Hemp: Challenges and Opportunities in a Budding Industry

Schwabe, Williamson & Wyatt PC
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Schwabe, Williamson & Wyatt PC

On May 12, Schwabe collaborated with Moss Adams to host a virtual roundtable that explored legal realities around owning and operating a hemp business in Oregon. Schwabe attorneys Lisa Schaures and Joe Hobson were joined by Jacob Crabtree of Columbia Hemp Trading Company, Sunny Summers of the Oregon Department of Agriculture, and Ryan Kuenzi of Moss Adams.

Our panelists discussed the evolving nature of the hemp industry at the state and federal level in Oregon. They also acknowledged sticky issues happening in the industry and tried to answer the big question: how do companies make money in hemp?

Read on to learn our top takeaways from The Business of Hemp in Oregon.

Starting a hemp business, practically and legally
There are many considerations in building a hemp business, from farming through distribution. Ryan Kuenzi noted: start from where you want to end up. His recommendation? “Begin with the end in mind. Ask: what do you anticipate as an owner group? Family farm? Investor group? Some type of joint venture? That can dictate the structure you implement, and tax results.”

Our panelists recommended business planning and connecting with people in the industry. Like many agricultural products, hemp is volatile—what is there one day might not be there the next day. Growers need to understand the cost of production (i.e., what it takes to produce a pound of biomass, or where the break-even point is for a hemp operation) and enterprise budgeting. Hemp growers should also build a solid crop year accounting program, based on an understanding of the cycles and cash flow points.

And on paper? Joe Hobson, an attorney well-versed in the nuances of Oregon agricultural law, pointed out that hemp business owners will want to learn the difference between LLCs and corporations. In Oregon, forming an LLC is often the primary choice for doing business. An LLC is formed by filing articles of organization with the secretary of state, then adopting an operating agreement. To manage risk, it’s important to build separate LLCs for various functions.

Sticky issues affecting the hemp industry
To quote panelist Sunny Summers, “it’s all sticky” when it comes to hemp, especially when it comes to product crossing state lines. When growing for CBD or other essential oils as opposed to grain or fiber, there are pretty significant obstacles at the federal level that include moving across state lines and how businesses can market their products.

On the federal side, there are two key regulating bodies—the USDA and FDA—and they don’t enable food and beverage products to easily come to market. A main challenge for CBD is to be sold as a supplement or in food/beverage products. It will take an act of Congress to create change at the federal level.

A brief history of hemp in Oregon
In 2015, Oregon began issuing registrations to hemp growers. To start, there were 13 registered growers, and the state has issued significantly more registrations every year. The 2018 Farm Bill made national changes, including creating a federal program within the USDA and setting out specific regulations that states would have to meet. It also created the opportunity for state departments of agriculture to have their own hemp regulatory programs to the extent they devise plans to license and regulate hemp that are submitted and approved by the Secretary of the USDA.

Washington’s hemp regulatory program was granted USDA approval in 2020, but Oregon’s program is still not approved. Oregon legislators are currently trying to develop laws and rules to meet the USDA requirements; this is the third legislative session in which lawmakers have worked on this. If they are able to move forward with submitting a state hemp regulatory program for USDA approval, it would hopefully go into effect for hemp farmers on January 1, 2022. Under the 2018 Farm Bill, Oregon has until January 1, 2022, to begin operating under a plan for the commercial production of industrial hemp that is approved by the USDA. Why is this a big deal? Hemp is currently Oregon’s largest agricultural commodity. 

Seeing green vs. going up in smoke
Endeavoring into hemp—and seeing a profit—takes careful planning, attention to business structure, and a deep understanding of what’s happening in the hemp industry currently and what’s on the horizon. Hemp also takes collaboration. Across the board, our panelists stressed the importance of building a team and knowing the nuances of the industry.  

Kuenzi warned against the tendency of operating a hemp business from a checkbook and not maintaining a set of books with meaningful information. His recommendation? “Build an accrual set of books. Understand your enterprise budgets. What it looks like from an accrual basis—this will give you the info to make good, informed decisions.”

Crabtree encourages the hemp business-curious to familiarize themselves with the American Herbal Products Association (AHPA). The hemp industry has its own unique nomenclature, and businesses/potential businesses will want to familiarize themselves with the terms.

His other advice is to tour facilities and really understand the supply chain. Ask what efficiencies you can get from different parts of the supply chain, identify how to price, and learn how fluctuations in biomass trickle down into different derivatives. “Show up, ask questions, tour many facilities, and get a real grasp on the supply chain. From there, pick your lane.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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