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Back in the regulated marijuana industry’s more heady days, a U.S. hemp-derived CBD subsidiary seemed like the must-have accessory for any Canadian cannabis company worth its bud.
Canopy Growth Corp. owned a hemp farm in Springfield, New York, and planned to build a $150 million industrial park in Kirkwood, New York, to produce hemp products.
Aurora Cannabis bought Reliva – a Massachusetts-based producer of hemp-derived CBD products – in a $40 million deal that included potential earnouts.
And Cronos Group spent hundreds of millions of dollars to acquire the Lord Jones hemp CBD brand.
The purchases came after the passage of the 2018 U.S. Farm Bill that legalized low-THC hemp, including hemp-derived CBD.
That legislation generated optimism about a new, multibillion-dollar market for hemp-derived products.
Now, after investor exuberance about the cannabis sector has largely worn off, several Canadian marijuana companies have retreated in one way or another from the hemp-derived CBD market south of the 49th parallel:
The Canadian pullback from hemp CBD in the U.S. partly reflects the diminished fortunes of once-high-flying Canadian cannabis licensed producers.
It also reflects a general lull in the American hemp-derived CBD market, given the U.S. government’s continuing struggle over how to regulate products containing CBD.
“It’s a very, very difficult market in the U.S. right now,” said Bethany Gomez, managing director of Chicago-based cannabis analytics firm Brightfield Group.
Brightfield Group data shows the U.S. CBD market peaked in 2021 at roughly $4.7 billion in sales before contracting to $4.4 billion in 2022, with another decline expected in 2023.
Canadian ambitions
When big Canadian cannabis companies originally invested in U.S. hemp-derived CBD assets, they were well-capitalized and eager to expand their operations around the world.
“And around 2020, it was starting to become clear that there’s only so much that these cannabis companies can grow within the country of Canada – Canada’s only so big, and there’s only so much cannabis that can be consumed there,” Gomez explained.
Canadian licensed producers (LPs) invested heavily in international markets, but Gomez said the U.S. was “the golden prize.”
As publicly traded companies in the U.S., those LPs couldn’t deal with a substance that’s federally illegal.
The American hemp-derived CBD market seemed like a way “to get a foothold there without violating federal law,” Gomez said.
“They could play in the CBD space and then eventually take that presence in CBD into the (high-THC) cannabis space. ”
For Canadian firms, operating in the U.S. CBD space was meant to be “an opportunity to plant the seed of a brand early on (and) get that into the mainstream,” said Beau Whitney, chief economist of Portland, Oregon-based hemp and marijuana data and analysis firm Whitney Economics.
“And then, as the adult-use market opens up, you’ve already got a brand established – and then you just convert over to your adult-use product line.”
American hemp CBD headwinds
So far, the plan to leverage U.S. hemp CBD assets to get a leg up on adult-use cannabis in the event of federal legalization hasn’t played out as expected.
“Fast forward to 2023 – there’s no movement at all on federal legalization for cannabis,” Brightfield’s Gomez said.
“There’s very little optimism in federal legalization toward cannabis, there’s no movement from the (U.S. Food and Drug Administration) on (regulation) of CBD, and that market has really hit a standstill.
“And there’s not a lot of promise, in the near term, of cannabis taking off, or having a type of triggering event that would allow them to really tap the U.S. cannabis market.”
In the meantime, the cannabis industry faces an ongoing “capital crunch,” Gomez added – and investors aren’t willing to wait for businesses to become profitable given the uncertainty of federal legalization.
“There’s this pressure to get rid of anything that is not profitable. … Cash is king, and people are starting to run low on cash in many areas.”
Cronos, for example, said it was exiting its American hemp CBD operations “to improve its cash flow in the near term and position itself to directly enter the U.S. THC market” when regulations permit.
Cannabis economist Whitney said Canadian LPs are “pulling back (and) focusing in on their core business” as well as cutting fixed costs in both the U.S. and Canada.
Whitney noted another challenge for companies operating in U.S. hemp CBD: State-level uncertainty amid a lack of federal regulatory guidance.
“And so this is also a risk-mitigation play,” he said, citing shifting state regulations regarding hemp-derived cannabinoids.
Despite the pullback, Canadian cannabis companies haven’t entirely abandoned the U.S. hemp market.
Canopy Growth still sells Martha Stewart and This Works CBD products in the U.S.
Tilray Brands’ Canada-based wellness brand, Manitoba Harvest, operates in the U.S., although Brightfield’s Gomez noted the Tilray subsidiary is more focused on hemp foods than CBD products.
Village Farms International, the parent company of Canadian LP Pure Sunfarms, also owns hemp CBD company Balanced Health Botanicals, although Village Farms isn’t strictly Canadian.
Evolving business practices
The continuing Canadian pullback from U.S. hemp CBD comes as overall hemp production has declined, with U.S. Department of Agriculture data showing a nearly 50% decline in planted hemp acreage between 2021 and 2022.
For hemp CBD, “the amount of licensed acres in the United States right now is less than what it was before the 2018 Farm Bill,” economist Whitney said.
“And so, the number of cultivators have been dramatically reduced for cultivation of hemp with the intention of cannabinoid use, or cannabinoid productization.”
Meanwhile, Whitney sees an evolution in the way some companies approach the cannabis market, citing as an example Canopy’s move toward an “asset-light model” with third-party sourcing.
Whitney expects companies will “develop that very same model for hemp and hemp-derived products.”
By way of analogy, Whitney offered ketchup.
Canadian LPs and U.S. multistate marijuana operators alike have “tried to be experts in the equivalent of growing tomatoes, of processing tomatoes, of making ketchup and distributing that ketchup,” he said.
But ketchup kings such as Heinz or Hunt’s “don’t do that with their ketchup,” he continued: They contract out to tomato growers and processors, then brand and sell the ketchup themselves.
“I think that’s the very same model that we’re starting to see evolve for cannabis, for the LPs out of Canada, and for some of the MSO brands in the United States,” he said.
“Now it’s starting to come into a branding play and an outsourcing play, (a) contract-manufacturing play, much more so than a vertical-integration play – even though, with the Trump tax cuts a few years ago, it was favorable to develop a vertically integrated model.”
The retreat of some companies from the American hemp CBD sector might benefit those who remain, suggested Brightfield’s Gomez.
Hemp CBD assets are “being sold at a fraction of the cost that these companies paid for them,” she said, “which indicates that valuations are an order of magnitude lower, and there’s a lot of people that are out there right now that are shopping for distressed assets.”
Solomon Israel can be reached at solomon.israel@mjbizdaily.com.
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