Hemp In, Spinach Out as Investors Throw Money at Newly Legal CBD

Hemp In, Spinach Out as Investors Throw Money at Newly Legal CBD

Mile High Labs has developed a new extraction system it says will boost CBD production.
Mile High Labs has developed a new extraction system it says will boost CBD production. Source: Mile High Labs

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When Patrick Horsman’s small private equity firm purchased 10,000 acres in Yuma County, Arizona, in 2016, organic spinach and lettuce were on the menu.

Then the anti-cannabis tide in Washington, D.C. shifted, with the 2018 Farm Bill decriminalizing both hemp and its trendy ingredient known as CBD. Now, he’s growing hemp instead.

Marijuana has already started to see an investment boom thanks to easing rules around the world. Now, congressional approval of hemp in the U.S. is sparking a new wave of activity, with companies and investors jumping in during the past year to the tune of hundreds of millions of dollars.

Integrated CBD - Field before planting
Integrated CBD’s farmland before plantingPhotographer: Integrated CBD

“The Farm Bill has caused a craze in hemp-derived CBD startup activity and new brand and new product activity because companies are looking at a new consumer market where there are no existing dominant brands,” said Scott Greiper, president of Viridian Capital Advisors, which has served as a matchmaker to connect investors with cannabis companies.

CBD, an abbreviation for cannabidiol, doesn’t give a high and can be derived from either hemp or marijuana. Pitched as a natural way to mitigateanxiety, insomnia, inflammation and other ailments, it’s showing up in everything from beauty creams and bath bombs to vape pens, seltzer and snacks.

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The U.S. market for it could be worth more than $20 billion by 2022, compared with about $600 million last year, according to cannabis analytics company Brightfield Group. As a result, hemp planted in the U.S. tripled to more than 75,000 acres last year, and is expected to double again in 2019, said Eric Steenstra, president of the Washington, D.C.-based hemp advocacy group called Vote Hemp.

Targeted Spending

Here are some recent examples of companies jumping into hemp and CBD:

  • Mile High Labs raised $35 million last fall and this month added a $65 million term loan, funding it says will help boost CBD production this year amid what it says is a run on high-grade hemp. The Boulder, Colorado-based company calls itself the largest extractor of CBD in the world and estimates it supplied about 25 percent of the global market last year.
  • Hemp company Lilu’s Garden spent about $50 million to build a 175,000 square foot extraction facility about 75 miles northeast of Louisville, Kentucky. The last few months, the plant has been processing more than 11 million pounds of hemp that will produce 300,000 kilograms of CBD, about half of which is already sold, according to co-founder and CEO Tom Guel.
  • GenCanna, another Kentucky-based startup, says it harvested and processed about 1,000 acres of hemp last year and plans to boost that by 10 times in 2019. The company has raised about $50 million in funding and, like its competitors, wants to be ready if giant retailers like Walmart Inc. and Target Corp. decide to stock CBD, according to Matty Mangone-Miranda, the company’s chief executive officer. “We want to make sure we have the right scale for big box,” he said.

‘Tremendous Opportunity’

“We believe hemp products are going to be a tremendous opportunity — potentially as big as cannabis,” said David Goldburg, a managing partner at Merida Capital, which is a $125 million private equity firm that focuses on cannabis investments that include CBD products. In addition to CBD, hemp can be used to make apparel and building materials.

Despite the hype, there are still many hurdles ahead. While CBD is no longer banned federally, the FDA also hasn’t approved it for use in food and beverages. CBD rules likely won’t be in place until 2020, and it’s not clear that hemp will ultimately be legal in all 50 states, according to a recent note from Rabobank. The USDA also has to develop new regulations for hemp cultivation, bringing an element of uncertainty to the current crop of plants.

Until there’s clarity, most large companies will remain on the sidelines, Goldburg said. That includes Coca-Cola Co., which has expressed interest in CBD as a potential ingredient in wellness drinks, but has said it will wait until it knows the product is safe and legal. Conagra Brands Inc., the maker of Hunt’s ketchup and Slim Jim, also recently said it was studying CBD.

Despite the uncertainty, the industry is undeniably revving up. CVS Health Corp. and Walgreens Boots Alliance Inc. each said in recent weeks that they’ll start carrying CBD products in a handful of stores. Companies that process hemp are investing to boost capacity to handle the larger volumes of the plant.

See Also: A Crash Course for Investors on Lingo of (Legal) Weed: QuickTake

Horsman has spent more than 16 years raising money for hedge funds and private equity firms. So far, he’s put together about $13 million for his startup, Integrated CBD, with a goal of reaching $100 million, according to a person familiar with the matter. He has snagged former hedge fund manager Jason Karp, who closed Tourbillon Capital Partners to focus on backing health and wellness companies, as an investor and strategic adviser.

The company expects to start building a 154,000 square foot facility in May to extract the CBD from the hemp, with plans to be operational by the end of the year. It also needs to buy 12 million seeds, at as much as 50 cents a pop, just to plant an initial 3,000 acres.

The competition is fierce and industry observers argue that any extraction facility that’s not up and running now won’t be ready for the 2019 harvest. Still, Horsman is confident his hemp bet will pay off.

“It’s not too often you get to invest and start a business 90 days past prohibition, and we’re really excited to do so in the hemp and CBD space,” he said.