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What the Farm Bill's Hemp Legalization Means for Small Business

How Hemp Legalization Could Be a Good Thing for Small Businesses
Credit: Andris Tkacenko/Shutterstock

On Dec. 20, President Donald Trump signed the 2018 Farm Bill, an annual piece of legislation that governs regulations and funding across the entire agriculture industry of the U.S. Naturally, such a bill has sweeping effects that have significant implications on both the U.S. economy and food production. This year, however, there is one measure that especially stands out: federal hemp legalization.

With the federal government's full legalization of hemp, a previously marginalized industry is opening for free interstate commerce. What does that mean for entrepreneurs looking to get into the space, as well as those who could benefit from a wider availability of hemp-derived products? Here's a brief look at hemp's history in the U.S., as well as what its newly legalized status means for small businesses.

  • The 2018 Farm Bill, signed into law by President Donald Trump, legalizes hemp through a measure known as Section 7606.
     
  • Legalization overturns more than 80 years of federal prohibition and permits the cultivation of and interstate commerce involving hemp and hemp products.
     
  • Passage of the farm bill greatly boosted projected growth of the hemp industry, putting it on track to become a more than $22 billion industry by 2022.
     
  • Small businesses are likely to benefit from an expansion of cost-effective, durable and domestically produced hemp products including paper, textiles, biofuels and more.

Hemp, a non-intoxicating form of the plant Cannabis sativa (L.), was outlawed in the U.S. in 1937 when Congress passed the Marihuana Tax Act. Although most states have legalized hemp in some form since, the federal prohibition meant interstate commerce involving the plant and its derivative products remained illegal. Jenelle Kim, co-founder and lead formulator of hemp product manufacturer JBK Wellness Labs, said the prohibition overshadowed thousands of years of hemp usage in human culture. [Interested in starting a business in the cannabis or hemp industry? Check out our guide to the emerging opportunities in that field.]

"In Chinese medicine, the first recorded usage of hemp was in 2,700 BC," Kim said. "It's one of our 50 fundamental herbs. You don't often find one herbal ingredient than can do so much for us … whether that's internal products, beauty lines, skincare, clothing or using hemp in other ways."

Federal law first loosened in 2004 when the Hemp Industries Association challenged the Drug Enforcement Agency (DEA) on a proposed rule that would have prohibited the import of hemp seed and oils for processing and manufacturing in the U.S. The Ninth Circuit Court of Appeals struck down the DEA rule, allowing manufacturers to continue importing hemp for the creation of finished products like hemp-based foods, beverages and topicals. Although the decision allowed many product manufacturers to continue operating their businesses, the domestic cultivation and harvest of hemp remained prohibited. It wouldn't be the last time the Hemp Industries Association pushed back against the DEA.

"All of our woes for industrial hemp can be entirely, directly, exclusively related to hemp's inclusion as a Schedule I drug," said Joy Beckerman, president of the Hemp Industries Association.

Ten years later, the 2014 Farm Bill established pilot programs in which universities and state agencies could grow industrial hemp, defined as containing less than 0.3 percent THC, for research purposes. It would be the first time since the 1937 law was passed that hemp could be legally cultivated and harvested in the U.S. The commercial cultivation, harvest and processing of hemp, however, remained federally illegal.

"[The 2014 Farm Bill] legalized research so that people could grow hemp under pilot programs ultimately regulated and monitored for those specific research programs," Kim said. "You could conduct research to understand more about hemp and cannabinoids, but, federally, it was still not legal."

With the signing of the 2018 Farm Bill, however, that is all about to change. Hemp legalization was first introduced by Senate Majority Leader Mitch McConnell, a Republican from industrial hemp-producing Kentucky. The measure, known as Section 7606, ends the Schedule I status of industrial hemp under the Controlled Substances Act (CSA), which categorized the plant as a potentially addictive substance with no medical uses alongside drugs like heroin and ecstasy.

"This is a total gamechanger. This is revolutionary," said Beckerman. "This is the first cannabis descheduling at the federal level in the history of the CSA. We're about to usher in the reintroduction in a massive way of a versatile and valuable hemp crop into the U.S."

Despite prohibition, the U.S. is already home to an active and thriving hemp industry, although much of it is confined to individual states because of the laws. Legalization means that U.S. farmers will now be able to grow the crop, and existing hemp companies will be able to expand unabated and undeterred by the potential for federal intervention.

Not only did prohibition mean hemp companies were legally unable to engage in interstate commerce, it also meant access to critical business services was often restricted. This includes banking, for example, because many banks harbored concerns about doing business with a company that remained federally illegal. Not only would that require more compliance work, risk management and due diligence on the part of the bank, it also would put banks at risk for money laundering charges and loss of FDIC status if the federal government enforced the laws on the books.

Legalization removes these barriers and is expected to provide a boost to the U.S. hemp industry, which was previously on track to grow to a $2 billion market by 2022 prior to the Farm Bill's passage. According to the Brightfield Group, though, legalization would result in a $22 billion hemp-derived CBD market by 2022, which excludes the many other types of hemp-derived products on the market. To put that in perspective, the entire domestic cannabis industry (which includes not just hemp, but also cannabis and all its derivative products) was projected to stimulate $23.4 billion in consumer spending by 2022. That means if the Brightfield Group's estimates are accurate, hemp-derived CBD alone could double the projected market value of the entire cannabis industry.

"It's very clear that this is going to be a huge opportunity for a lot of people and will bring a lot of growth for people within our country," Kim said. "The CBD industry is unlike anything I've ever seen."

The legalization of hemp does more than simply create a new industry, and thus new business ideas and opportunities for entrepreneurs. Hemp is an extremely diverse crop with a wide range of applications, including in textiles, nutrition and biofuels, to name a few. The wider availability of these products could provide small businesses with more cost-effective or durable inputs.

For example, offices that require a lot of paper could take advantage of hemp-based paper products that are cheaper to cultivate than lumber-based paper products. That's not to mention hemp's 3 to 4-month life cycle, making it a far more ecologically sustainable choice for companies focused on environmentally-friendly practices.

"[Legalization] is paving the way for a massive expansion to both the agricultural industries and a spectrum of industries in America," Beckerman said. "[It opens] ancillary service providers from every industry like banking, insurance, finance, merchant processing and packaging labeling distribution. And we're talking about improving products by blending in the superior properties of hemp."

According to Beckerman, hemp products can be found in a wide range of industries, including nutrition, pharmaceuticals, paper, textiles, building materials, biocomposites, biofuels, industrial sealants and coatings, nanotechnology and biomedical applications. However, she stressed that this was "not an exhaustive list."

"The hemp plant does all of that," she said. "It's here to serve all the needs of humanity."