If you have been paying attention to various state elections recently, you have likely realized that industrial hemp has been able to generate a significant amount of legal attention. With each passing year, the hemp industry’s momentum towards legalization seems to be continuously increasing.
There is still a significant amount of work before hemp can be considered to have the same legal status as other commercial crops (corn, wheat, etc.), but the general progress of the industry remains quite clear. Even in the face of some legal ambiguities, the hemp industry has enjoyed increased levels of investment, increased access to public markets, and increased levels of research and development.
As is the case with any major industry, successfully investing in the hemp industry will require you to successful time the market. While investing in a hemp growing operation can earn you significant returns in a short amount of time there are still some operations that have difficulty getting off the ground. If you do hope to become a successful investor in the hemp industry, you will need to have a firm understanding of the variables making the industry unique.
In this article, we will discuss the unique financial factors affecting the hemp industry and how you could become a successful hemp investor. Though there are still many components of the industry that make it relatively difficult to navigate, with the right knowledge in hand, you can still earn a significant return on your investment.
Individual Firms are Volatile, the Industry as a Whole is Trending Up
At first glance, one of the reasons that many investors are hesitant to enter the hemp industry is that individual firms tend to be quite volatile over time. Of the firms that have access to public markets, it is not unusual to experience 10% value swings (both upwards and downwards) within the same week.
However, while individual firms do indeed demonstrate a relatively high amount of volatility, the industry as a whole has been generally moving in a positive direction. In fact, over the past ten years, there has never been a year where the hemp industry had a smaller level of working capital than it did the year before. The clear trend of industry growth mixed with individual firm volatility strongly resembles the tech industry in the 1990s (which is clearly here to stay). In order to become a successful hemp investor, it may be wise to diversify and invest in many different hemp producers at once—this provides you with the benefits of general growth while protecting you from firm-specific risk.
The Hemp Industry Faces Some Degree of Legal Ambiguity
Unfortunately, though there exists a significant amount of demand for hemp, there are still some legal obstacles that are yet to be overcome. In the United States—and elsewhere around the world—there are a variety of instances where the laws governing the manufacture and distribution of hemp are not entirely clear.
Technically, the production of hemp is something that is still illegal in the United States. However, in practice, the federal government has remained relatively “hands off” when it comes to hemp and has allowed the states to make their own rules. Ultimately, although the federal government reserves the right to use force against the hemp industry, this is something that seems unlikely to actually occur in practice.
Currently, there are many different efforts to promote the legal production of hemp within the United States. At the state level, all but two states have passed at least some legislation that can be considered “pro-hemp.” Typically, this legislation either decriminalizes certain enterprises, allows for the growing of industrial, or distinguishes hemp as a cannabis product with 0.3% THC content or less.
At the national level, the most recent Farm Bill is expected to help legitimize the industry as a whole. The bill has bipartisan support and broad appeals for a variety of different industries. Though the legislative process will certainly take some time, this clear pro-legalization trend (and general laxness of the government) is clearly something that will benefit those who are able to invest in the hemp industry early.
Conglomeration and Specialization are Likely to Occur
As time goes on, the growth trends that seem to affect nearly all other industries are likely to occur in the hemp industry as well. In general, this means that investors can expect increased levels of conglomeration, specialization, and globalization.
If the hemp industry is anything like other comparable industries, then investors should expect a few firms to emerge as dominant forces and eventually begin to buy out their competition. This trend has been observable in various other agriculture and personal wellness industries for quite some time.
On the other hand, while generic hemp production enterprises begin to conglomerate, it is likely that a number of boutiques (specialized) hemp firms will still remain independent. These firms will probably be the ones that are able to master a specific focus such as organic growing techniques, maximizing CBD content, or hemp that can be efficiently used as an energy source.
Due to these trends, it is clear that the firms that have already established themselves in the hemp industry will have a lasting first to market advantage. These companies will be able to effectively establish the necessary growing and distribution infrastructure before the industry has fully developed. Consequently, investors who can identify which firms are likely to last (high yields, high market cap, global connections, operational excellence, etc.) will stand to earn a significant return on their investment.
Hemp is Gradually Moving into the Public Trading Sphere
Due to widespread legal ambiguities and other complications surrounding the hemp industry, the industry as a whole has had an unusual amount of difficulty reaching public markets. However, over the past few years, an increasing number of hemp manufacturers are finding ways to issue IPOs and enter the public trading sphere.
Currently, several hemp producing companies are listed on the NASDAQ, OTCMKTS, and even the NYSE exchanges. Some of these companies have been able to enjoy significant increases in value over time. Between August and October 2018, many companies within the industry experienced growth rates exceeding 300%. Though some of these companies have since lost some of their gains, the prospect of entering into a lucrative position is clearly quite high.
Ultimately, what seems to be driving the generally high returns on investment in the hemp industry is the fact that it offers objective value. New research, new sources of technology (especially IoT), and improved operations are all reasons that hemp companies are able to improve their overall performance each year. Furthermore, the incredible usefulness of hemp—as a fiber, source of paper, animal feed, fuel, and wellness product—has allowed it to become considered as a viable option in many different industries.
It would be absurd to claim that investing in the hemp industry is easy—this industry is one that is in a unique situation where some principles of investing are difficult to apply. However, what remains abundantly clear is that within the hemp industry, there is an incredibly strong potential for you to earn a return on investment. By taking the time to do research, diversify your portfolio, and recognize which firms are likely to sustain their value, you can establish yourself as a successful hemp investor.