Hemp Industry benefiting from U.S. – Chinese trade war
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While the huge increase in U.S. consumer demand from hemp extracts and hemp product is largely credited as the reason for the boom in the number of hemp acres under cultivation, there is a significant additional part of the hemp-growth story to tell.
With a pending acquisition in the cultivation supply market, Sugarmade Inc. (OTCQB:SGMD) appears to be well poised to become a strong pick-and-shovel provider to the hemp industry. Even the large cultivators and suppliers are now getting in the hemp market. One of the first companies of the larger players to make the move into hemp cultivation was Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON), which just a few days ago announced that it would invest $300 million to enter the hemp market. Not to be outdone in the hemp gold rush, Greenlane Holdings Inc. (NASDAQ:GNLN), which began trading on the NASDAQ, and The Green Organic Dutchman (TSX: TGOD) (OTCQX: TGODF) have both entered the fray. KushCo Holdings Inc. (OTCQX:KSHB), another industry supplier, is also seeming to benefit for the strong growth in the hemp marketplace.
- USDA reports indicate that hemp is by far the crop with the fastest growth in acres, planted at nearly a 400% increase.
- Many in farming communities now see hemp cultivation as an economic necessity.
- Consumer demand for hemp extracts continues to grow with little letup in sight.
Mainstream Acceptance
An increasing number of U.S. farmers affected by low prices and reductions in Chinese agricultural purchases are now seeking economic refuge by planting hemp. And in many cases, hemp is saving farmers from bankruptcy.
In many farming areas — in particular Western Kentucky and Tennessee — the movement to hemp will restore many farmers to economic viability. Not only is there a strong demand for hemp biomass, but prices are significantly higher compared to other crops with many Kentucky farmers last year realizing tens of thousands of dollars in profits per acre compared to well less than $1,000 per for other crops.
The numbers are in from the U.S. Department of Agricultural on the number of acres of hemp planted this year. At 128,320 acres, those numbers are up from only 27,424 acres last year, with even more growth expected next year. With such growth, it is no wonder that both supply and cultivation companies are realigning their businesses to take advantage of the huge market growth.
In part, this growth stems from the hemp industry making rapid headway into mainstream acceptance. Recent reports indicate that two-thirds of all Americans now favor legalizing recreational cannabis use, up from 25% support two decades ago. And what may be most telling is that support for the crop is increasing among seniors (aged 55 and older) as well as the Republicans — both traditionally known for their conservative views regarding hemp.
In addition, medical marijuana is now legal in 33 states, with 10 of those states actually legalizing recreational use as well. And Canada overturned an almost century-old tradition when it legalized use of the drug countrywide last year. The trend is clear, and the continued increase in positive public acceptance seems inevitable.
Savvy companies in the sector, including brand-development company Sugarmade Inc. (OTCQB:SGMD), are seeing the window of opportunity and are positioning themselves to make the most of their areas of expertise. For Sugarmade, that area is hydroponic systems, which give cannabis cultivators greater control over how their plants are grown.
Sprouting hemp indoors provides an array of benefits, including protection from changing weather, such as sudden frosts or unseasonal heat, which can harm crops. Indoor cultivation also protects crops from contaminants, infections and chemicals.
Hydroponics offers even greater advantages. When farmers feed their plants with carefully balanced nutrient baths instead of soil and fertilizer, they harvest a cannabis crop with higher CBD content, making their plants more valuable.
In addition, when hydroponics are used, hemp often more easily passes the stringent quality tests that are applied to plants in this sector, tests that are likely to become even firmer now that the federal government is officially allowing and regulating hemp production in the United States. This is yet another reason hydroponic experts such as Sugarmade may see significant benefits as the hemp industry grows.
Forecast Growth
And the hemp wave doesn’t appear to be ebbing anytime soon. Industry forecasts differ, depending on which source is cited. Grand View Research says the global legal market is expected to reach $66.3 billion by the end of 2025, with an anticipated CAGR of 23.9% during the forecast period, while Business Wire projects the market will reach $89.1 billion by 2024, with a CAGR of 37% during the forecast period.
While the numbers may differ a bit, everyone appears to agree that growth seems certain. And that growth may indicate that companies involved in the sector are almost certain to grow as well. At least a portion of the growth for some of those companies, including Sugarmade, will come from careful and strategic acquisition within the industry.
Last year Sugarmade announced the creation of the industry’s largest publicly traded cannabis and hydroponics supply company.
The announcement was made after the signing of a master market agreement with industry leader BZRTH LLL, a highly successful manufacturer and distributor to the hydroponics and cannabis markets. The acquisition is expected to be highly accretive for common shareholders.
Sugarmade is also in the process of acquiring Sky Unlimited, LLC, which through its AthenaUnited.com operations and website offers several popular hydroponic brands to a variety of growing agricultural cultivation sectors. This planned acquisition has prompted Sugarmade to raise its revenue guidance for calendar 2019 from $30 million to $70 million.
Moving to the Majors
With such impressive growth, it’s little wonder that hemp companies are eager to uplist to either the NASDAQ or NYSE exchanges. Such a move can mean reduced volatility, added trading volume and improved liquidity, along with the simple credibility that comes from being listed with alongside major players from a wide range of industries.
For many companies, that credibility translates into increased awareness and investment opportunities. Since not all financial institutions are allowed to invest in or cover companies that trade on the OTC exchange, uplisting may increase investment opportunities for companies moving their way forward in the burgeoning hemp space.
The fact that the major exchanges are approving cannabis companies’ uplisting applications is another strong indication that the industry has arrived. Since February 2018, 8 of the 11 pot stocks that now list their common stock on either the NYSE or NASDAQ have uplisted from the OTC exchange. The acceptance of these initial companies may clear the path for subsequent hemp movers and shakers, such as Sugarmade, which are hoping to follow suit.
Not all hemp companies are eligible to make the uplisting move, however. Because U.S. federal regulations still categorize marijuana as a schedule I drug, companies that directly deal in the U.S. cannabis industry are ineligible to list their shares on either of the major exchanges. In addition, both the NASDAQ and NYSE have a fairly stringent list of requirements —based on trading, average daily volume and minimum share price— that must be meet before a company’s application for uplisting is accepted.
The stringent application and approval process mean that companies currently trading on or exploring the uplisting option should be some of the most viable in the industry. Sugarmade is committed to meeting that standard. In only a few years, the company has moved from being a small, innovative supplier to the quick-service restaurant industry to its current status as a multi-divisional, multi-product company in various market sectors, with a special focus and presence in the world of cannabis.
Value of Trading Up
Sugarmade isn’t the only company that recognizes the significant value of trading on the major exchanges.
One of the first cannabis companies to uplist, Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) has traded on the NASDAQ exchange since February 2018. The company recently announced its Q2 numbers, reporting that net revenue was $10.2 million in Q2 2019, a 202% increase from $3.4 million in Q2 2018. The increase was primarily driven by the launch of the adult-use market in Canada. Net revenue increased 58% quarter-over-quarter from $6.5 million in the first quarter of 2019, primarily driven by increased sales in CBD oil. “During the second quarter, Cronos Group expanded its R&D capabilities, innovation expertise and global infrastructure network in what has been a year of tremendous growth,” said Cronos CEO Mike Gorenstein. “We opened Cronos Device Labs, our new global R&D center in Israel, announced the acquisition of our new state-of-the-art fermentation facility and added Dr. Todd Abraham as Chief Innovation Officer to our executive leadership team.”
A leading distributor of premium vaporization products and consumption accessories, Greenlane Holdings Inc. (NASDAQ:GNLN) common shares began trading on the NASDAQ exchange in April. Greenlane customers include more than 6,600 independent smoke shops and regional retail chain stores, which collectively operate approximately 9,700 retail locations and hundreds of licensed cannabis cultivators, processors and dispensaries throughout the United States and Canada. Greenlane also owns and operates two of the most-visited North American, direct-to-consumer, e-commerce websites in the vaporization products and consumption accessories industry, VaporNation.com and VapeWorld.com, which offer convenient, flexible shopping solutions directly to consumers.
KushCo Holdings Inc. (OTCQX:KSHB) is another supplier to the growing hemp industry. A premier producer of ancillary products and services to the cannabis and hemp industries, KushCo awaits approval of its application to uplist on the NASDAQ exchange and is eager to satisfy all applicable listing and regulatory requirements. “Listing on the NASDAQ Global Select Market, the highest and most prestigious NASDAQ tier, will raise the company’s profile by diversifying our shareholder base and enhancing share liquidity in support of our company’s long-term goals and objectives,” said KushCo chairman and CEO Nick Kovacevich.
The Green Organic Dutchman (TSX: TGOD) (OTCQX: TGODF) is also awaiting a determination by the NASDAQ that it has satisfied all applicable listing requirements. Subject to approval for listing, the company’s common shares will continue to trade on the TSX Exchange (TSX) under ‘TGOD,’ which is also the reserved symbol for the NASDAQ application. “This is an important step in the growth of TGOD, one that will broaden our investor base and increase access for international investors as we build the leading global organic cannabis brand,” said TGOD CEO Brian Athaide. “Our team remains focused on executing our business plan and creating value for our shareholders.”
As more hemp companies make the uplisting move, they may see added benefits from being traded on the major exchanges.