This article originally appeared on Bloomberg Law, and is republished here with permission.

The USDA’s interim final rule on hemp provides needed clarity and certainty around its legal production. At the same time, producers must ensure they are not running afoul of state or tribal requirements. Foley & Lardner LLP attorneys offer important takeaways from the rule and say it sets the stage for industrial hemp production to take off around the country.

The Department of Agriculture’s recent interim final rule establishing the U.S. Domestic Hemp Production Program and outlining a regulatory framework for monitoring hemp cultivation and production is welcome news to U.S. industrial hemp stakeholders eager to respond to an increase in demand for foods, dietary supplements, and consumer and industrial products containing hemp derivatives, including CBD.

The new rule allows the USDA to maintain information on where hemp is being produced, sets requirements on authorized levels of delta-9 tetrahydrocannabinol (THC), requires disposal of plants exceeding 0.3% THC, and makes clear that hemp may be transported across state lines, even in instances where a particular state does not currently authorize hemp production.

At the same time, the USDA defers to state law when it comes to hemp cultivation and production. Because the USDA’s interim final rule does not preempt state law with specific regard to hemp production, many hemp producers will need to comply with a patchwork of state laws in addition to understanding the nuances of the USDA’s new requirements.

What Is Hemp?

Hemp or industrial hemp is a strain of the Cannabis sativa plant species. The 2018 Farm Bill defines hemp as any part or derivative of the Cannabis sativa L. plant with a THC level below 0.3% on a dry-weight basis.

Hemp is distinct from marijuana. Each are distinct species of Cannabis, a genus of plants with two primary species—indica and sativa. Hemp and marijuana both derive from the C. sativa family. Hemp and marijuana therefore share certain similarities. But there are key biological differences. For example, whereas hemp contains just 0.3% or less of tetrahydrocannabinol (THC), a psychoactive chemical compound, marijuana contains THC concentrations between 15% and 40%.

The distinction between hemp and marijuana is critical because the Agriculture Improvement Act of 2018 (i.e., the 2018 Farm Bill) only legalizes hemp (not marijuana) and tasked the USDA with the responsibility to develop the interim final rule published on Oct. 31. Marijuana continues to be classified as a Schedule I controlled substance by the Drug Enforcement Administration pursuant to the Controlled Substances Act.

Hemp stalk, seeds, and derivatives may be used to produce a range of products from food and clothing, to packaging and construction materials. Cannabidiol (CBD)—perhaps the best known hemp derivative—presents a substantial growth opportunity for food, beverage, dietary supplement and wellness companies with projections for hemp-derived CBD to near $22 billion in market revenue by 2022.

What USDA’s New Rule Covers

The rule applies to producers of hemp and describes how the USDA will approve hemp production plans developed by states, including:

1. requirements for maintaining information on the land where hemp is produced;
2. testing the levels of delta-9 tetrahydrocannabinol (THC);
3. disposing of plants not meeting necessary requirements; and
4. licensing requirements.

Importantly, the rule also establishes a federal plan for hemp producers in states that do not have their own approved hemp production plan, provided that hemp production is not prohibited in the state (or tribal territory) at issue.

What it Means for Hemp Stakeholders

The publication of the interim final rule is welcome news to U.S. industrial hemp stakeholders who are eager to respond to an increase in demand for foods, dietary supplements and consumer and industrial products containing hemp derivatives, including CBD.

Key takeaways from the rule applicable to hemp producers and ancillary businesses include:

• Testing Requirements. The USDA is imposing strict sampling and testing requirements to confirm that THC levels in hemp do not exceed 0.3%. See concurrently issued USDA guidelines for sampling and testing procedures.
• Interstate Transportation. Hemp may be transported across state lines even in cases where the state does not authorize hemp production. This assumes that the hemp was lawfully produced under a USDA-approved plan.
• States May Impose Stricter Hemp Production Laws. The rule expressly notes that “nothing preempts or limits” any state law that regulates hemp production or is more stringent than the 2018 Farm Bill.
• Producing Hemp in State Without USDA Plan Allowed. In cases where a state does not have a USDA approved hemp production plan in place, hemp may be produced in that state under a USDA hemp producer license (which would cover production, cultivation or storage of the hemp).
• No Impact on Use of CBD or Other Hemp Derivatives in Food or Dietary Supplements. The new rules have no bearing on the separate, ongoing regulatory conversation at the U.S. Food & Drug Administration (FDA) regarding the use of hemp and its derivatives in food, beverage or dietary supplement products.

The roll-out of the interim final rule facilitates hemp production, enabling American hemp producers to embrace new economic opportunities while reducing fear of civil or criminal sanctions. Key to any stakeholder’s success will be an understanding of laws at both the federal (USDA) and state level.

For example, South Dakota currently prohibits the growing of hemp. Therefore, the production of hemp in South Dakota continues to be prohibited unless or until the state legislates otherwise. At the same time, you can transport hemp across a state like South Dakota, provided that the hemp was grown under a USDA-approved plan. In addition, in states where hemp may be produced, that state may impose more stringent requirements than the USDA.

Importantly, the USDA’s new rule affords states and tribes flexibility in determining whether hemp producers have violated their USDA-approved plan. States and tribes are free to determine whether or not a licensee under their applicable plan has taken reasonable steps to comply with plan requirements.

Thus, in addition to understanding the nuances of USDA rules around hemp, stakeholders will need to pay significant attention to laws in every state in which they conduct business.

Looking Ahead

The diverse potential applications of hemp and its various derivatives to a range of consumer and industrial products combined with increasing consumer appetite for CBD—a key hemp derivative—means that industrial hemp production is set to take off around the country. The new USDA rule provides needed clarity and certainty around the legal production of hemp. At the same time, producers must ensure they are not running afoul of state or tribal requirements.

The interim final rule became effective on Oct. 31 and will sunset on Nov. 1, 2021. A final rule will be issued thereafter incorporating stakeholder comments that the USDA will be accepting through Dec. 30.