Economic Impact of Industrial Hemp in Kentucky
July 1998
Demand for Industrial Hemp by Hemp Processors
The amount of industrial hemp that would be grown in Kentucky if cultivation were legalized naturally would depend on the demand for the product. Demand refers to the likely tonnage of industrial hemp straw and grain that would be demanded by processing facilities. This tonnage demanded can first be estimated based on current demand by processors. Although, the quantity of industrial hemp demanded is likely to grow if domestic cultivation of industrial hemp significantly lowers the price of industrial hemp fiber, hurds, and grain.
Due to this uncertainty, estimates for future demand for hemp will be presented under a number of alternative scenarios in a later section of this report. Estimates presented in the current section will depend on the current demand for industrial hemp. The current demand for industrial hemp will serve as a lower bound for the future. Other scenarios would assume continuing growth in demand for products currently being made from industrial hemp, or growth in demand based on the adoption in North America of uses for industrial hemp currently found in Europe.
A substantial quantity of industrial hemp grain is currently demanded, and therefore imported, into the United States by domestic grain processing firms. Further, grain processing firms are being established in Canada that will use grain cultivated in that country but will help meet the demand for hemp oil and other hemp grain products in the United States. An estimate of the current demand in the United States for hemp grain products was developed by contacting these firms and asking how many tons of industrial hemp grain they currently purchase per month for their production process. Processors in Canada were asked about how much industrial hemp grain they planned to cultivate in 1998. Based on this, it is estimated that there is a total demand for 1,300 tons of industrial hemp grain in North America at current prices.2 At a yield rate of 1,000 pounds of seed per acre, this implies that there would be enough demand for industrial hemp farmers to cultivate 2,600 acres of grain production under current conditions. This yield of 1,000 pounds per acre is based on current yields in Germany, and is the same yield used in farmer profit per acre estimates for industrial hemp discussed later in the report.
As for hemp grain prices, farmers certainly cannot charge more than it costs to import hemp grain from overseas, including Canada. Therefore, one estimate of the price that farmers in the United States could expect to receive is the price that farmers in Canada are going to receive from the hemp grain and fiber processing facilities operated by KENEX of Chatham, Ontario. Another way to estimate the price levels that farmers can expect to receive is based on the current price of importing hemp from other countries. Based on these sources, and an assumed $0.01 per pound cleaning cost, the price per pound that farmers are expected to receive for uncleaned grain is $0.39 per pound. This price excludes the part of the cost going to sterilize grain, since this part of the cost would not be received by the farmer. This means it is important to keep in mind that the current price of importing industrial hemp grain, including the sterilization cost, is substantially higher that $0.39 per pound.
Relative to the demand for grain, the demand for industrial hemp straw is more difficult to estimate. As discussed above, the demand for industrial hemp cultivated in Kentucky will be determined by both the overall demand for industrial hemp fiber and hurds regionally and nationally, and by whether an industrial hemp processing facility happens to locate in Kentucky, or very near its borders. Thus, determining the demand for industrial hemp straw will not simply depend on counting the current demand at existing industrial hemp processing facilities, of which there are only two in North America located near Chatham and London, Ontario, Canada. Instead, determining the demand for industrial hemp straw depends on determining whether it is economically feasible to develop industrial hemp processing facilities in Kentucky given the price of imported industrial hemp, as well as the demand for industrial hemp fiber and hurds. One estimate of the current demand for industrial hemp fiber is import data assembled by the United States Trade Administration (USTA). Table 1 shows the tons of hemp products that were imported into the United States in 1996 and 1997, according to USTA figures. There were 417 tons of industrial hemp stalk, fiber, or yarn imported into the United States in 1997, along with 700,000 square meters of woven fabric. Only a small share of imports was raw stalk that was not decorticated, that is, where the fiber of the hemp was separated from the woody interior. The rest of the imports required processing. It should be noted that the figures in Table 1 do not include imported hurds or string, since these were not reported separately in USTA data. These import figures do not primarily represent industrial hemp fiber imported from Canada.
TABLE 1: Imports of Industrial Hemp Products in 1996 and 1997
Product 1996 1997
Raw Hemp Stalk, Not Decorticated (Tons) 21.8 6.7
Raw Hemp Stalk, Decorticated (Tons) 36.6 97.0
Hemp Yarn (Tons) 6.5 313.1
Woven Hemp Fabrics (1000 Square Meters) 435.3 705.3
Source: United States Trade Administration
Several hundred acres of industrial hemp cultivation would be required to meet the level of demand illustrated in Table 1, as is discussed later in this report in the section on Textiles. However, given this current demand, it is unclear how many acres of industrial hemp would be cultivated in the United States even if cultivation were legal. There are no industrial hemp processing facilities in the United States at this time. It might be possible to process industrial hemp with existing equipment in the United States, such as modified tobacco or flax processing equipment. However, given that this equipment was not designed for processing industrial hemp, industrial hemp fiber processed with it might have difficulty competing on price and quality with imported hemp products, particularly fiber imported from the two new processing facilities in Ontario, Canada. Still, some industrial hemp straw might be cultivated and processed in the United States, perhaps on new acreage devoted to cultivating industrial hemp for straw. Much of the demand from industrial hemp processors in the United States might be met by industrial hemp straw from acreage cultivated primarily for grain.
The price that a U.S. farmer would receive for a ton of industrial hemp straw would be based on the expected price of the byproducts of industrial hemp straw: hurds and fiber. In particular, given that industrial hemp straw is separated into 30 percent fiber and 70 percent hurds, the expected price of fiber and hurds can be used to calculate the total return from one ton of hemp straw. Subtracting the cost of decorticating the hemp from this amount of return will yield the price farmers can receive at the factory gate for a ton of industrial hemp.
The average price for raw industrial hemp fiber in the long run is expected to fall within the range of $400 to $600 a ton. The price paid to processors for industrial hemp hurds is expected to vary even more. As is discussed below, the price paid for industrial hemp hurds in the long run is expected to be $100 a ton for use as animal bedding, which is a limited market, down to $40 a ton for use in medium density fiber board, which is a large market (Lloyd, 1998). These varying prices for hurds and fiber suggest that farmers may receive a widely varying price for industrial hemp straw. Table 2 shows the prices that farmers could be paid for industrial hemp straw in the long run under alternative assumptions for hurd and straw prices. These figures use $100 a ton cost for decorticating. This cost is explained in Appendix 1 below.
Based on Table 2, the price that farmers would receive would range from $40 to $140 a ton under the alternative assumptions. This figure is less than the US$200 a ton price that the KENEX corporation expects to pay for raw stalk in Canada (Laprise, 1997). Current import prices are much higher, but these Canadian prices set a lower bound for the price under current conditions. Thus, the current price of industrial hemp for its very specialized uses at this time is expected to be the price in Canada. KENEX indicated a price of $200 a ton in U.S. currency. Hempline, Inc. will be offering farmers a similar base price, although it will offer a bonus if farmers can deliver stalk grown to specification (Kime, 1998). Market forces in the long run, however, are expected to push the price down to the levels in Table 2 as the industry grows more competitive and the uses for industrial hemp fiber and hurds expand. The price paid for hemp straw harvested from fields where industrial hemp is cultivated primarily for grain is expected to be $120 a ton. It is expected to have a lower value because the quality of industrial hemp fiber is expected to be lower in industrial hemp cultivated primarily for seed. Finally, while overseas producers currently selling industrial hemp fiber in North America might be expected to drop their prices in order to maintain their North American customers, domestic producers are expected to be able to maintain a price advantage. This is because transportation, brokerage, and import fees would increase the cost of industrial hemp imported from Europe or Asia by as much as 20 percent (Kime, 1998).
TABLE 2: Potential Price Paid to Farmer for Ton of Industrial Hemp Straw Under Alternative Prices for Straw and Hurds
Fiber Price Hurd Price Per ton
Returns* Decorticating Costs Price Paid To Farmer
$400 $40 $139 $100 $39
400 100 180 100 80
500 40 167 100 67
500 100 208 100 108
600 40 195 100 95
600 100 236 100 136
* All calculations of the return assume that one ton of hemp straw yields 0.68 tons of hemp hurds, and 0.28 tons of hemp fiber. It is assumed that .04 tons of material is lost during the decorticating process.
Under moderate levels of industrial hemp production, it is anticipated that industrial hemp hurds will be sold for close to $100 a ton for animal bedding, as is explained below. This implies prices nearer to $100 a ton for farmers. If hundreds of thousands of tons of hemp are produced, however, then hemp hurds will need to be sold for lower-value uses such as fiber board. This implies prices closer to $70 a ton for industrial hemp straw if there is large scale production of industrial hemp straw.
Another potential market is certified seed. Certified seed is seed which can be used for planting and growing industrial hemp as opposed to grain which is grown for use in processing and manufacturing. The demand for certified seed in North America naturally is determined by the amount of industrial hemp that will be planted and grown for grain and straw. Thus, the demand for certified seed under alternative scenarios can be estimated based on the demand for industrial hemp grain and straw under each alternative scenario. Under the current demand conditions, it is estimated that 2,600 acres of industrial hemp for grain will be grown. This implies a demand for 30 acres of certified seed under current conditions given the seed requirements illustrated in Table 3 in the following pages. The price per pound of seed is estimated to be roughly $1.20 per pound. This is less than the $2.50 per pound that seed companies are expected to charge for certified seed. The difference in price is expected as a return for the seed company for developing the seed variety. It is expected that holders of the seeds will lease the right to grow certified seed to farmers at a price roughly three times the price paid for industrial hemp grain, which was $0.39 per pound. This is in line with the premium for growing certified seed in other industries. It is further assumed that the yield for seed that qualifies as certified will be roughly 75 percent of the yield for grain.
2 The level of demand, even at current prices, might be higher if cultivating industrial hemp was legal. In particular, the government¹ s ban on industrial hemp grain may discourage some manufacturers from utilizing the grain even though it is available legally, and sterilized, from brokers in the United States.
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