Rising hemp production is putting pressure on processing. Sugarmade Inc. (OTCQB:SGMD) (SGMD Profile), a provider of cultivation equipment, is adding processors to its catalog of products, focusing on next-generation machinery. Canopy Growth Corporation (NYSE:CGC) (TSX:WEED.TO) will be among the companies with a rising demand for processing, as it increases both its cultivation capacity and its product lines. Demand is rising in part thanks to CBD’s public profile, with deals such as the partnership between Aurora Cannabis Inc. (NYSE:ACB) (TSX:ACB.TO) and UFC shining a spotlight on the plant and its potential. New uses for CBD are also increasing demand for the plant, with R&D led by companies such as Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON.TO) and Aphria (NYSE:APHA) (TSX:APHA.TO).
— Hemp can be processed to extract both fibers and cannabidiol (CBD).
— CBD is currently the most valuable segment of the North American hemp market, though demand is likely to grow for fiber processing.
— Larger machines offer one option to increase the scale of processing.
— New technology may provide a more efficient answer.
To view an infographic of this editorial, click here.
Masses of Hemp
The year 2019 looks to be a bumper year for the U.S. hemp industry. Rising consumer demand has met the legal relief of the 2018 Farm Bill, whose passage in December paved the way for legal hemp cultivation and processing across the country. The industry is preparing to make hay while the sun shines — or in this case, make heaps of hemp.
This rise in production, which is expected to continue into next year and beyond, is inevitably creating complications. Most important among these is the challenge of processing the hemp. U.S. hemp-processing businesses are relatively new and small scale, as is much of the machinery with which they work. If the industry is to profit from the massive rise in hemp production, then it needs to ramp up its processing capacity. Otherwise today’s bumper crops could become tomorrow’s waste.
What We Get from Hemp
Hemp production and processing has risen from nothing to become a huge business in just the last few years. Companies working in the sector, such as Sugarmade Inc. (OTCQB:SGMD), cover a wide range of products and services, from providing cultivation supplies to marketing new products to consumers.
Those products usually incorporate one of the two main ingredients that can be extracted from hemp: fibers and cannabidiol (CBD).
Fibers are how hemp has been traditionally cultivated and used. For centuries, hemp was the basis of rope and cloth, playing an essential part in equipping navies and clothing people. This use fell out of fashion in the 20th century, as sailing was replaced by mechanical shipping, and hemp became caught up in drugs criminalization efforts. As a result, America is not well positioned to produce hemp fiber, and imports most of what it uses from China, a country with a more advanced hemp fiber industry. But with growing interest in hemp and the disruption of trade wars, home-grown fibers have moved onto center stage, with more companies recognizing the significant opportunity the crop offers.
The product that has brought American companies such as Sugarmade into the hemp space is one of the breakaway commercial phenomena of the past decade — CBD. A natural chemical found in hemp and related plants, CBD has recently been the subject of much research and development. Claims have been made for its effectiveness in relaxation, pain management and countering anxiety. The component has become a popular ingredient in health and well-being products, including supplements, foods and toiletries.
With a bumper harvest of hemp expected this fall, companies throughout the value chain are asking how raw hemp can most effectively be processed to provide for the massive demand for CBD.
The industry is clearly going to have to scale up to meet the challenge of hemp processing. This burgeoning increase is creating unprecedented levels of demand for processing machinery.
“Our staff has done extensive research into the fast-growing hemp industry,” said Sugarmade CEO Jimmy Chan. “We continue to see an imbalance between cultivation outputs and extraction capacities within the industry. This leads us to believe the market for extraction services and the equipment required by these extraction companies will continue to accelerate.”
The company has responded by entering the market for hemp extraction technologies and equipment. As a supplier of cultivation supplies, Sugarmade has already benefited from the green rush surrounding the Farm Bill and the growing interest in hemp that preceded it. Moving from cultivation equipment to extraction equipment is a natural next step for a company whose business model is built around supporting cultivators.
In addition to increasing the number of machines available, many companies are looking into providing bigger machines that can process ever bigger volumes of biomass. But the drawback of this “bigger is better” philosophy is cost. The larger machines being installed in many extraction facilities are expensive, not just for the machines themselves but also the associated costs. Expenses such as real-estate square footage and ethanol storage have to be factored in, and once those costs are included, a modern hemp-extraction facility can easily cost tens of millions of dollars, a cost passed on to cultivators through processing fees.
While the industry’s processing capacity clearly needs to increase, the best solution may not be the most obvious. Sugarmade is looking at a different approach.
Rather than focus on larger versions of current machines, Sugarmade is exploring the next generation of hemp-processing technology.
Most CBD extraction in the United States currently uses ethanol to chemically separate the CBD from the rest of the plant and make it available for use. But other options are available and are becoming more sophisticated. New technology using water-based sonication extraction, microwaves and other techniques may transform the way extraction is carried out — and significantly impact costs as well. These machines, which Sugarmade plans to make available to its customers, could reduce the cost of extraction and so help cultivators increase their output without exorbitant increases in cost.
These technologies may also help with other steps in the processing of hemp. New machines could perform additional functions that currently require auxiliary equipment, such as THC remediation and removing heavy metals. Skipping steps in processing would only add to the efficiency of operations, reducing costs and increasing speed of processing.
To bring this new technology into the American market, Sugarmade is working with Chinese manufacturers. The Chinese market is advanced in its approach to extraction, thanks to its reliance on essential oils for herbal medicines. For more than a thousand years, Chinese farmers have been cultivating and extracting essential oils from hemp. This expertise has led to an in-depth understanding of the process and the equipment needed to complete the task. Working with Chinese manufacturers could allow Sugarmade to provide its customer with more advanced and efficient technology.
Hemp processing needs to scale up. But just because eventual outputs need to be bigger doesn’t mean that bigger is necessarily better where machinery is concerned. In many cases, bigger may be just more expensive, whereas improved technology could bring real benefits.
Companies in Need of Processing
The pressure on processing capacity for hemp and related plants comes in part from the emergence of large companies in the sector. Among these is Canopy Growth Corporation (NYSE:CGC) (TSX:WEED.TO), a leading player that has benefited from investment from other industries. The company has been steadily growing, including through the acquisition of a company making hemp skin-care products, creating demand for more CBD from within the company. To help meet this demand, it has been preparing another acquisition of Acreage Holdings Inc.
Another of the large Canadian companies with an interest in hemp and CBD, Aurora Cannabis Inc. (NYSE:ACB) (TSX:ACB.TO) is exploring new ways in which these products can be of use. The company recently announced a partnership with mixed martial arts company UFC. As part of this arrangement, Aurora will explore ways in which its research and products might help athletes, whether in pain relief, dealing with the strains put on muscles, or helping with rest and relaxation. The partnership could help raise the company’s profile by association with an exciting sport and some of the world’s most impressive athletes.
Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON.TO) is also looking for new approaches to CBD, with the creation of a recent R&D facility. While R&D work may only consume relatively small amounts of plants, its results include new products that could expand the market and increase demand for processing facilities. The company’s CEO, Mike Groenstein, has also been raising the profile of this work through a series of conference appearances, as the sector becomes better connected and interdependent.
The law around CBD and related products continues to evolve, and with it the products that can be sold. Aphria (NYSE:APHA) (TSX:APHA.TO) is developing vaporization products in anticipation of changes in Canadian law later this year. As more states and countries bring in ever more liberal laws, product ranges should continue expanding, and with that growth will come the sector’s rising demand for equipment.
For more information about Sugarmade, please visit Sugarmade Inc. (OTC:SGMD).
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