Industrial hemp is now legal in the U.S., which advocates hope could eventually loosen laws around the popular marijuana extract CBD.
President Donald Trump signed the 2018 farm bill on Thursday afternoon, which legalized hemp — a variety of cannabis that does not produce the psychoactive component of marijuana — paving the way to legitimacy for an agricultural sector that has been operating on the fringe of the law. Industrial hemp has made investors and executives swoon because of the potential multibillion-dollar market for cannabidiol, or CBD, a non-psychoactive compound that has started to turn up in beverages, health products and pet snacks, among other products.
For now, however, it appears that CBD will remain largely off-limits. The Food and Drug Administration issued a statement saying that despite the new status of hemp, CBD is still considered a drug ingredient and remains illegal to add to food or health products without the agency’s approval, disappointing many hemp advocates, who said they will continue to work to convince the FDA to loosen its CBD rules, the Associated Press reported. The FDA said some hemp ingredients, such as hulled hemp seeds, hemp seed protein and hemp seed oil, are safe in food and won’t require additional approvals.
The farm bill is a sprawling piece of legislation that sets U.S. government agricultural and food policy for the country and is renewed roughly every five years. This version of the bill places industrial hemp — which is defined as a cannabis plant with under 0.3% of tetrahydrocannabinol, or THC — under the supervision of the Agriculture Department and removes CBD from the purview of the Controlled Substances Act, which covers marijuana. The law also “explicitly” preserved the Food and Drug Administration’s authority to regulate products containing cannabis, or cannabis-derived compounds.
The overall effect is not assured because, like cannabis — which is illegal under U.S. federal law although some states have allowed medical or recreational use — states will continue to be able to enact laws related to industrial hemp, allowing for a potential patchwork of legislation across the country. Other questions remain in terms of how exactly the Agriculture Department will regulate the plant.
While CBD still faces legal hurdles to go mainstream, beverage giants, food companies and others have begun to take serious interest in the roughly $2 billion U.S. market. Tilray Inc. TLRY, +4.32% announced a partnership with Anheuser-Busch InBev SA BUD, -1.63% this week to research marijuana-based beverages, and Constellation Brands Inc. STZ, +1.04% has invested heavily in pot producer Canopy Growth Corp. Other large companies, like Molson Coors Brewing Co.TAP, -1.55% , have invested in research, and Coca-Cola Co. KO, -0.40% and others have at least considered making a play for the space.
Smaller companies focused on CBD beverages, such as New Age Beverages Corp.NBEV, +13.43% , have been targeted by investors, but some firms have used CBD-related announcements to pump stock prices as well as fuel excitement in a compound that scientists do not fully understand. Other companies operating in the sector will benefit too: Charlotte’s Web Holdings Inc. CWBHF, -4.70% has focused on a range of CBD products, capturing about 17% market share in 2017 with sales in 3,000 retail locations, according to PI Financial research.
U.K.-based GW Pharmaceuticals PLC GWPH, -1.25% stands to gain from the farm bill, as one of its flagship drugs called Epidiolex, a seizure drug, counts CBD as an important component. Epidiolex is the first drug derived from cannabis that the Food and Drug Administration has approved.
Despite uncertainties, cannabis executives and those tied only to the hemp-growing industry are heralding the farm bill as a major victory for business owners and consumers.
Qualis Cannabis Corp. Chief Product Officer Julien Morris said that the bill grants the same legitimacy to hemp farmers as others in agriculture.
“It allows them to use banks, get insurance and investment capital will be less spooked,” he said over the phone.
Luke Zigovits, chief executive of Wisconsin-based Hemp Science, said, “We can finally relax. Because now we can source seed, now we can sell our product across state lines. Prohibition is over. It broadens horizons, allowing universities to do research, for example.” Beyond moving the industry into legitimacy, Zigovits said there are opportunities for tobacco farmers in Wisconsin and elsewhere to start growing industrial hemp crops as well.
In Canada, where cannabis for recreational use is legal under federal law, some of the largest licensed pot producers have been eyeing or actively trying to capture the CBD market via hemp-related expansion.
Tilray Chief Executive Brendan Kennedy said over the phone earlier this week that his company has made a supply agreement with LiveWell Canada Inc. to purchase industrial hemp-derived CBD that it will use for “wellness” and medical products distributed across the U.S. and Canada.
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“That gives us the opportunity to meet increased demand in Canada and other countries around the world, and presents us with an opportunity to capitalize on a $22 billion market for hemp-derived products,” he said.
Executives from Canopy Growth CGC, +11.08% WEED, +11.17% and rival Aurora Cannabis Inc. ACB, +6.27% ACB, +6.26% both discussed their hemp operations on September-quarter earnings calls that included disappointing results related to early recreational pot sales. Aurora declined to comment on the latest developments and Canopy did not make executives available by the time of publication.
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“We have intellectual property that we’ve developed around how to manage hemp, and that we thought was prudent, because I think hemp is going to happen in the U.S. and when it does, I know that’s not the time to start,” said Canopy Chief Executive Bruce Linton in November’s earnings conference call. “You should have already been started up and ramped up, and get ready to revenue up. We think we are.”
Aurora Chief Corporate Officer Cam Battley said in the company’s earnings call last month that it has made acquisitions in Lithuania and Uruguay, as well as taken a stake in an Alberta-based hemp producer, giving it a strong position in the market.
“With this large presence in the CBD space, we’re embarking on a CBD-focused strategy that covers the entire value chain from supply through genetics, research and clinical trials to product development and distribution and distributing product to international markets across five continents,” Battley said in the call.
Cronos Group Inc. CRON, +0.66% CRON, +0.33% , unlike some of its Canadian rivals, may not be as well-positioned to take advantage of changes to industrial hemp laws in the U.S.; it has not banked sales from hemp-related products nor does it have assets related to hemp. Cronos declined to comment.
Cannabis stocks mostly fell Thursday with a few exceptions. Tilray gained 10.4% after Wednesday’s announcement, Cronos fell 2.3%, Canopy dipped 1.8% and Aurora dropped 3.6%. ETFMG Alternative Harvest ETF MJ, +1.66% was down 2.2% as the S&P 500 index SPX, -0.53% declined 1.6%.