As more American farmers expand their business into the hemp industry, a number of factors–some quite new–are influencing the price of hemp flower. In an industry where purchasers can expect to pay anywhere from $150 to $1,200 a pound for hemp flower, it can be difficult to understand exactly what you’re paying for.
To gain a better grasp on what determines the price of hemp, we spoke with Jeff Tacy, COO and CFO of Franny’s Farm. As a vertically integrated CBD/hemp company that distributes to all 50 states, Tacy has an insider’s perspective on the costs, risks, and benefits of growing hemp.
One factor affecting hemp prices, says Tacy, is the size of the hemp farming operation. Local farmers running smaller scale grows are competing with an influx of large scale farm operations, many of which are extensions of existing cannabis growing companies. These larger producers can sell their flower for less than their local counterparts, adding to the overall pricing discrepancy.
“Many of the western state farms in Oregon, Washington, California, and Colorado are transitioning away from growing marijuana and beginning to grow CBD hemp, and many of them are very large farms and grows,” says Tacy. “Last year some of these farms sold pounds of flower for $150 to $200, and it really hurt the local market for flower.”
To stay competitive, local farmers do have one major advantage. With direct control over their operation, they are able to grow higher quality flower and sell it for three to four times the price. Tacy is one such purchaser who opts for the local option when possible. He has paid between $600 and $900 for a pound of locally grown flower that has met his quality standards.
“We require testing for cannabinoids, THC, mold, commercial fertilizers, and commercial pesticides,” Tacy says. “The buds must meet visual bud structure standards and the CBD percentage must be a minimum of 12%.”
Large scale farms don’t typically meet his criteria, so for Tacy, the price hike is well worth it.
However, local farmers looking to sell their flower at a premium have their work cut out for them. To seal a deal at these prices, farmers need to forge strong relationships with purchasers and establish a healthy amount of trust.
“They have to be willing to drive around to all the retailers, drop off samples, leave Certificates of Authenticity, and try to set up accounts,” Tacy says.
Most local farms don’t have a dedicated sales arm to pick up the slack. They don’t have the manpower to drive around multiple states setting up accounts, and hiring a representative would cut into their profits. For a farm to expand into these areas, they might have to include the additional labor costs in their flower prices.
Hemp farms of all sizes also face another dilemma: storage. In Tacy’s experience, flower purchasers typically buy one to three pounds of flower at a time rather than a year’s worth of product in one go. This means farmers must store and preserve their flower for long periods of time in order to fill year-round orders.
“Not very many farmers are aware, prepared or equipped to do business this way,” says Tacy.
Supply scarcity also affects the price of hemp. As harvest time approaches, flower supplies tend to run low, and prices go up. It’s a symptom of an emerging industry, where there are more retailers than there are farms growing quality flower.
Franny’s Farm, which is located in North Carolina, has struggled in the past to find local flower that met their quality standards. To fill customer demand, Tacy and company purchased what they could at the local level, and supplemented the rest with flower from out west.
However, Tacy predicts things are about to change.
“I believe we will have massive amounts of flower available after the September/October harvest,” Tacy says. “With all the new farms growing this year that didn’t grow last year, I think we will have a lot more flower on the market.”
Tacy’s right. In 2019, South Carolina doubled the amount of permits for industrial hemp farmers, Pennsylvania issued 10 times their number of permits, and the amount of licensed hemp cultivators in New York grew from 21 in 2017 to almost 150 today.
While farmers are growing more hemp than ever before, companies are quickly learning that processing hemp is much more lucrative. While hemp flower can sell for $150 to $1,200 a pound, the average price of ethanol-extracted CBD oil is $2,000 to $2,500 a kilo (about half a pound). For CO2-extracted oil, that number jumps to $3,000.
In their second year of growing, Tacy came to the same realization, and began expanding the business into processing, manufacturing, retailing, and wholesaling CBD products. To accomplish the ambitious plan, Franny’s Farm constructed a vertically integrated system where they could own and control every aspect of the supply chain. This included building an entirely new arm of their operation, Franny’s Farmacy Dispensaries.
Through this type of vertical integration, companies like Franny’s Farm can ensure the consistency and quality of the supply and end-user products, as well as the transparency, accountability, and traceability throughout their systems.
“Unlike the majority of the CBD products we see on the market that lack the same accountability, we can honestly follow our plants from the field to the shelf,” Tacy says. “We figured out as a farmer how to make money in an industry filled with scams, misinformation, and hysteria of getting rich off hemp fever.”
Building a vertically integrated system doesn’t come without its challenges. Such a large scale endeavor requires a much broader and more comprehensive wealth of knowledge, and designing, developing, and distributing product lines is arduous and expensive. And of course, the additional costs demand more upfront capital.
“The average farmer does not have the skill set or wherewithal to even begin to build the machine required to compete with the products currently flooding the market,” Tacy says.
For those who can’t vertically integrate, hemp can still turn a profit. Tacy believes there will always be a market for higher-end quality flower. Thus, the best thing local farmers can do is grow small plots with the intention of producing super high quality buds.
“I like to compare it to the beer industry,” Tacy says, “where craft beer producers have gained a market share of the beer giant’s sales [because] consumers are making purchase decisions to spend more for what they want.”