A boom in demand for cannabidiol (CBD) has created an alarming shortage, which savvy hemp companies are aggressively looking to solve.
Cultivation supplies company Sugarmade Inc. (OTC:SGMD) (SGMD Profile) has acquired several other suppliers, allowing it to benefit from economies of scale. Canadian cultivator Tilray Inc. (NASDAQ:TLRY) is investing heavily in new growing space. Canopy Growth Corporation (NYSE:CGC) (TSX:WEED.TO) has expanded from Canada into the United States and is collaborating with other companies to meet demand. Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON.TO) has received a substantial inflow of funds from a tobacco company and is investing some of it in R&D. Charlotte’s Web Holdings Inc. (OTC:CWBHF) (CNSX:CWEB.CN) is focusing on growing high-quality hemp to supply a range of novel products.
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— Demand for CBD has soared thanks to consumer interest.
— Legalization nationally in the United States through the farm bill has led to more cultivators and a rising demand for cultivation supplies.
— Companies are rising to meet these supply challenges through expansion, consolidation and innovation.
CBD and the Challenge of Demand
The ability to meet customer demand is one of the fundamental challenges for any industry. If businesses can’t keep up with demand, they don’t just miss out on an immediate opportunity for profit, they risk losing the attention of customers in the long term.
For a relatively new product such as CBD, that problem is particularly acute. Though demand for the product is currently high, the industry is not well established, making it critical that companies reinforce customer habits through supplying the products they’re seeking. Being new, however, makes the supply problem particularly challenging, as production techniques and supply pipelines are not fully developed for massive consumption. The future of the industry will depend upon which companies are able to meet this demand and how they do it.
The CBD Boom
The CBD industry has seen a staggering boom in the past. This growth has created opportunities for companies such as brand expansion and acquisition firm Sugarmade Inc. (OTC:SGMD), which is making a strong play into the sector, as well as new companies focused purely on CBD.
The demand for CBD is easy to explain. Recent research into its uses has suggested that this naturally occurring compound can be useful in a range of health and well-being roles, including managing pain and helping users to relax. This compelling research has naturally drawn the attention of customers seeking new options to improve the way they feel, especially those consumers who prefer to avoid heavily processed chemicals.
Publicity around CBD has further raised demand. Some of this attention comes from emerging CBD companies, whose marketing efforts have raised the profile not just of their own brands but of the sector as a whole. Additional exposure has come from the battle to make hemp cultivation legal across the United States. Because hemp provides most of the available CBD, this process also brought hemp production into the public spotlight. Companies such as Sugarmade found their businesses attracting far more attention — so more demand.
This demand culminated with the passage of the 2018 Farm Bill. Signed into law just before Christmas, the bill legalized the production of hemp on a national level. This makes hemp production a far more straightforward and reliable source of income, and will allow more farmers to benefit from a profitable cash crop. As companies rush to enter the sector or expand production in response to the bill, demand for the services and equipment they need has soared. As a provider of the hydroponic cultivation supplies on which many hemp farmers depend, Sugarmade and its pending acquisition subsidiaries — AthenaUnited.com and Zenhydro.com — has found itself swamped with orders.
Shortage of CBD
This surge in demand following the farm bill has created an undeniable opportunity within the CBD sector — along with a challenge. Fortunately for Sugarmade, it’s a challenge that they appear to be instrumental in solving.
Hemp cultivators are currently unable to provide the volume of plants that customers want. One of the reasons is that the cultivation, processing and supply systems simply aren’t large enough. The CBD industry was already on an expansion path as it tried to meet growing demand before the farm bill. Now with that demand growing further, it’s going to take time and a big push to achieve what people are after. Making an industry legal doesn’t make it magically appear.
Then there’s the unreliability of the CBD levels in hemp. The chemical content of the plants is small and hugely variable. Relatively small shifts in the makeup of a crop can have a significant impact on how much CBD is produced.
Cultivating larger, more reliable crops is vital to the future of the industry. Manufacturers are eager to rise to that challenge. However, to do so they need to get the supplies to get them off the ground, including hydroponic systems, feed chemicals and the clippings, or clones, from which much hemp is grown.
Looking at the effect of this shortage in just one state, Sugarmade CEO Jimmy Chan was optimistic about the effect on his company. “With at least 42,000 acres of hemp expected to be planted in Kentucky and considering an average plant density per acre of well over 1,000, farmers in Kentucky will need hundreds of millions of clones over the coming years,” he said. “When these numbers are multiplied over the many other hemp cultivation states, it is easy for anyone to see the strong demand scenario that is quickly developing.”
Responding to the Shortage
To meet the demand for CBD, hemp cultivators will clearly need to improve both the quantity and the quality of their crops.
It’s easy to see how an increase in quantity will have knock-on effects for suppliers such as Sugarmade. The company’s pending acquisition subsidiaries AthenaUnited.com and ZenHydro.com are seeing orders for their cloning supplies skyrocket, with backorders building up as they rush to meet unprecedented demand.
The search for more reliable levels of CBD is also contributing to this demand. Hydroponic systems give cultivators control over the growing process. By experimenting with hydroponics and controlling the light, plant food and environment, cultivators can find ways to grow plants with predictable and higher levels of CBD. This experimentation will create even more demand for hydroponic materials. Sugarmade should be central to the improvement of these processes.
To provide supplies as efficiently and profitably as possible, Sugarmade has gone through a period of expansion, acquiring other companies in the hydroponics and CBD sector. This model of consolidation is being repeated across the industry as businesses seek efficiencies of scale.
“Sugarmade plans to integrate these businesses fully as soon as is possible, making us one of the larger suppliers to this growing marketplace,” stated Chan. “Additionally, we are in process of vetting other possible acquisitions to further enhance our portfolio of hydroponic and cultivation supply products. We are certainly excited about our prospects for the remaining part of this year and into next year.”
Sugarmade isn’t the only CBD-related company using acquisitions to expand potential. Canadian company Tilray Inc. (NASDAQ:TLRY) has undertaken a series of acquisitions, including Manitoba Harvest, the world’s largest hemp foods company, to strengthen its position in hemp. The company has responded decisively to the recent supply shortage in hemp and related plants in North America, in part by investing $32.6 million to significantly expand it production space across three sites, increasing its cultivation and manufacturing footprint by nearly 20%.
Another of the big Canadian companies, Canopy Growth Corporation (NYSE:CGC) (TSX:WEED.TO) has opted into investing south of the border thanks to the farm bill. The company has set up a hemp-growing facility in New York state and acquired another hemp company, AgriNextUSA. Canopy Growth has also been collaborating with other CBD and related companies to boost their shared output. One collaboration with PharmHouse has seen Canopy Growth provide high-quality genetic stock to PharmHouse’s growing facility. In return, Canopy Growth will benefit from an offtake agreement to obtain flowers from the plants PharmHouse is growing.
Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON.TO) has benefited from attention on the sector through a huge injection of outside cash. Tobacco giant Altria has agreed to invest C$2.4 billion in Cronos Group, providing the company behind Marlboro with a way into a new sector. Fittingly, Cronos Group is investing some of its funds in a new R&D facility that will work on vaporizer products. Vaping has become a popular way of consuming CBD, so the investment may allow Cronos to benefit from the market from multiple angles.
American CBD producer Charlotte’s Web Holdings Inc. (OTC:CWBHF) (CNSX:CWEB.CN) has been using proprietary genetics to work toward the goal of high-quality, low-cost hemp. The company has also been creating innovative new products to make use of the growth in CBD. Its recently expanded pet line offers the promise of calming dogs and easing joint pain brought on by age.
Rising demand for CBD has created a challenge, but it’s a challenge that smart companies are definitely ready to meet.
For more information about Sugarmade, please visit Sugarmade Inc. (OTC:SGMD).
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