Excitement is brewing around hemp’s potential as a substitute for various products. As the 2021 planting season draws nearer, COVID-19’s economic impacts are showing varied, complex implications not only on the hemp market, but also on other markets where hemp can be competitive.
Concern over the brevity of any pandemic-related financial support has producers and buyers looking for new market opportunities to keep their businesses afloat. But this begs the question: Which of the widely reported potential 25,000 uses of hemp are cost-competitive with their substitutes?
The industry has long used hemp’s substitution potential in numerous markets as a talking point, but the pandemic may finally allow hemp to gain more of a share in these markets. COVID-19 has strained relationships between buyers and sellers of traditional feedstocks, potentially opening the door for hemp to take their place. This year will be an important one to determine if “true hemp”—meaning the bales of hemp stalks rich in bast fibers, as defined by PanXchange—will play an increasingly important role in the U.S. and, in turn, the global hemp market.
Tracking Potential Substitutes
Because hemp can be used either with or in place of thousands of other products, it will be vital to watch potential areas of substitution for the emerging true hemp market. As opposed to the cannabinoid market, the availability and relative liquidity of products with substitution potential provide significant reference points for if and when feedstock diversification with hemp will be possible.
In the May 2020 issue of PanXchange’s benchmarks and analysis report, the company identified the most advanced and mature end-use markets for true hemp, including biocomposites, cottonized textiles and hemp paper. These products’ common feedstocks include petro-based raw materials, like polypropylene and polyester, and natural feedstocks, like cotton, coarse wool and wood chips.
The price of petroleum-based products fell in 2020, but the more interesting and arguably tangible opportunities for hemp concern its ability to substitute natural fiber products. Increasing concerns regarding the biodegradability of synthetic fibers coupled with a growing emphasis on reducing plastic-based materials’ usage are expected to support significant growth in the natural fiber market for the foreseeable future.
In the natural fibers category, cotton is still king. For all intents and purposes, it serves as a floor for all prices in this category. After reaching a ten-year high of $2.29 USD per pound in 2011, U.S. cotton prices reached a ten-year low of $0.63 USD per pound in April 2020, according to the International Monetary Fund (IMF), an organization of 190 countries that oversees the international monetary system and trade. This volatility has driven cotton farmers, especially those in the Texas panhandle, to consider hemp as an alternative crop, PanXchange has found.
Coarse wool, on the other hand, sets an upper threshold for this product channel. In 2018, coarse wool reached a 10-year peak at $11.42 USD per pound. Since then, prices have slumped, and the most dramatic price reduction occurred just last year. According to the IMF, prices for coarse wool stood at $5 USD per pound in Q3 2020—a nearly 56% price decline over 18 months.
As opposed to cotton, wool offers more functionality concerning downstream woven and non-woven applications. Furthermore, this price reduction has significantly increased sales volumes, suggesting that coarse wool prices may rebound slightly in 2021.
Of the two natural fibers, hemp fiber seems more prepared to substitute coarse wool in the near-term. Apart from its qualitative properties, the price of coarse wool, though volatile, is not nearly as uninspiring as cotton, nor does it have the same degree of subsidization afforded to cotton at this time. (Major cash crops, like cotton, are often provided some sort of financial assistance based on the crop’s supply, demand and/or some combination of the two each year. These programs are often run by state or federal administrators.) In addition, rather than complete substitution, the blending of wool and hemp may provide an interesting road for companionship moving forward. Companies like Patagonia have already demonstrated their support for this idea by backing FiberShed, a non-profit organization that helps develop regional, regenerative fiber production systems (including hemp fiber) for clothing.
The Value in True Hemp
How true hemp and resulting derivatives compete with these mature, often subsidized, channels will be based significantly on how successful hemp producers are in 2021. Apart from following sound, processor-driven agronomic practices, a key determinant of this success will be the relative bast fiber content of a given lot, as it is the most valuable true hemp byproduct on a per-unit basis.
PanXchange anticipates the value of true hemp will eventually split into categories based on the amount of bast fiber it contains, and the firm is monitoring that bifurcation of value with extreme interest. In 2020, higher bast fiber content increased the product’s value by anywhere from $0.05 USD to $0.12 USD per pound. This value proposition will make or break a producer’s entry in true hemp production.
PanXchange is encouraging all actors within the supply chain to be conscientious that valuation is relatively immature at this time. Put another way: True hemp’s value in the Central Plains market should not represent what another producer can earn from true hemp grown in the South.
As PanXchange has reported recently, the relatively low barriers to growing true hemp could encourage production beyond processing capacity as soon as this year. As we have seen in the cannabinoid market, oversupply occurring too early can drastically impact these markets’ short- and long-term profitability. It should serve as a cautionary tale of all producers considering growing true hemp in 2021.
I encourage producers to be extremely judicious of contract farming true hemp beyond 100 to 150 miles from their site location, as transporting true hemp any further is cost-prohibitive. If a grower isn’t aware of a local processing partner, commodity exchanges and other market experts such as PanXchange can assist them. Start 2021 by not taking on too much too fast. Instead, focus on nailing down the basics and staying on top of the emerging markets.