Last year, public interest in the cannabis industry was supercharged following the US government's decision to pass the Agriculture Improvement Act of 2018 into law.
The news sent pot stocks soaring, as the legislation radically changed how hemp is regulated under US law.
The bill's introduction means that hemp and marijuana are now classified as two legally different substances under the Controlled Substances Act. As a result, hemp-derived cannabidiol (CBD) products can now be sold throughout the US, despite the fact that the plant itself remains illegal at the federal level.
This immediately drew the attention of eagle-eyed investors, as the CBD market is expected to be worth as much as $16 billion by 2025, according to a recent report from Cowen & Co.
However, before you jump headfirst into the hemp market, it's useful to understand how marijuana, CBD, and hemp are different.
What is Hemp?
Although marijuana and hemp have wildly different qualities, both are siblings from the same Cannabaceae genus plant species.
There are two predominant plants in the Cannabaceae family, Cannabis indica and Cannabis sativa. While marijuana can come from either the indica or the sativa plant, hemp can only be found in the sativa family.
What really sets them apart is their respective chemical compositions. There are over 100 chemical cannabinoids that can be found in cannabis, however the amount of these cannabinoids differs significantly when comparing hemp and marijuana.
Marijuana typically has high levels of tetrahydrocannabinol (THC)—which cause its infamous psychoactive effects when smoked—often reaching 30 percent or more depending on the strain.
Conversely, hemp has been found to contain less than 0.3 percent THC, which has led to its historic employment as an industrial material. In the past hemp has been used to create ropes, clothing, sails, and paper thanks to its durable fibres and low cultivation time.
Even though hemp has low levels of THC, it has been found to contain significant amounts of another non-psychoactive cannabinoid, CBD. This has made the hemp industry an increasingly valuable commodity, as studies have shown that CBD's interaction with central nervous system receptors and the immune system can offer numerous medicinal benefits.
Previously, foreign cannabis companies have been unable to do business in the US due to the restrictions placed on them by major stock exchanges, as they would be unable to maintain their listing if they conducted business in a country where marijuana was illegal at the federal level.
However, following the passing of the US farm bill, CBD derived from hemp plants is now legal in all 50 American states. This means that they are now able to create their own licensing programs—in collaboration with the U.S. Department of Agriculture—for the widespread cultivation of hemp with THC levels below 0.3%
The legislative shift is expected to supercharge the American CBD market, as companies create an increasing number of consumer products for wide-scale distribution.
This is exciting news, as a recent market analysis report published by Cowen & Co. suggested that the CBD industry may be worth as much as $16 billion by 2025 in America alone.
CBD is becoming an increasingly prominent powerhouse in the cannabis industry, as a growing body of research has confirmed that it can be used to treat a variety of illnesses, including chronic pain, anxiety, epilepsy, cancer, and even acne.
Wellness Market vs Pharma-Grade
The CBD market is clearly on the rise, however not all CBD products are created equal.
When examining the CBD space, it's important to ensure that you differentiate between companies who are targeting the "Wellness Market" and those who are developing pharmaceutical grade products.
According to a senior analyst at strategic research firm The Future Laboratory, Victoria Buchanan, the "interest in CBD as a search term is now four times higher than it is for THC, according to Google Trends".
"As cannabidiol and hemp oil grow in popularity as skincare ingredients and in wellness treatments, brands are adopting a more sophisticated and nuanced aesthetic that is more closely aligned with the luxury market."
While companies who are developing products for the medicinal market must undertake numerous research, development and clinical studies before they can be approved for sale, CBD wellness products have no such requirements.
This has led to a proliferation of CBD infused wellness products flooding the market, such as skincare creams, balms, dietary products, and even bath-bombs. Market research firm the Brightfield Group estimates that the US CBD wellness industry could be worth almost $22 Billion by 2022.
Although the lower barrier of entry has already proved lucrative for many smaller cannabis companies, investors should remain aware that some product claims may be dubious in nature.
Hemp also has numerous applications as an industrial material, and can be used to make fuel, paper, textiles, health food, biodegradable plastics, and even cigarette filters. It is also one of the fastest growing agricultural crops, and is capable of being harvest within four months of planting.
Hemp cultivation requires little to no pesticides, produces oxygen, exhibits zero topsoil erosion, and can even be used to replace more environmentally harmful products. This is because hemp often requires less industrial processing post-harvest, which significantly lessens the overall environmental impact.
This has led to a flood of agricultural companies jumping into the hemp market, while also drawing positive attention from environmental groups due to the industry's comparatively sustainable qualities.
According to a research report published by Grand View Research, the global industrial hemp market is expected to reach $10.6 billion in value by 2025. The growing demand for hemp food and beverages, cosmetics, personal care products, and protein supplements are predicted to be one of the primary drivers of future market growth.
Additionally, the increasing refinement of hemp's water repellent and fire retardant by companies operating in the market space will likely drive further commercial demand for the plant.
Industrial hemp is farmable on most of the world's agricultural land, and is already produced in major countries around the world by major exporters such as China, Canada, and France.
Top Hemp Stocks for 2019
Thanks to the passing of the 2018 Farm Bill the US is now officially open for business when it comes to hemp-derived CBD. While this has triggered a flood of hemp companies looking to capitalise on the rapidly expanding CBD space, there are four in particular that we feel are primed to fully take advantage of what will eventually be a $22 billion market.
Charlotte's Web (CSE:CWEB) is a Colorado-based, vertically-integrated business, that is the undisputed leader of the hemp-derived CBD market. The company operates on over 300 acres of irrigated farmland, with a 50,000 square foot in-house production and manufacturing facility.
They also have contract farming agreements for their hemp in Kentucky and Oregon, a direct to market sales platform via their e-commerce site, and wholesale distribution through their network of 2700 retailers. These assets allowed them to produce over $40 million in revenue in 2017 (an increase of 172% on the previous year) with EBITDA of $14 million.
CV Sciences (OTCMKTS:CVSI), is another vertically-integrated hemp company that manufactures, sells and markets its' hemp-derived CBD products across the US. There are two distinct divisions to CV Sciences. They have a pharmaceutical division and a consumer-products division.
The pharmaceutical division focuses on the research and development of new CBD based drugs. Their current focus is on CVSI-007, a CBD-based drug intended for the treatment of smokeless tobacco. However, they are only in preclinical stage.
Their consumer products division however, is a completely different story. CV Science's PlusCBD brand is sold nationally through a network of retailers, and has more than 50 products in its range. These cover verticals such as beauty care, nutraceutical and vape products to name but a few. Given the range of products and their current reach, this is certainly no early stage company.
Elixinol Global (ASX:EXL) is another strong contender to take on the CBD market. The company—which operates in the industrial hemp, dietary supplements and emerging medicinal cannabis sector—actually comprises three separate companies. The first of these, Elixinol US, is the main business unit. Elixinol US manufactures and distributes hemp-based dietary and skin care products to the US market and exports to another 40 countries globally.
The other two companies both operate out of Australia. One of these is Hemp Foods Australia, which sells hemp foods and seeds through retail networks and wholesale channels. The other is Elixinol Australia, a late-stage medicinal marijuana applicant which aims to produce premium medicinal marijuana for the emerging Australian medicinal market.
And finally, there's the newcomer of the bunch—having only listed on the ASX in March 2019—Ecofibre Limited (ASX:EOF). The Brisbane-based company managed to raise $20 million from an IPO of $1 per share, and subsequently listed with a market capitalisation of more than $300 million.
Ecofibre plan to use the funds to push the development of Hemp Black—a range hemp-based textiles developed in partnership with Thomas Jefferson University—closer to commercialisation. The company's activities are currently split between the Australian and US markets, and although the company is based in Queensland it's currently deriving the lion's share of its' income from American consumers.
Ecofibre is already well established in the US wellness market, and produces a number of popular CBD-based topical creams, salves, and nutraceutical products for humans and animals. Thanks to robust US sales the company managed to take home $5.7 million in fiscal revenue for 2018, while the last six months have produced unaudited returns of $13.3 million.
Building a Hempire
Although the hemp market is already going strong, things are only just beginning to heat up.
The passing of the US Farm bill has opened up the game for international companies, with Canopy Growth (NYSE:CGC)—the biggest cannabis company in Canada—having already announced plans to enter the American market.
The company has already received processing license for New York state, while corporate management confirmed that the Canopy Growth intends to invest $150 million on a hemp-focused industrial park.
Thanks to a growing body of research touting the health benefits of CBD, companies can expect greater demand for hemp-based products in future. And, the growing popularity of environmentally conscious consumerism—along with its high yields and fast grow times—will likely drive additional interest in the plant's potential as an industrial crop in the years to come.
Whether you're investing in pharmaceutical grade CBD, the wellness market, or industrial producers, the future looks green for the hemp industry.
Further in-depth explorations of the topics discussed in this guide can be found in the articles listed below. Investors who are looking to learn more should watch this space, as we will continue to post further updates on the global hemp market as they emerge.