Who Is Going To Survive The Green Rush After The FDA Gets Involved In The Cannabis Space?

By Russ Cersosimo, co-founder of Hemp Synergistics.

On January 24th, 1848, James S. Marshall, a lumber mill foreman in Coloma, California, noticed glistening flakes of gold in the stream bed below the mill’s water wheel. He took the discovery to his boss, lumber pioneer John Sutter. As news of the discovery spread, thousands of prospective gold miners traveled by land and sea to the San Francisco area, sparking the legendary California Gold Rush and paving the way to the West as we know it today. 

At the beginning of the gold rush, goldfields were primarily on "public land,” which was land formally owned by the United States government. However, there were no laws or guidelines in place and no functional enforcement mechanisms. With no law regarding property rights, people staked claims. Gold was simply "free for the taking,” which was beneficial to the early forty-niners. There was no private property, no licensing fees, and no taxes. It was the literal wild west, and essentially, a lawless environment. As far as acquiring the gold, any prospector could retrieve the precious metal from streams and riverbeds using simple tools and techniques. 

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Eventually, it was realized that mining caused environmental harm, and more sophisticated methods of mining were developed and, eventually, adopted. These technological advances reached a point where significant financing was required, which hurt individual miners. By 1855, the economic climate changed significantly as the second wave of gold miners came to California. Gold could only be mined profitably by bigger organizations. By the mid-1850s, it was these second-wave gold-mining organizations who were making the money.The cannabis and hemp industries are currently undergoing a similar restructuring. They are commonly referred to as the “wild west” - and you can see why. Loose rules, no regulations, pioneers staking unfounded claims and no formal repercussions. Just like in 1849, quick money is to be had, so everybody is rushing in to make their fortune.

History Repeats: Green Rush Of 2019 Is The Gold Rush Of 1849

The Gold Rush of 1849 has many similarities to what I call the Green Rush of 2019 in the cannabis and hemp industries. In 1849, miners could buy a simple pick, shovel, and a pan and voila - they were a gold miner. No licensing, no fees, no taxes, no rules, and no prior experience necessary. Similarly, in 2019, the barrier to entry into hemp farming wasn’t high. With some land and legal documentation, one could obtain a state hemp permit and begin planting seeds in the ground - no prior experience in farming necessary. The same holds true for processing, as anyone can currently buy an extraction machine and, after 2 hours of training, be processing hemp to be sold and marketed as a medical product. No special permit necessary to begin conducting business. No background in science, research, or medicine required. 

A few years ago, well before the 2018 Farm Bill, I was on a radio show with a panel of cannabis experts. In addition to the panel, the host asked a local CBD product manufacturer to join the conversation. She had just released a new CBD water and could not keep it on the shelves. 

The radio show came back from a commercial break to begin our segment. The host, holding and looking at a bottle of her CBD water, started the interview by asking the CBD product manufacturer, “So you’re telling me this is 100% legal in the United States?”

All three cannabis experts leaned forward into their microphones and calmly said in unison, “No”, while CBD manufacturer sat on the edge of her seat, smiling ear to ear smiled and excitedly said, “Yes of course!”. The cannabis experts all looked at each other and shook their heads because, the fact was, the CBD manufacturer was wrong. At the time, it was not federally legal.

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The CBD manufacturer went to explain, on the air and to the public, that CBD was legal in all 50 states. The CBD manufacturer brushed the facts off and just kept rambling on about the benefits of her CBD water. To the experts, it wasn’t even worth arguing with her. It was obvious her mind was made up that CBD was legal in all 50 states, and she could keep doing what she was doing. With no regulation, she was going to keep getting away with making whatever claims she wanted. Ignorance is bliss.

This manufacturer was one of the early pioneers that made up the first wave of hemp entrepreneurs. These early adopters are the ones who were not afraid to push through the dangerous and uncharted terrain of an unregulated market. They turned a blind eye to grey areas and took a chance of striking gold, and many of them are currently making money hand over fist, just as in the first wave of the gold rush.

Let’s look at the short evolution of hemp farming. At the end of 2018, we saw a shortage of hemp, combined with an onslaught of media attention surrounding the 2018 Farm Bill. This caused the huge rush into hemp farming in 2019. In with the rush came many first wave farmers from industries outside of agriculture, with absolutely no previous experience in farming. Fast forward to the end of 2019. We have a surplus of hemp. The cost of biomass has dropped significantly, and first-time farmers had to deal with crop-loss due to unexpected issues due to lack of experience, many of which were storage-related.

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Who is going to survive 2020? The farmers that can produce consistent and quality product - at-scale.  In 2018 hemp farmers reaped profits at $4 per CBD point per pound. In 2019, there was a surplus of growers based on market demand. Pre-harvest 2019, prices cut in half to $2 per CBD point per pound. Post-harvest 2019 prices dropped even further to around $.85 per CBD point per pound. We should expect fewer growers in 2020, in relation to product demand, which will help the market begin to stabilize. As the market demand steadily increases, expect to see prices slightly increase and level out at around $1- $2 per CBD point per pound.

Advanced civilization took over the wild west in the late 19th century. Regulation came, and the United States became a safer and more civilized place. With government regulation right around the corner for the hemp industry, we can expect much of the current landscape to change in 2020.

Larger product manufacturers will come on board after regulation is clearly defined. These types of buyers will require large-scale, recurring orders that cannot have the slightest variation in formulation. Customized cannabinoid formulations will become the status-quo for extractors, and labs that can’t scale customized cannabinoid formulations won’t survive with the new THC and THC-A limits.

There will be major advances in technology, science and research, and the industry will evolve quickly. The first wavers that can’t keep up with the science or build a product to exact specification, batch after batch, won’t be able to manufacture the products that the second wave buyers will demand. Large companies will come with the second wave and make it extremely difficult for the small operations to compete at scale.

Detailed laboratory analysis will be necessary to prove product safety. Labs will require certification, internal and external testing as part of quality assurance and control, and ongoing audits. Product stability and variance issues will have to be dealt with. Further research will need to be conducted before making health claims, and there will need to be greater transparency in advertising, ingredients, and methods. It is all coming in 2020. 

In the Gold Rush of 1849, tens of billions of today's US dollars were recovered in gold, though many who took part in the California Gold Rush earned little more than they had started with. It’s worth mentioning that neither Sutter nor Marshall got rich off the gold rush, and in fact, by 1852 Sutter was bankrupt. 

Original publication: February 3, 2020

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.