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Opportunities and Challenges for the CBD and Hemp Industry

While the CBD and hemp industry isn’t necessarily new, the nearly complete legalization across the country and the complex cultivation and extraction regulations present many opportunities – and challenges – for cities and states looking to welcome this newest entry in the food and beverage industry. We interviewed Scott Kupperman, Owner, Kupperman Location Solutions, at the 2019 Area Development Consultants Forum in Houston about some of these insights. Below are some excerpts from our interview, which you can also watch here.

Q2 2020
Scott Kupperman, Owner, Kupperman Location Solutions, spoke with Area Development about the site selection opportunities - and challenges - for the CBD and Hemp industry at our 2019 Houston Consultants Forum. Interview conducted by Margy Sweeney, Founder and CEO, Akrete, Inc. and Area Development Editorial Board member.
Editor’s note: This interview was conducted before the global COVID-19 pandemic, which will undoubtedly affect food and beverage supply chains and site selection throughout 2020 and beyond. Food and Beverage – and CBD?
For me, the definition of the food and beverage industry is very broad. Not only is it representing companies that make a product that you and I would eat or drink, but it also includes grocery chains [that] have a need for a distribution or warehousing facility. Lately, it's included working for companies that make all sorts of [food] packaging, which is a big growth sector in the industry. It might include supplements of various kinds. Today, [at the Consultants Forum,] I spoke about a CBD project that I have worked on over the course of this past year, which I had a referral from for that particular user. It did have some similar requirements to a standard food and beverage site selection project, but also because it's so heavily dependent on the regulatory environment, it was a topic worth discussing specifically to an audience of economic developers. [The federal banking industry will] hopefully provide banking and credit card services to businesses in the hemp and CBD industry, which in similar ways to the marijuana industry, has been a real struggle. Scott Kupperman, Owner, Kupperman Location Solutions

[The CBD industry] is particularly heavily regulated. It's something that people eat and drink in one form, but it's also being used as both a supplement you know, a gummy or a dropper – what they call a tincture – and, with a high degree of popularity, a balm or ointment. For one reason or another, people find relief by using CBD, whether it's from certain types of pain in their joints or elsewhere in the body. But they also find it as a means for dealing with anxiety or other sources of stress.

There are obviously different ways to use it. Food marketing companies are very astute about this. There's a lot of research that shows acceptance of CBD is gaining in the mainstream very, very quickly. It's gaining acceptance not by people on the fringe who are, you know, buying sort of off-the-radar products. It's being purchased by well educated people with disposable income in very mainstream points of retail. So that popularity is being tuned into and hopefully tapped into by a growing number of food and beverage companies out there.

CBD Versus Hemp – What Are They?
The technical name is cannabidiol… everybody calls it CBD. It is an extract derived from the hemp plant, and the hemp plant looks almost identical to a marijuana plant if you were to see it, but it has a lower content of THC, which is the chemical that people recognize is getting you high, and CBD, by definition, has 0.3% THC in it. Anything beyond that is considered THC, so under 0.3% it's CBD, and higher, it’s THC and subject to a whole different variety of regulations. So, what that also means is that the growing, testing, and regulation of hemp (the plant from which CBD is derived) is inextricably linked to the CBD industry, and the hemp industry is governed by the USDA. The CBD industry is governed by the FDA. They each own have their certain and very evolving set of regulations that govern both of those that crop in that product. And states also have the opportunity to change that as well. So, it's an incredibly fluid, constantly changing… set of regulatory issues that these companies have to deal with.

Is Growing Hemp and Extracting CBD Legal?
In December of 2018, the federal government took hemp off the list of controlled substances through the 2018 Farm Bill. They also allowed for individual states to make the decision as to whether or not they wanted hemp to be legal in their state. So [at the time of this interview] in December 2019, hemp is legally grown at both the state and federal level, with the exception of Idaho, South Dakota and Mississippi, where you cannot grow hemp right now or CBD products.

That farm bill also started the governance of testing regulations for hemp, and most importantly, it started the process of signaling to the industry – and the federal banking industry – that they should start seeing this is a viable form of interstate commerce. [The federal banking industry will] hopefully provide banking and credit card services to businesses in the hemp and CBD industry, which in similar ways to the marijuana industry, that's been a real struggle. CBD itself is not legal on the federal level, according to the FDA. It is not assumed to be a generally safe product. I think with one exception of being usable as a form of medication for a certain type of epilepsy, they make that that exception. However, you see, when you go to various points of retail, different types of products… So, the FDA, at least until now, was turning a blind eye to those products, [like] those things you drink with CBD on the label. What they don't want those companies making claims that that product has a health benefit for you, and that's the place where they're cracking down. Not necessarily on saying, “you have to put it up, pull it off the shelf,” but censoring those companies and issuing warnings.

So there's a lot of companies out there in the CBD industry that are making a food and beverage product, both smaller ones who were doing it on kind of craft scale and many bigger ones who were waiting on the sideline for the FDA to say: “Here's how we're governing the use of CBD in the mainstream food and beverage industry.” That should be decided upon sometime in the next 12 months… that's the hope. That's why you see a lot of companies that provide CBD extract in various forums gearing up right now, to hopefully start selling it to a much broader market.

Site Selection, CBD, and Hemp
If I were an economic developer, I would want to arm myself with at least an intermediate level understanding of the regulatory environment for these industries. Number one, is it changes state by state. There's a federal standard that states have their own laws to govern both how hemp has grown, tested, and where and how you can sell CBD. So if you're going to address a requirement, or you [get an] RFP from somebody like me that says, “I want to bring a hemp business to your state,” one of the first things we're going to look at – even more so than other types of businesses – [is] what are your state regulations about how this could move through your state, how it could be grown? What do we need to know? And the average economic developer is not going to have the technical expertise to know that…

I found by virtue of my experience in working on a project this past year, any state will have somebody either in state government, possibly a legal resource, but somebody who's making a living by understanding what's going on with that state's regulatory environment. I would absolutely encourage an economic developer to find that person and be that talking head and level of expertise because it's going to rise to the top level of importance much quicker than… an auto, pharma or food requirement that something is less susceptible to varying levels of the regulatory system.

In the food industry, they're absolutely consumed with risk. You know, the risk of getting started and a time frame they can understand, involving a budget that they can they can adhere to, and certainly the risk associated with manufacturing their product safely according to whatever regulatory standards are out there. [CBD is] an industry that's evolving very quickly. Like most others, they want to get rid of the gray area and try to understand what's a clear path to success for them. They’re at a handicap just because this is a space that's evolving so quickly.

The CBD and Hemp Supply Chain
So the supply chain, at least as I know it… a farmer decides that he or she wants to plant a crop. It could be on a large scale, or it could be on a smaller scale. The more sophisticated ones at this point in time probably have a couple of growing seasons under their belt because they've been doing it now legally in some places for about four or five years.

It is not an easy crop to grow successfully. Many farmers are getting, at best, 50% level of harvest from all the overall crop that they plant. It is easily susceptible to mold and pesticides ruining it. It is very labor intensive to pick. The CBD is only contained in female plants. Male plants kind are full of seeds, and it's much more difficult, if not impossible, to get extract out of it. So, the sophisticated hemp farmers number one, might have a greenhouse where they can control what they call the genetics. They might have automated picking and drying. That gives him an advantage and efficiency over smaller farmers. And what they probably have if they have a good relationship, is that have a forward commitment to buy their crop. [The crops are] subject to testing of not being over the 0.3% THC threshold from a larger CBD extractor. So, they've made that agreement up front that if you grow a certain amount of hemp, I will buy it from you.

Usually the hemp is cultivated [between] September and October. It needs to be tested, according to federal regulations, two weeks before it's harvested to see what that THC content is. Assuming it tests for the correct level, it is pulled out of the ground, and I'm not sure exactly how it's processed on the farm or bundled, but it would get transported to a CBD extraction or processing facility.

Generally, those extractors like the source of hemp to be fairly close to where they are for a couple reasons. Number one, it's heavy, and shipping costs can be on the more expensive side. But more importantly, the more states it has to be transported through, the higher risk there is of confiscation from a police force or state regulator from a state you may be traversing through who doesn't understand the differences between hemp and cannabis, so they like to minimize that risk.

Once it finally makes its way to the extraction facility, there's different ways of processing it. You're getting above my pay grade on what that involves, but then those companies turn it into various forms… creating an ingredient that they would sell to a food processor in some way or a further ingredient processor.

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