With export markets in flux and farm commodity prices slumping, some ag producers are eager to jump into the newest opportunity: Industrial hemp. Bankers who have a solid understanding of compliance risk are approaching the financing of hemp production cautiously. But what hemp introduces in addition to regulatory challenges is credit risk. To clear the fog around hemp, regulators are busy providing guidance on this new opportunity.
The legalization of hemp happened quite rapidly given what is otherwise legislative gridlock. Legal hemp started as a pilot program within the 2014 Farm Bill. The 2018 Farm Bill reclassified industrial hemp, and at the end of 2019 the United States Department of Agriculture introduced crop insurance options for new growers taking on hemp production. Beginning with the 2021 crop year, hemp will be insurable under its well established insurance options. So it’s officially “game on” for hemp.
Around the same time insurance programs were being drawn up, the Federal Reserve, the FDIC, the Financial Crimes Enforcement Network and the Office of the Comptroller of the Currency, as well as the Conference of State Bank Supervisors, issued a statement clarifying the legal status of hemp production under the Bank Secrecy Act for banks providing services to hemp-related businesses. The joint statement on the guidelines emphasizes that banks are no longer required to file suspicious activity reports for customers engaged in the growth or cultivation of hemp.
Before hemp and its derivatives were federally legalized, financial institutions were required to file SARs for accounts associated with the crop because it remained a Schedule I controlled substance treated the same as marijuana. Hemp products come from the same plants that produce marijuana, but they are grown to contain only trace amounts of THC, the chemical that produces that “high” when marijuana is ingested.
Hemp can be used to produce many different commodities, from fabrics to oils. Grain and fiber varieties of hemp have been around for decades. Tony Cortilet, the noxious weed and cannabis supervisor with the Minnesota Department of Agriculture told bankers attending a regulatory event in December that grain and fiber hemp varieties are properly certified under federal and international standards, thus they are good choices for producers looking to get into hemp. Grain and seed hemp isn’t as lucrative to produce as hemp destined for CBD products, but it also isn’t as risky, Cortilet said.
Federal regulators, meanwhile, have pressed the following points:
- Consistent with the USDA interim final rule, hemp may be grown only with a valid USDA-issued license or under a USDA-approved state or tribal plan. Research and development initiatives authorized under the Agricultural Act of 2014 remain in effect until one year after the effective date of the USDA interim final rule.
- A state or tribal government may prohibit the production of hemp, even though it is legal under federal law. The 2018 Farm Bill provisions related to USDA-approved state or tribal plans did not preempt state or tribal laws regarding the production of hemp that are more stringent than federal law.
- Separately, marijuana is still a controlled substance under federal law. The 2018 Farm Bill amended the definition of marijuana only to exclude hemp from the Controlled Substances Act.
Bankers asked to finance hemp production are advised to understand that the plant grows differently depending on soil and climate conditions. Hemp seeds produced in an arid climate may not develop plants that mature with acceptable THC levels (0.3 percent) when planted in wetter climates, for instance. A crop that has a THC level higher than 0.3 percent will need to be destroyed, even if other sections of the crop mature under the maximum THC level.
The rapid march to legalizing hemp was championed in Congress by Senators Ron Wyden (D-Ore.) and Mitch McConnell (R-Ky.), who wrote and introduced the bill that opened the doors and put pressure on banking regulators to makes moves.
“Hemp was legalized almost a year ago, yet Oregon farmers and producers have been forced to ride the rollercoaster of uncertainty,” Wyden said after the new regulations were announced. “Slowly but surely federal regulators are starting to catch up, and these new banking guidelines are an important step toward giving hemp businesses the certainty they need.”
Both the Independent Community Bankers of America and the American Bankers Association have long championed easing up on banks trying to work with hemp growers. Both groups view the gains in hemp as a pure win for banks.
“We are pleased that the guidance also notes that bank customers are responsible for complying with regulatory requirements surrounding hemp, not the banks who serve those customers,” said Rob Nichols, ABA president and CEO, in reaction to the joint announcement.
Meanwhile, hemp’s fun-loving cousin remains in a state of banking limbo. Recreational marijuana is now legal in 11 states and the medicinal variety is available in 33, but federal banking laws continue to hold back an industry roaring to life, and one for which community banks are well positioned to serve.
Retail sales at regulated marijuana dispensaries reached around $9 billion last year, according to the Marijuana Business Daily. Given this is happening alongside a still massive black market for grass, some estimates place the actual market to be upwards of $60 billion a year. Proponents of the burgeoning hemp industry, which has a vastly more diverse market of goods to offer, claim the employment and income potential for hemp, as the industry develops, is several times greater.