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The US Hemp Market:
An economic examination of the hemp industry.
Richard A. Adams
Baker College Center for Graduate Studies
An examination and evaluation of the hemp industry in the United States of America with particular emphasis on current issues involved in the agricultural production of hemp both domestically and internationally. Discussion of the economic benefits of a re-evaluation of the legal issues, in particular those laws which necessitate importation versus domestic production of raw hemp for production purposes. A brief examination of the history of the hemp industry and hemp agriculture in the United States of America provides a background against which the current legal and economic status of hemp may be viewed. Discussion of various hemp products, the suitability of the product to American agricultural and production capabilities, and the potential of the market provide an economic understanding of the question.
Statement of Purpose
The purpose of this study is to examine the economic benefits/drawbacks which would result from changes in the current legal status of hemp production in the United States of America. Through an examination of current status of hemp production and marketing structures in the United States and a comparison of those structures in other nations, an economic understanding of the issue will be more easily achieved. Because of the very substantial profit potential involved in this industry a study of the subject was deemed beneficial to pursue.
Methods used in obtaining information relevant to the study.
Information was obtained primarily from three sources:
Benefits accruing from the solutions presented.
Benefits to the hemp industry would include increased market shares on an international basis, substantially higher profit margins, reduced production costs, the potential to benefit from increased economies of scale, increased product development potential, and the opening of new markets for current and newly developed products.
Benefits to the National economy would include the creation of a new and highly profitable agricultural industry, increased trade opportunities, an increase in the GNP, improved environmental conditions, new tax resources, and reduced costs with respect to enforcement of current laws.
Personal benefits would include the ability to add additional, profitable, product lines to those currently carried by my firm, personal economic savings resulting from reduced costs of goods resulting from such changes, and the social benefits inherent in use of more environmentally beneficial products.
A brief history of legal hemp in America
In contrast to modern laws which prohibit the agricultural production of hemp and severely regulate the importation and production of raw hemp and hemp products, early colonists not only were free to cultivate the plant, they were required by law to do so. Puritans, for example, grew hemp to meet the conditions of their 1607 contract with the Virginia Company.(Robinson, 1996)
Throughout the colonization and political unification of what is now the United States of America, hemp production played a key role in international trade and in the development of a significant agricultural industry within the emerging nation. So important was the product, in fact, that any list of prominent Americans of the era who were involved in the hemp industry tends to resemble a list of American political figures. Among the many well known individuals whose writings clearly demonstrate their personal involvement with this industry are George Washington, Thomas Jefferson, and John Quincy Adams. Economically, the industry was so vital to the prosperity of the colonies that the Massachusetts House of Representatives commissioned a study of the subject in 1765, in which the author, Edmund Quincy, clearly stated:
It is presumed none will be at a loss to determine, that the two most important materials which the inhabitants of these colonies should be principally encouraged in the growth of, are Flax and Hemp of any which can be so easily and generally produced in North America. (Quincy, 1765)
Indeed, so common was the use of Hemp during the era that the first two drafts of the Declaration of Independence and the final version of the Constitution of the United States of America were, in fact, printed on paper made from hemp.
Throughout the nineteenth century, hemp continued to excel as a domestic agricultural crop and the uses for the product, ranging from paper making to the production of sails, rope, medicines and clothing continued to be expanded by visionary entrepreneurs who were able to recognize new potential markets and capitalize on their development. In times of war, particularly, hemp was of critical importance to the nation, a trend that held true well into the twentieth century. During the Second World War, in order to promote production of this vital material, the government inaugurated programs which exempted American farmers from military duty if they agreed to produce hemp products in support of the war effort. (Frazier, 1991) As the industrial revolution took hold in the nation, new means of production which incorporated hemp products as integral parts of the processes were introduced. Even Henry Ford, one of automation=s greatest innovators, Aenvisioned a future where plastics from hemp polymers were the building blocks of almost all products and where fuel was provided by hemp biomass.@ (Robinson, 1996, p. 139) Ford even went so far as to develop an Aall organic car@ which was constructed from a combination of hemp and other products and which ran on hemp fuel. (Henry Ford Museum Information Center, Greenfield Village) In 1937, Mechanical Engineering magazine called hemp Athe most profitable and desirable crop that can be grown@ in an article that, due to production delays, was published shortly after the passage of the Marihuana Tax Act of 1938 which rendered the production of hemp illegal.
Under current U.S. law, the agricultural production of hemp is forbidden, except under special permit, by Federal statute. Internationally, hemp is grown commercially in most European and Asian countries. Australia, Canada, and Germany have granted limited research plots. The U.S. has not granted any large-scale licenses since the 1950's. (Industrial Hemp Information Network, 1996) As a result of these restrictions, all industrial production of hemp products in the United States of America requires the importation of raw materials, resulting in higher production costs and decreased competitiveness in both domestic and international markets.
Economic implications of agricultural hemp production in the United States of America
To understand the economic implications of hemp production we must examine both the basic principles of agricultural economics and the nature of hemp agriculture itself.
While agriculture, in general, adheres to the basic economic principles applicable to any industry, there are several unique and very relevant characteristics which must be considered in any examination of agricultural production. These may be divided into discrete areas, which include:
1. Regional Specialization.
Due to climatic and geographical concerns, agricultural production is commonly divided into distinct areas of specialization, within each of which unique mixes of products are produced. Unlike many forms of production, in which such concerns as labor availability or materials costs are the primary factors upon which location is based, in the agricultural market weather and soil conditions provide the primary determinants. By necessity, therefore, all things being equal, those products which are adaptable to the widest range of climatic and geographical conditions provide the greatest potential for agricultural production.
Within the continental United States ten distinct farm production regions have been defined for statistical purposes. They are, respectively, the Pacific region, the Mountain region, the Northern Plains, the Southern Plains, the Lake States, the Corn Belt, The Delta States, the Northeast, the Appalachian region, and the Southeast. While considerable overlap exists, the differences between these regions are significant enough to define the product mixes which may be produced efficiently within each as being distinctly different from the product mixes appropriate to any other region. Cotton, a major competitor of hemp products, is, for example, produced primarily in the three southern farm regions while, due to poor climatic conditions range livestock production, among the least efficient of all forms of agricultural production due to excessive requirements for land and feed, is the primary agricultural product of the Mountain region. (Wilcox, Cochrane, & Herdt, 1974)
Hemp, unlike nearly all other common agriculturally valuable products, is unique in its ability to thrive in an extremely wide range of climates and geographical conditions. As a result of this property, it can profitably be grown in all ten regions. In addition to its heartiness with respect to climate, it is a particularly efficient plant with respect to nutrient requirements, and therefore, is as effectively grown in relatively poor soil conditions as it is in the nutrient rich soils of the farm belt. This characteristic makes the plant ideally suited to agricultural production in regions where most cash crops either require extensive (and expensive) fertilization and irrigation, or cannot be grown efficiently at all. Combined with the particularly low labor costs inherent in the agricultural production of hemp, a very high yield per acre planted, and the lack of any significant requirement for costly (and environmentally damaging) insect or weed eradication measures, this results in extremely low production costs and, therefore, an average cost curve significantly lower than that for comparable products. Thus, hemp production may, given a ready market for its output and a sufficiently high demand (both of which already exist or may easily be developed as will be demonstrated later in this paper), be considered to have a remarkably attractive profit potential for investors. Indeed, even the most cursory examination of the relatively high profits currently enjoyed by such agriculturalists in nations which permit the commercial production of hemp clearly demonstrates the potential income available to the American farm industry, one reason the American Farm Bureau Federation, the largest farming organization in the United States (4.6 Million members) passed a unanimous resolution at its 77th annual convention in 1996 stating:
2. Enterprise Combination. Modern farmers plan their production to include the most profitable mix of products in a Acropping sequence@ or crop rotation. (Wilcox et al, 1974) The result is a mix of crop and livestock enterprises which is determined by the principle of equal marginal returns. Hemp, due to its exceptionally low fertilizer and irrigation needs, high nutrient return (with up to 70% of all nutrients absorbed by the plant returned to the soil), and its short-day growing cycle, is an ideal rotational alternative for use with short season high-demand crops. (Hemp, 1994) Thus, it offers modern farmers the opportunity to make optimum use of available resources with the lowest possible average cost figures, given the nature of the secondary crop (which often can utilize, at least in part, the nutrient and soil enrichment properties of the hemp crop in lieu of expensive and ecologically damaging fertilizers) and, therefore, provides a far more attractive cost curve than is the case for other agricultural products. In addition, because many of the byproducts of hemp production are appropriate for use as livestock feed, the range of efficient product mixes is even greater than is the case with many other product choices.
3. The Farm Market System.
As a close approximation of a perfectly competitive market organization, agricultural firms have above average needs for efficient and cost effective means of production. In addition, due to the nature of a competitive market, the opportunity to compete on the basis of product differentiation is essentially non-existent, and the sole criteria for successful production becomes the ability to produce goods profitably given the fact that the product demand curve for agricultural products is perfectly price elastic (from the standpoint of the individual firm, of course, from the industry perspective, the curve is highly inelastic). Thus the selection of a product mix which maximizes the potential for profit under as wide a range of conditions as possible is a necessity for any firm which wishes to remain competitive. Moreover, due to the nature of the farm market itself, which is based in large part on speculative investment in future production (the commodities market) as well as the wide range of uses for its outputs, which in the case of hemp include such diverse applications as the production of paper, use as a fuel, food production, clothing production, and industrial applications, crop selections which maximize not only production possibilities but market possibilities as well increase the likelihood of profit while minimizing the impact of any potential substitution effect as a result of the lowering of the price of other agricultural products. Indeed, given the exceptionally wide range of products which incorporate hemp into their production, the likelihood that a substitute product will adversely affect product pricing is exceptionally low, a positive inducement to farmers to produce the crop.
4. Environmental Concerns.
Due to the very low requirements for artificial fertilizers, insecticides, and herbicides in the production of hemp, the crop produces substantially fewer external diseconomies than is the case for nearly any other domestic agricultural product. Not only does this provide a direct benefit in terms of reducing the environmental impact of crop production, a significant problem, given modern agricultural methods, but the nature of the products produced from the raw hemp themselves offer similar benefits, with the concurrent reduction in environmental costs inevitable in such a transition. Paper produced from hemp fiber, for example, requires far less chemical processing than is the case for the wood pulp based form, despite its comparable cost of production. Studies done at the Wageningen Agricultural University, in fact, demonstrate that waste from the hemp pulping process does not contain toxic elements (as are common to wood pulping processes), and that all components are biodegradable with the exception of a very small percentage of the lignin, which is expected to be resolved by further research as well. (Van Roekel, 1995) In addition, because hemp produces substantially greater biomass per acre of cultivation than is true of trees, and requires a far shorter growth cycle to produce yield, the impact of a conversion to hemp production for such products as paper, building materials, and other products commonly associated with the lumber industry would result in the reduction of many of the negative effects of the timber industry on the environment, including preservation of forests and wildlife habitats, erosion of topsoil due to logging, and pollution of lakes, rivers, and streams, all of which costs represent diseconomies with respect to the wood industry. (Environmental and economic benefits, 1996)
5. Social Control of Land Use.
As a remarkably high yield crop, hemp produces significantly more usable product per acre than is the case for any other modern agricultural product. The result of this high yield is to maximize the use of land resources while minimizing the impact on society resulting from the dedication of such land to agricultural uses. Indeed, an area of land only 25 miles square (the size of a typical U.S. County) is sufficient to produce enough hemp fiber in one year to manufacturer 100 million pair of denim jeans, thus providing an equivalent yield to an area ten times the size planted in cotton, and offering the additional benefit of producing clothing which is 10 times stronger than cotton and that, in contrast to cotton which requires exceptionally high applications of pesticides and enormous quantities of water, requires no pesticides and only minimal quantities of water as well. Moreover, by being amenable to production in all 50 states, versus the 10 states in which cotton can be reliably produced, hemp offers the additional advantage to clothing manufacturers of being relatively immune to price variations due to climatic variations or natural disasters, thus permitting more accurate long run cost stability for such producers.
In addition to these social benefits, because hemp products include such socially valuable items as non-fossil (and non-polluting) fuels, highly nutritious high-protein oils which exceed the nutritional and industrial values of soybean oils with a lower cost associated with their extraction, and because hemp production in the United States of America could significantly influence the balance of trade in a positive direction, as well as providing a source of additional export revenues (rather than an additional cost of production associated with import costs, as is currently the case in the United States of America), the social costs of hemp production are exceptionally favorable, and thus social control of land resources clearly favors the production of hemp as a viable alternative to less efficient uses.
6. Governmental Policies and Agricultural Supports.
Current government policies prohibit the production of industrial hemp (defined as hemp plants containing less than 0.03% THC and thus non-intoxicating substances) and no current policy exists with respect to the production and marketing of such products. Based on European models, however, it can be successfully argued that hemp production would, due to the nature of the market, be highly unlikely to require any form of government subsidies in order to be profitable or competitive in the farm market. Indeed, it is very possible that the legalization of hemp production in the United States of America would actually reduce the cost of agricultural supports by the government in that it would offer a highly attractive alternative crop to agricultural interests which currently rely on subsidized or price supported products as their primary crops.
7. Seasonality and Natural Hazards in Agricultural Production.
All forms of agricultural production are subject to seasonality and natural hazards. Seasonality, or the tendency of agricultural prices to follow a seasonal pattern (normally at a low point at or soon after harvest and a high point just prior to harvest), results in a cyclic variation which, by necessity, influences both marginal revenues and, as a result, profits. While such a pattern is integral to the production of any crop, in the case of single-season, limited region products (such as avocados or oranges) it is far more influential than in the case of crops which grow well in a wider range of climates, or which are adaptable to multi-season, multi-harvest production. Hemp, because it meets both these criteria, and because its crop yield is not as time immediate (i.e., it is less perishable than is the case of many other agricultural products) tends to be far less influenced by such variations and, therefore, offers the potential for more stable and accurate revenue forecasting, with the resultant increases in benefits to the producer.
In a similar manner, all crops are subject to natural hazards such as droughts, floods, late (or early) frosts, or similar disadvantageous conditions. Hemp, however, by nature of its botanical characteristics, is far more immune to such influences than is true of most other agricultural crops grown in the United States of America. Two of the most notable characteristics of hemp, from a production standpoint, are its relative immunity to frost damage and its inherent ability to thrive in widely varying conditions with respect to water. Coupled with the ability to grow hemp in essentially all parts of the United States, thus avoiding dangers of localization with respect to natural disasters, hemp may be considered an ideal crop from this aspect as well. From an agricultural perspective, few, if any, products combine the economic benefits of hemp with the ease of production inherent in the crop.
Industrial and Commercial uses for hemp and hemp products.
The hemp plant lends itself to a very wide range of production possibilities, and thus is particularly appealing to the agricultural firm seeking new markets. Some of the products which may be, and are being, profitably produced from hemp include: Animal bedding, auto/boat covers, backpacks, bags (both paper and canvas), balms, bandages, baseball caps, baskets, bed linens, belts, bioplastics, birdseed, books, boots, bread, butter, candlewick, candy, canvas, cardboard, carpeting, caulking, cellophane, cement, chairs, cheese, cloth and paper napkins, cloth and paper towels, coffee filters, compost, cosmetics, curtains, cushions, denim, desks, detergents, diapers, dolls, draperies, duffel bags, dynamite, erosion control, fabrics, fire hoses, fiberboard, fishnets, flags, floor mats, flooring, flour, fuels, furniture, futons, gloves, glues, hammocks, harnesses, hats, ice cream, inks, industrial coatings, industrial oils, insulation, jackets, jeans, linen, livestock feed, lubricants, luggage, magazines, medicines, moisturizers, mulches, natural pesticides, nets, newsprint, note pads, oil-spill absorbents, packaging, paints, paneling, pants, parachutes, particle board, pasta, pet foods, pharmaceuticals, pillows, plaster, plywood, polymers, protein, purses, quilts, roofing materials, rope, sails, salad oils, salves, sandals, scarves, shampoos, shirts, shoes, skirts, slippers, soaps, socks, sofas, stationary, tablecloths, tables, tea, tents, thread, tissue paper, toilet paper, twine, varnishes, wallets, and wallpaper. (Environmental and economic benefits, 1996, Frazier, 1991, Industrial Hemp Informational Booklet, 1996)
With respect to production, one researcher summed up the position of industrial hemp in the agricultural marketplace quite definitively when it was stated that: ANo tree or plant species on earth has the commercial, economic, and environmental potential of hemp. Over 30,000 known products can be produced from hemp.@ (Environmental and economic benefits, 1996)
World wide production of hemp and hemp products.
Despite major legal obstacles to industrial hemp production in many nations, and complete prohibition in the United States of America, hemp still produces substantial sales internationally. According to Canadian Government figures, world production of hemp in 1992 equaled 124,000 tonnes, comparing favorably to other vegetable fiber crops (none of which suffer the legal limitations of industrial hemp) such as sisal (383,000 tonnes) and flax (610,000) tonnes. (Hemp, 1994) While it is obviously impossible to predict with any degree of accuracy the market share that would ultimately be occupied by industrial hemp were legal limitations on its production removed, some indication of the potential of this agricultural product may be discovered by a comparison to cotton production (a crop for which hemp serves as a direct substitute) which in 1992 was 18,064,000 tonnes. (Hemp, 1994) Given the far greater production potential of industrial hemp with respect to other fiber crops, and given the increased agricultural regions in which it can be profitably grown, there is no reason to doubt that once established as a viable world wide competitor for cotton and wood products (among other uses) it would equal or even exceed this volume. Indeed, in Canada where hemp production is still limited in scope, and thus the overall production possibilities are not, as yet, fully realized, the gross revenue generated by chopped hemp stalk is $750 per hectare, comparable to Ontario corn. (Hemp, 1994) Once hemp production has been expanded and thus made more amenable to modern technological methods (as has been projected by Canadian agricultural experts), it is reasonable to expect this figure to become even higher.
Clearly industrial hemp can be shown to be a viable product of enormous economic benefit to the United States agricultural market. Even the most cursory examination of its economic and social benefits easily demonstrates the necessity to follow the recommendations of the American Farm Bureau Federation with respect to researching the introduction of this crop into the American agricultural market. Not only would such an introduction benefit the agricultural industry itself, but due to its extensive economic, environmental, and social values as discussed earlier in this paper, it would provide substantial benefits to the nation itself. By reducing dependence on imported products, it would provide impetus to manufacturers to develop new product lines (or revise their production approaches to old product lines) incorporating the use of industrial hemp, thus simultaneously enhancing domestic production and improving the balance of trade as those products were produced for export, rather than being imported as is currently the case. In addition, by providing a more dependable, heartier, and less seasonally affected crop for agricultural interests it would reduce dependence on government farm subsidies and price supports, thus enhancing the economic structure of U.S. agriculture even further.
A number of steps must be taken if such a change is to occur, given the current status of industrial hemp in the United States of America. First, and most important, research needs to be conducted to demonstrate the applicability of hemp cultivation to modern American farming techniques. Next, legislators and other government officials need to be provided education concerning the nature of industrial hemp which demonstrates the non-drug nature of the plant, and thus provides justification for the elimination of overly broad legislation concerning its cultivation. Finally, an intensive effort aimed at developing a new market within the United States, as well as abroad, for the products resulting from agricultural production of industrial hemp would need to be undertaken in order to insure a solid, and profitable, market for the product once farms began to produce it in volume.
Clearly, such change is inevitable. Given that hemp production on a world wide basis has steadily increased over the past several years, and each year an increasing number of nations are experimenting with, or actually legalizing, the production of industrial hemp (one of which, Canada, is a major competitor to United States agricultural interests, particularly in border states where shipping costs are relatively similar to those borne by United States producers), by necessity the United States of America will ultimately have to give in to international pressure and legalize the production of this valuable product. Hopefully, such a change in policy will occur before other nations become so firmly entrenched in the market that they will present a significant barrier to international trade for American agricultural and manufacturing interests.
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