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Capitalizing on Legal Hemp!

An Entrepreneur’s Guide By Mark Goldfogel

In December of 2018, the U.S. Government legalized hemp; joining China, France, Great Britain and most of the developed world in recognizing that rope is not dope. This ended a prohibition on hemp dating back to 1937 and foretells the end of marijuana prohibition. To date, the dope or marijuana version of cannabis has been legalized on a state level in 33 states. Ten of those: Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, (and the District of Columbia)have legalized marijuana for anyone over the age of 21.

So where do entrepreneurs look to make their fortune?

To better understand the profit potential, it is important to appreciate the cannabis plant. Steven DeAngelo, founder of Harborside Health Center, told many industry leaders in early 2010 to stop using the term marijuana and refer to the plant as cannabis. In his opinion, the term marijuana is racist, derogatory and limiting to the public’s understanding of the plant and its potential. I argued at the time that calling our industry cannabis would confuse the public between the THC version of the plant, referred to as marijuana (marihuana), and the THC-free version, also known as hemp. That may have been his objective.

It is critical to understand that hemp is any version of the cannabis plant that contains 0.3% THC (delta 9-TetraHydroCannabinol) or less. Only the female portions of the plant produce the flowers which are necessary for three of the four industry categories of the plant. Both hemp and marijuana varieties of cannabis have male and female plants. Hemp is NOT the male version of the plant. A female hemp plant can not only mutate into a male (hermaphrodite), she can get frisky and raise her THC content above 0.3% and she is no longer covered by the U.S. Farm Bill which legalized hemp, not marijuana.

Rather than thinking of cannabis as one plant, consider it four industry groups. The four F’s, as I have coined it, Food, Fiber, Fuel, and Feelings. To date, most of the media, government attention, conservative mom fervor, and dot.com activity has taken place around the fourth category, so I will start there.

Feelings

The Feelings category of cannabis is where the government has the most to say and where the profits and the risks are the highest. Once we are in the Feelings category of the plant, there are two sides: the psychotropic THC side, called marijuana, which is making billions in 33 states and the District of Columbia, and the non-psychotropic CBD version (0.3% THC or less). The CBD version was recently awarded a pharmaceutical license (1) (GW Pharmaceuticals) for use on children with seizures. Effectively you can think of CBD as “Near Beer”. Taste, flavor and applications can be the same for the THC or CBD versions. The latter simply doesn’t get you high, but according to the U.S. Food and Drug Administration, it does stop seizures in children.1

One of the many paradoxes of this industry is that the U.S. Government owns the patent on Cannabis as a medicine (2). Our same government has proclaimed–until July of this year– that cannabis is very dangerous and is a Schedule 1 drug with “no currently accepted medical use and a high potential for abuse.” With the Food and Drug Administration’s (FDA) approval of Epidiolex to GW Pharmaceutical, the U.S. Government has moved the non-THC version of the plant to a Schedule 5 drug, and thereby carving a lane for G.W. Pharmaceuticals to charge $32,500 a year for a medicine that is legally available as a nutraceutical in many states and online nationally for approximately $1,200 per year for a comparable dosage. According to Tim Broeren, President of full spectrum CBD products manufacturer Wasu.US, “Many of our customers ingest 40 mg to 100 mg of CBD per day at a retail cost of $100 to $190 per month ($1,200 to $2,300 per year). We want to provide access to this effective compound to the masses and expand familiarity with its results.”

Proponents of the Farm Bill proclaim that CBD derived from Hemp, is now fully legal. The FDA has a different point of view. According to Steven Gottlieb, head of the FDA: “Selling unapproved products with unsubstantiated therapeutic claims is not only a violation of the law, but also can put patients at risk, as these products have not been proven to be safe or effective.” 3

While not proven to be safe or effective, selling the oil extracted from the flower of the cannabis plant provides the biggest profit potential in the cannabis industry today!

Each of the 33 states that have legalized marijuana have enacted state driven laws, predominantly around “Seed To Sale Tracking,” a paradigm I first proposed to the State of Colorado in 2010. The state-run program prohibits interstate traffic, requiring each state to maintain separate growing, production and distribution facilities. Some states also have restrictions on out-of-state business ownership. Also any businesses involved in the marijuana side of the industry are subject to IRS Tax Code 280E (4) which limits deductions for any business involved with the a Schedule 1 drug to Cost of Goods Sold.

If I am a professional assassin, I can deduct my travel, healthcare and time on the shooting range toward my illegal business. But as a licensed marijuana dispensary I can’t deduct my rent, payroll or R&D. Nothing but the cost of the THC enriched candy, concentrate or the flower itself.

It is important to understand that the 2018 Farm Bill did not legalize marijuana, the THC version of the plant,but I do believe it bodes well for future enlightenment. Certainly the Safe Access to Banking Bill should breeze through government now that neither Jeff Sessions nor Pete Sessions are there to obstruct this common sense legislation. I am proud to have been a part of The Fourth Corner Credit Union, which directly impacted this legislation.6 This is a phenomenal example of the bleeding edge of this industry and is important for investors to note.

On the CBD side, patients notice and report amazing results for sleep, anxiety, stomach distress, autism, and many other ailments. But without government approved testing, there are no claims that anyone can make about the plant from a Feelings category. This leaves this category with lots of profit potential and huge possibility for risk.

CBD companies are sprouting up like weeds to take advantage of the niche of non-psychotropic and non-state regulated CBD enriched products from gummy bears to bath balms. They are shipping intrastate and internationally with abandon. Our bodies are filled with endocannabinoid receptors and whether it gets you high or not, CBD definitely effects how a person feels. It will be interesting to see if the government enforces its domain on what seems to be benign substances.

Christie Lunsford of The Hemp Biz Conference shared, “From 2012, to 2013, I tracked over 150 people who were consuming CBD from hemp daily for a variety of health concerns. Feedback from them was overwhelming – that CBD based products were having significant positive impacts on their overall sense of well-being. Fast forward to 2018 and we are on the cusp of an international explosion of new CBD companies offering a plethora of products. CBD manufacturing companies need to understand the new playing field the regulated market brings and follow guidelines set by the FDA to ensure product quality for consumers.”

Now it is time to shed light on the other three categories of cannabis. Food, Fiber and Fuel. Each has the potential to eclipse Feelingsas a category. Each has been unquestionably legalizedby the farm bill. These hemp industry categories are not subject to IRS Code 280E.Products grown and manufactured for these categories can be shipped to any state and worldwide where accepted.

According to Mark Mason, leading cannabis attorney and badass who led the lawsuit against the U.S. Federal Reserve on behalf of the cannabis industry, “There is no drug testing because the plants contain no THC and are used for industrial purposes.Certain Law Enforcement forensic laboratories have terminated their Marijuana certification and spot or field testing programs due to the legalization of Industrial Hemp because the marijuana spot or field tests cannot differentiate between Industrial Hemp and Marijuana. Separating Hemp from Marijuana is a new challenge for law enforcement, which now needs to develop a new field test in order to analyze plant material and the THC level to distinguish Industrial Hemp from Marijuana. Law Enforcement is working to address this issue ‘as timely as resources allow’, while legalization advocates work to reform marijuana laws to make distinguishing dope from rope legally unnecessary.”

Marijuana, the Gateway Drug for Hemp!

Food

Hemp is a superfood. Unlike marijuana and CBD products, the benefit is derived from the seed, not the flower. Paradoxically, if you let the flowers go to seed through fertilizing (intentionally or not) they become useless as oil for Feelings. All the energy goes into producing seeds, not cannabinoids, and they lose their potency in order to produce protein.

According to Wikipedia (7): A 100-gram portion of hulled hemp seeds supplies 586 calories. They contain 5% water, 5% carbohydrates, 49% total fat, and 31% protein. Hemp seeds are notable in providing 64% of the Daily Value(DV) of protein per 100-gram serving.[20]Hemp seeds are a rich source of dietary fiber(20% DV), B vitamins, and the dietary minerals manganese(362% DV), phosphorus(236% DV), magnesium(197% DV), zinc(104% DV), and iron (61% DV). About 73% of the energy in hemp seed is in the form of fats and essential fatty acids,[20]mainly polyunsaturated fatty acids, linoleic, oleic, and alpha-linolenicacids.[21]

Hemp has largely been missing from the U.S. diet because without local growing and processing facilities, it is not a financially beneficial form of protein distribution. That changed with The Farm Bill. Hemp is a better source of protein than soy and much more gentle on the environment. The passage of The Farm Bill will add hemp as a rotation crop for millions of acres virtually overnight. This creates a new opportunity for harvesting and processing equipment. My first job out of college was with John Deere and I never understood why until this year.

The growing and harvesting of millions of tons of hemp will cause a capacity bubble in processing. Turning hemp seeds into hemp meal–for example– breakfast cereal, requires processing mills. While some existing mills might be retrofitted to meet the need, the knowledge and expertise in processing hemp for food was lost to the U.S. in 1937, but not the world. Early movers like Hemp Way Foods stand to gain as health conscious consumers seek high protein, gluten-free alternatives.

Carla Boyd, CEO of Hemp Way Foods told me, “This opens the door to many opportunities for Hemp Way Foods including: retail grocery buyers feeling secure offering hemp food products, the retail customer feeling secure since they are now buying a federally legal agricultural crop, and expanded funding/investment options for the small hemp business owner” she went on to say, “educating the public is a key aspect in growing a hemp business.”

While we are talking paradox, if a huge food hemp seed plantation is fertilizing its flowers to encourage seed production, the CBD or marijuana grow downwind is very likely going to get pollinated and ruined for marijuana or CBD flower production. We can’t control the wind, or those concupiscent male cannabis plants looking to mate with any flower they can find.

This is another appropriate time to mention that females mutate into hermaphrodites. Not a big deal if you are a seed farmer but fatal if you are a marijuana farmer. I would anticipate that localities heavily invested in marijuana grows will ban hemp (seed) producing grows. Indoor grows will be wise to beef up ventilation filters. Pollen carries across geography and even state lines. This is one of the biggest unseen risks on the horizon.

“Genetic drift is a contentious issue in all of agriculture and cannabis will just throw more wood on the fire. But there are some sound research models that can help resolve this issue before things escalate. Even if you assume these programs are implemented in a timely fashion, we still have to recognize the risk that patchwork, protectionist (and potentially illegal…) policy produced by local jurisdictions can cause. This impacts operators presently in the industry, and those jumping in now that the Farm Bill has been enacted” says Tom Dermody, Vice President of Operations at Bija Hemp LLC.

One of the benefits of The Farm Bill is that hemp growers will now be able to apply for insurance. This was previously unavailable and stood in the way of any government sponsored testing or bank financed grow loans. Without this infrastructure support, hemp was simply unsustainable to grow.

Fuel

Remember when gas was $4 a gallon and people were driving around in biodiesel busses smelling of french fries? Hemp can produce two types of fuel, biodiesel and ethanol/methanol. Hemp turns out to be the most cost-efficient and valuable of all the fuel crops we can grow on a scale that could help fuel the world (9).

Now that hemp can be mass-produced as a rotation crop and grown on lands that have not been viable for traditional crops or in need of remediation, access to source material is expected to lower the cost of fuel per gallon, making this a viable fuel additive. I wonder if this means that vehicles will smell like rock concerts?

Fiber

I have intentionally saved the best for last. Fiber is the least interesting, political, controversial and profitable by volume of the four categories and it will unquestionably usurp all the others, combined! Remember the line from the movie The Graduate, “Plastics are the future.” Well almost everything made of plastic can be made from hemp, and its biodegradable!

And let’s consider rope and traditional fiber products. As a fiber, hemp beats cotton hands down. China will likely always own the hemp textile fiber segment, but there are millions of fiber applications that entrepreneur ingenuity need only apply to world’s most durable, biodegradable, renewable substance.

Contemplate car panels, building panels, paper, shirts, shoes and snacks. Hemp can be the snack and the snackbox. Hemp has more uses than Dr. Seuss’ Thneed, according to the Lorax “A fine something that all people need”. Hemp is one of the most durable, strongest natural substances on earth. It can be used to pull toxins from the soil and mulched into animal bedding.

The best part of the fiber category is that it is complementary to every other industry category. You can turn the fibrous stalks into a nice cozy home for you or your horse. Once the flower and or the seeds have been used, 90% or more of the plant remains for Fiber! Of course this varies by cultivar, and not all fiber is created equally, but no other industrial plant has this many applications for whole plant usage. This does not even mentioned applications for the plant’s roots.

Summary

The industries and opportunities for cannabis are endless. They break down into four industry types: Food, Fiber, Fuel and Feelings. Each industry requires specific cultivation, processing, distribution, and ancillary businesses.Only Feelings involves the flower of the plant and can get you high and can stop seizures if you’re a baby. And the seizure stopping version can’t get you high. Are you keeping up?

There are thousands of cannabis cultivars that hybridize the plant. And the plant itself is widely variable and can grow in many different climates. Legalizing hemp in the United States will have impacts on almost every industry in every state and will change the world.

According to Bob Hoban, leading cannabis attorney, “The passage of the Farm Bill, which includes the outright legalization of industrial hemp, makes industrial hemp an ordinary agricultural commodity across the United States. This represents a seismic shift in United State’s cannabis policy. But more importantly,it signals an entire hemp revolution, which will likely be more significant than the Industrial Revolution, and without the damaging environmental consequences.”

One of the biggest bottlenecks in the industry will be processing.It won’t take nearly as long to grow hemp as it will take to build factories that process the material into usable form and even longer for manufacturers to substitute hemp materials for their previous sources of fiber or protein. But processing will come, and industries will switch to hemp for its environmental benefit, flexibility and cost.

Having said all of that, perhaps the most opportunity for entrepreneurs in the cannabis industry will come from ancillary businesses. I have helped found four companies in the cannabis industry since 2010 and they were all ancillary businesses. One recently received a $70M valuation, despite doing almost everything wrong.

On the marijuana side, ancillary businesses are not subject to IRS 280E restrictions if they don’t touch the plant. They are also not limited by intrastate or international commerce.

On the hemp side, the opportunities for ancillary businesses could not be stronger. Unlike marijuana, which had a thriving underground business running during the entirety of prohibition, the hemp industry has been dormant in the U.S. Everything involved in the growth and processing of hemp and hemp derived products must be custom developed understanding the idiosyncrasies of the specific cultivar and application. For example, the harvesting equipment used for seed producers will be different than CBD oil. The insurance, licensing, testing, banking, and packaging will all be unique. The laws for each industry segment will be wildly different. Obviously the testing requirements for a food supplement will be different than a bicycle seat. But both products will need companies skilled at supporting their needs.

I have never been more excited to be alive. One Forrest Gump moment of inspiration, “simply track from Seed to Sale and you have diversion control, health and human safety and TAX REVENUE.” Today that system is the most complicated inventory control mechanism for any industry. A racehorse, government committee designed into a camel. But it has allowed the growth of marijuana which gave birth to hemp which currently supplies my dog with CBD medicine for her hip. Don’t tell the FDA.

Sources:

1 https://www.pharmaceutical-journal.com/news-and-analysis/news/fda-grants-first-approval-of-a-cannabis-derived-medicin e/20205071.article?firstPass=false
2 https://patents.google.com/patent/US6630507B1/en
3 https://www.latimes.com/nation/nationnow/la-na-hemp-cbd-illegal-20181222-story.html

4 https://www.irs.gov/pub/irs-wd/201504011.pdf
5 https://www.congress.gov/bill/115th-congress/senate-bill/1152
6 https://mjbizdaily.com/marijuana-focused-credit-union-gets-conditional-approval-federal-reserve/

7 https://en.wikipedia.org/wiki/Hemp

8 http://hempway.net/

9 http://www.hemp.com/hemp-education/uses-of-hemp/hemp-fuel/

Mark Goldfogel

Mark Goldfogel

Mark Goldfogel is an entrepreneur, consultant, writer, and speaker. He is credited with having first proposed “Seed to Sale Tracking” as a means of diversion control, taxation, and health and human safety to the State of Colorado. He co-founded the cannabis industry’s first compliance inventory control system and was a key advisor to The Fourth Corner Credit Union, a financial institution with a banking charter to support the “Hemp and Cannabis Movement.” He has advised States, non-industry companies wishing to enter the industry, and startup companies capitalizing on the opportunities and avoiding the potholes of the budding cannabis industries. For a free copy of his book, Smoking Something, The Cannabis Paradox10, (Amazon $24.20) please send an email to [email protected]

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