on our SP+GTM algorithm, the cannabis industry experienced 107 mergers and acquisitions (M&A) during the first three months of 2019, compared with 68 deals during the same period in 2018. Canadian firms are driving much of the M&A activity, as they take advantage of a nationally legal marketplace in Canada to acquire U.S. assets.
But what about hemp? Will the hemp industry develop along the same market consolidation tracks that cannabis is tracing now?
The key points from SP+GTM algorithm are: (1) The U.S. hemp market will mature more rapidly than the adult-use and medical cannabis markets due to federal legalization, especially in CBD and THCA oil extract production. (2) Legalization has opened access to financing and IP protection, providing access to capital to fund new and expanded operations throughout the country. (3) Hemp cultivation and manufacturing is still an incredibly capital-intensive business, with extraction equipment costing upwards of $4 million for some industrial units.
WHAT'S NEXT FOR HEMP
The hemp M&A market could advance at a faster pace than the cannabis industry because of its legal status. Hemp and hemp extracts are ‘federally legal,’ subject to the FDA's pending guidance, and the hemp industry does not operate under the same limited license regime that the marijuana industry does. Indeed, there are few barriers to entry for a company to start their own CBD line—they just procure oil, packaging and build a website, and they are off selling product.”