USDA Implementation
In October 2019, the U.S. Department of Agriculture (USDA) published its interim final rule (IFR) setting out initial regulations implementing the hemp provisions of the 2018 Farm Bill.
Importantly, both legal hemp and illegal marijuana are different types of the same plant—cannabis. The 2018 Farm Bill defines hemp as cannabis containing less than 0.3 percent THC (the primary psychoactive ingredient in cannabis) on a dry weight basis. Cannabis containing more than 0.3 percent THC on a dry weight basis is still defined as “marihuana” under the Controlled Substances Act. 21 U.S.C. § 802(16). Thus, key issues in implementation include testing for THC levels to differentiate legal hemp from illegal marijuana and disposing of “hot” hemp that exceeds the permitted 0.3 percent THC threshold.
The USDA wanted to issue the IFR in time for industry and other government officials to review and implement it prior to the 2020 growing season, and thus it did not engage in the full public comment process that it would normally undertake for an administrative rule of this novelty and complexity. Following publication of the IFR, the USDA permitted members of the public to offer comments through January 29, 2020, and it has since issued guidance to address certain widespread concerns voiced by hemp producers.
Acknowledging that “there is currently insufficient capacity in the U.S. for testing of hemp and disposing of non-compliant plants,” the USDA provided guidance for enforcement discretion in implementing the IFR on February 27, 2020. U.S. Dep’t of Agric., Enforcement Discretion—Interim Final Rule (Feb. 27, 2020). The IFR initially required testing for THC levels in hemp to be performed at a lab registered with the U.S. Drug and Enforcement Administration (DEA), but the USDA’s interim guidance recognized that there are not currently sufficient DEA-registered testing facilities to economically provide the required testing in a timely manner. Thus, the February 27, 2020, guidance delayed implementation of this testing requirement until USDA publication of a final rule governing the hemp program or October 31, 2021, whichever comes first. The USDA emphasized that in the meantime hemp producers will be required to “to test for total THC employing post-decarboxylation or other similarly reliable methods” in order to comply with the IFR. Id.
Similarly, the USDA delayed the requirement that producers use a licensed “reverse distributor” or law enforcement to dispose of hemp that tests in excess of the 0.3 percent THC threshold. Rather, the USDA provided guidance regarding “common on-farm practices as a means of disposal” while rendering noncompliant plants or products “non-retrievable or non-ingestible.” Id. Producers will be required to report destruction to the USDA using a “USDA Hemp Plan Producer Disposal Form.” Id.
The USDA also announced that it will be conducting random audits of licensed hemp producers to ensure compliance with the IFR. Id.
The USDA has generally been responsive to industry comments regarding implementation of the 2018 Farm Bill and the IFR. Although uncertainty will persist as federal and state agencies work to fully implement hemp regulations, it appears that in most respects hemp will be treated like other agricultural crops. For instance, on February 6, 2020, the USDA announced that it will be implementing a pilot hemp insurance program through Multi-Peril Crop Insurance to cover loss of hemp grown for fiber, grain, and cannabidiol (CBD) and through Noninsured Crop Disaster Insurance to provide coverage for losses associated with lower yields or destroyed crops.
The FDA and CBD
In contrast to the USDA’s focus on enacting implementation regulations that encourage the growth of a robust domestic hemp industry, the FDA has taken a far more cautious approach to regulating products containing hemp-derived CBD.
Section 297D of the 2018 Farm Bill specifies that it does not modify the Food, Drug, and Cosmetic Act (FD&C Act). This is important because the most lucrative sector of the hemp industry currently involves products containing hemp-derived CBD. Section 331(ll) of the FD&C Act prohibits introducing into interstate commerce food or animal feed products that contain an FDA-approved drug as a substantial ingredient. 21 U.S.C. 301 et seq. Because CBD is the active ingredient in the pharmaceutical drug Epidiolex, the FDA has taken the position that CBD cannot be lawfully added to food or nutritional supplements.
Many hemp entrepreneurs protest that the FDA’s position appears inconsistent with section 10114 of the 2018 Farm Bill, which specifically permits interstate commerce of hemp and hemp products. Additionally, the definition of hemp in the 2018 Farm Bill encompasses hemp “extracts” and hemp-derived cannabinoids, which include hemp-derived CBD. CBD businesses have generally advocated for hemp-derived CBD products to be regulated like “nutraceutical” products or dietary supplements like fish oil or red rice yeast.
In late February 2020, Dr. Stephen Hahn, the newly appointed commissioner of the FDA, told members of the National Association of State Departments of Agriculture that the FDA plans to issue regulations governing CBD products, stating, however, that “[w]e’re not going to be able to say you can’t use these products. It’s a fool’s errand to even approach that.”
The FDA set out its most recent analysis regarding CBD in a March 5, 2020, Report to the House and Senate Appropriations Committees (FDA Report). The FDA Report was in response to a joint explanatory statement contained in the December 20, 2019, Further Consolidated Appropriations Act, 2020, directing the FDA “to provide a report regarding the Agency’s progress toward obtaining and analyzing data to help determine a policy of enforcement discretion and the process in which cannabidiol (CBD) meeting the definition of hemp will be evaluated for use in FDA-regulated products.” FDA Report at 1 (quoting Public L. No. 116-94 (2019)). Members of Congress, in turn, were responding to concerns raised by farmers and hemp businesses that the FDA was unnecessarily restricting the growth of the hemp and CBD industries in the United States.
The FDA Report does not signal a major policy shift for the FDA. It states that, under current law, “CBD products cannot lawfully be marketed as dietary supplements.” Id. at 2. However, it adds that the FDA is considering engaging in rulemaking that would permit hemp-derived CBD products to be marketed as dietary supplements. Id. It also states that the FDA is gathering information regarding possible adverse effects of CBD and “evaluating issuance of a risk-based enforcement policy that would provide greater transparency and clarity regarding FDA’s enforcement priorities while FDA potentially engages in the process of a rulemaking.” Id. at 3, 9. Thus, although the FDA is responding to congressional and industry pressure to create a legal framework for sale of hemp-derived CBD supplements in addition to the sale of the prescription drug Epidiolex, it is not clear when the agency will promulgate new regulations in this area.
The reality is that dietary supplements and food products containing CBD are widely available and becoming ever more popular with consumers. To date, the FDA’s enforcement actions have focused on companies making claims that CBD can treat or prevent various health conditions. Under the FD&C Act, such claims can lawfully be made only in connection with drugs that the FDA has approved to treat or diagnose specific diseases. The FDA has also sent warning letters to companies that advertise products containing a specific quantity of CBD whose products do not, in fact, contain the advertised quantity of CBD or are otherwise mislabeled. In short, the FDA’s enforcement priorities are sensible and have not stopped the rapid growth of U.S. sales of CBD products, but there remains a major disconnect between the FDA’s position that dietary supplements containing CBD are unlawful and the widespread availability and use of such products.
State and Tribal Implementation
The 2018 Farm Bill authorizes the USDA to review and approve proposed plans submitted by states and Indian tribes for regulation of hemp. As of March 3, 2020, the USDA had approved regulatory plans submitted by 11 states and 12 tribes and was reviewing several dozen more plans submitted by states or tribes. U.S. Dep’t of Agric., Status of State and Tribal Hemp Production Plans for USDA Approval (updated Mar. 31, 2020). Importantly, the USDA has approved Delaware’s regulatory plan, which may give comfort to corporations registered in Delaware that are considering entering the hemp space.
Seventeen states, including hemp powerhouses Colorado, Kentucky, and Oregon, have announced that they will continue to operate pilot programs implemented under the 2014 Farm Bill rather than submit new regulatory plans for USDA approval in 2020.
The 2014 Farm Bill remains relevant not only because certain states will continue to operate pilot programs established under the 2014 Farm Bill through 2020 but also because hemp harvested in 2019 was not grown under the purview of a USDA-approved regulatory plan. On May 28, 2019, USDA general counsel Stephen Alexander Vaden issued a legal opinion titled “Certain Provisions of the Agriculture Improvement Act of 2018 Related to Hemp” (Legal Opinion). After examining the 2014 Farm Bill, the 2018 Farm Bill, and other pertinent authorities, Vaden concluded that states and tribes “may not prohibit the interstate transportation or shipment of hemp lawfully produced under the 2014 Farm Bill.” Legal Opinion at 1.
Vaden also discussed two conflicting holdings regarding whether hemp grown in accordance with state law under the auspices of the 2014 Farm Bill can be lawfully transported through states that did not enact a hemp pilot program under the 2014 Farm Bill. Id. at 9–12. In Big Sky Scientific LLC v. Idaho State Police, a magistrate judge concluded that it was lawful for Idaho state police to seize a shipment of Oregon hemp being transported to Colorado via Idaho because Oregon’s hemp program had not been approved by the USDA pursuant to the 2018 Farm Bill. Id. at 10–11 (discussing Big Sky Scientific LLC, Case No. 19-CV-00040 (D. Idaho Feb. 2, 2019)). In contrast, Vaden opined that the court in United States v. Mallory correctly analyzed the text of the 2018 Farm Bill, the 2014 Farm Bill, and federal spending bills to conclude that hemp grown in West Virginia under its pilot program from seed produced in Kentucky under the Kentucky pilot program could be lawfully transported to Pennsylvania for processing and sale. Id. at 11–12 (discussing Mallory, Case No. 18-CV-1289 (S.D. W. Va. Mar, 6, 2019)). Vaden wrote that the Mallory holding was consistent with the USDA’s “interpretation that States cannot block the shipment of hemp, whether that hemp is produced under the 2014 Farm Bill or under a State, Tribal, or Departmental plan under the 2018 Farm Bill.” Id.
In summary, the USDA has taken the position that hemp that was produced under a state pilot program under the 2014 Farm Bill can lawfully be transported and sold in interstate commerce. This is important because essentially all of the hemp grown in the United States in 2019 would fall into that category. But the Idaho decision in Big Sky Scientific LLC demonstrates that conflicting interpretations of what activities the 2014 Farm Bill permitted may continue to create regulatory risk with regard to hemp that was not produced under the auspices of a USDA-approved state or tribal plan.
Price Uncertainty
Although consumer demand for hemp products continues to increase, the amount of hemp being produced each year currently appears to be growing more rapidly than processing capacity and potentially more rapidly than consumer demand, which generally pushed prices downward in 2019 compared to 2018.
Price uncertainty will likely continue for the foreseeable future as more acreage comes under production in more states. It also seems likely that acreage under production will continue to increase more rapidly than hemp-processing capacity because it is generally less expensive to cultivate hemp than to purchase and operate the specialized equipment necessary to extract fiber, hurd, hulled hemp seeds, and cannabinoids from the constituent parts of the hemp plant. Although opportunities certainly exist for additional processors to enter the market, there is still uncertainty regarding how rapidly consumer demand for hemp products will increase.
These factors are explored in more detail in a February 2020 USDA Economic Research Service report (USDA Report). The authors of that report point to a lack of comprehensive data regarding pricing for hemp and hemp products as a particular barrier to producing useful financial projections: “Without access to consistently reported reliable price and production information, U.S. growers do not have the information to move beyond speculative decision-making which will create added risks and market volatility.” USDA Report at 29.
The past year saw a major pullback in the valuation of both hemp and full-THC marijuana companies. For instance, the U.S. Marijuana Index tracks 25 publicly traded companies that have at least 50 percent of their operations in the cannabis sector and includes both hemp companies and full-strength marijuana companies. The index fell from a high of almost $135 in late April of 2019 to a low slightly over $25 on March 12, 2020.
There are many factors that likely contribute to volatility in this sector, including legal uncertainty, a fragmented and highly competitive marketplace, and new entrants coming into the market as new U.S. jurisdictions and foreign countries legalize various forms of cannabis. But there is also an intriguing parallel to the fall in valuation of the office-sharing company WeWork, which led many investors to question whether high valuations accompanying businesses in a variety of new sectors were justified and whether the previously widespread view that it does not matter whether a company is profitable as long as it achieves exponential growth is economically sound. In any event, hemp companies seeking funding can no longer rely principally on the fact that they are part of a new and growing industry. Instead they must make a more thoughtful pitch focused on fundamentals and the company’s particular strengths versus those of its competitors. Although this focus on fundamentals will be healthy in the long term, the short-term effect has been a liquidity crunch within the industry.
Conclusion
The regulatory and financial landscape has changed rapidly in the hemp industry since the 2018 Farm Bill was signed into law in December 2018. The majority of U.S. states and dozens of Indian tribes will permit hemp farming and processing in 2020, and consumer demand for hemp products continues to grow rapidly domestically and abroad.
The 2018 Farm Bill places no explicit restrictions on the export of lawfully produced hemp products; but, as more countries legalize hemp and CBD, it is likely that domestic hemp producers will compete in foreign markets with exported products from the United Sates and hemp products from China, Canada, and European Union countries. The upshot is that, for the foreseeable future, the hemp industry will remain highly competitive as new entrants compete with incumbents at each link in the supply chain and companies struggle to achieve profitability while scaling rapidly.
