Opportunities arise for farmers and ag lenders from the 2018 farm bill.
By Whitt Steineker and Jared Batte
Hemp, one of the nation’s oldest and most versatile crops, is poised for a resurgence following the passage of the 2018 farm bill. That legislation codifies the distinction between hemp and marijuana and removes hemp from the scope of the Controlled Substances Act. This should be a welcome development for agricultural lenders — who have largely avoided any association with hemp for decades — as it will allow them to access a now-legal industry that is expected to generate billions of dollars of potential deposits in the next few years.
What Is Hemp?
In order to fully appreciate the significance of the hemp provisions in the new farm bill, it is first helpful to understand the difference between hemp and marijuana. Marijuana and hemp are different strains of the Cannabis sativa L plant. The CSA historically made no distinction between marijuana and hemp. However, the 2018 legislation defines hemp as any part of the Cannabis sativa L plant, including all derivatives, provided that the plant contains less than 0.3 percent tetrahydrocannabinol (THC). Any Cannabis sativa L plant or derivative thereof with a higher THC level is considered marijuana, which remains an illegal substance under the CSA. Because THC is the psychoactive ingredient in marijuana that produces the feeling of being “high,” the critical difference between marijuana and hemp is that hemp will not produce a “high.”
Millennia of experience also demonstrates hemp’s impressive versatility as a crop that has been used to make numerous industrial products — including clothes, food, building materials and others — and the modern economy shows a tremendous potential market for hemp-derived health and wellness products.
Federal and State Regulation of Hemp
Congress first distinguished hemp and marijuana based upon THC content with the passage of the 2014 farm bill. That legislation legalized hemp production for research purposes through state-licensed “pilot programs.” To date, as many as 38 states have implemented a version of these pilot programs.
Under the 2018 farm bill, states can elect to regulate hemp production by submitting a regulatory plan to the U.S. Department of Agriculture. The plan must include procedures for, among other things, maintaining land records for hemp fields, testing the THC level in hemp, destroying hemp that contains unlawful THC levels and undertaking enforcement actions upon the discovery of negligent and/or criminal activity. Notably, states may impose more restrictive requirements than these, but a state may not restrict the transportation of hemp across or within its borders. If a state elects not to submit a plan to regulate hemp within its borders, the USDA will have primary responsibility for regulating hemp cultivation in that state.
Before the USDA will approve any state plan, the agency will issue rules and regulations to provide more specificity than what is currently outlined by the current farm bill. The agency has begun the rulemaking process and intends to have final regulations by the fall of 2019. In the meantime, states can continue to operate pilot programs under the 2014 farm bill, and these programs will continue for one year after the agency issues the new regulations.
Federal legalization of hemp is particularly relevant to agricultural lenders for two reasons. First, given the fact that financial analysts predict the hemp industry to blossom into a multibillion-dollar industry, lenders who serve customers in this space could see substantial economic benefits. Second, lenders can participate in the hemp industry without bearing substantial legal risks that were present before the passage of the 2018 farm bill.
Economic Impact of the Hemp Industry
As of now, hemp can be generally grouped into two categories: industrial hemp and phytocannabinoid rich (PCR) hemp. Industrial hemp is tall, grows outdoors and produces a fiber that can be used in the production of numerous industrial products such as ropes, textiles, building materials, paint, soaps and animal feed.
PCR hemp is grown on a smaller scale indoors and under lights. Cannabidiol products, such as CBD oil, are derived from PCR hemp. The FDA recently approved an epilepsy drug that contains CBD, and CBD has been identified as a potential treatment for illnesses such as anxiety, depression and arthritis. A recent study suggests that the hemp-CBD market alone could become a $22 billion industry by 2022.
For farmers, the passage of the 2018 farm bill provides a path forward following a challenging time for the agricultural industry. Land, facilities and manpower can now be channeled towards a new, more lucrative crop. Importantly, the bill also adds hemp to the list of crops that are eligible for crop insurance.
The 2018 Farm Bill’s Effect on Lenders
Because hemp has been a Schedule I substance along with marijuana for decades, many lenders have understandably shied away from the industry. Anti-money laundering laws, such as the Bank Secrecy Act and conflicting guidance from the Department of Justice and the Treasure Department, created substantial risks for banks that transacted business with hemp producers.
While most of these risks fell away when Congress removed hemp from the definition of marijuana under the CSA, lenders should nevertheless be cautious of hemp-specific risks when entering this space. For instance, hemp producers might also grow marijuana alongside hemp or commingle legal hemp proceeds with illegal marijuana proceeds.
To protect against these risks, lenders should ensure that hemp customers comply with USDA regulations and/or state plans that are enacted under the 2018 farm bill. Second, as part of the due diligence process and periodically thereafter, lenders should assess the business activities of hemp customers and file suspicious activity reports and/or sever the relationship if the lender suspects or observes illegal activity. Finally, lenders should craft strong representations, warranties, covenants and other contractual provisions that are tailored to address these hemp-related risks with customers.
Legalization of hemp under the 2018 farm bill, coupled with the expected rapid expansion of the hemp industry, presents opportunities for agricultural lenders. In order to reap the benefits from this budding industry, however, agricultural lenders should build thoughtful internal procedures to ensure compliance with the new law.
Whitt Steineker is a partner at Bradley Arant Boult Cummings and serves as leader of the firm’s Food, Beverage and Hospitality team. He counsels clients regarding the ever-evolving legal status of cannabis in the United States and Canada. Contact him at email@example.com. Jared Batte is an attorney in Bradley’s banking and financial services practice group. He represents clients in real estate, finance and banking transactional matters. He can be reached at firstname.lastname@example.org.