How Hemp Production Services Is Navigating Canada's Regulatory Landscape

Features - Cover Story

The largest Canadian-owned hemp wholesale supplier and national exporter of hemp food products to Asia is serving as a mentor while exploring growth opportunities in a shifting regulatory climate.

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November 19, 2019

Garry Meier, president, Hemp Production Services and Hemp Genetics International.
Photos © Dave Stobbe unless otherwise noted

For the last 20 years, the epicenter of industrial hemp farming in North America was Western Canada’s Prairie Provinces, specifically Manitoba, Saskatchewan and Alberta. It was here, amid the vast lands of swaying wheat and treeless plains between Ontario and the Rocky Mountains, that Hemp Production Services (HPS) and its sister company, Hemp Genetics International (HGI), first discovered how hemp can thrive in Canada—as a cash crop for farmers and a vital ingredient in everything from T-shirts to carpets to cereal.

Ask the people who run HPS and HGI today, and they will tell you that this was no easy feat to undertake in 1998, the year Canada legalized hemp for the first time since World War II. The effort required significant investments in agronomy, bruising trial and error in the field (which included a failed attempt to grow and harvest hemp at scale using imported seeds from Europe) and a whole lot of patience.

But it has all paid off: HPS is now the largest Canadian-owned bulk hemp wholesale supplier and the largest exporter of Canadian hemp food products to Asia. (It also exports to other countries.) Meanwhile, HGI is one of the most trusted authorities in industrial hemp genetics for grain production in Canada, having developed coveted new varieties expressly for the region’s often unforgiving growing conditions. Now, as farmers in the United States rush to grow hemp following legalization under the 2018 Farm Bill (formally called the Agriculture Improvement Act of 2018), HPS and HGI find themselves playing an unfamiliar role as stabilizing presence, teacher, mentor and wizened elder with wisdom to burn.

“It wasn’t something we downloaded from the ‘University of Google,’” Jeff Kostuik, director of operations for central Canada, U.S., and International, says of the companies’ collective expertise in hemp. (Today, HPS and HGI staff have between 75 and 100 years of experience in agriculture and hemp, and the companies employ seven agronomists.) “We went to the school of hard knocks,” Kostuik says of the companies’ hard-earned education in hemp.

HPS and HGI may now be going back to that school once again—and with the same dedication, deliberateness and discipline they brought to bear 20 years ago. The reason? To explore opportunities to capitalize on global demand for one of the naturally occurring chemical compounds that can be extracted from the tall, fibrous hemp crop: cannabidiol, or CBD. 

 

In Learning and Teaching Mode

Since Canada’s legalization of hemp in 1998 and the loosening of hemp regulations in the United States starting with the 2014 Farm Bill, HPS and HGI routinely receive calls from farmers with no previous history of growing hemp who are interested in the crop’s market potential. (Kostuik, for his part, has been on the speaking circuit for the past several years across North America to share what he calls the Canadian experience in hemp.)

But CBD is another matter entirely: It is still stringently regulated in Canada, even compared with the U.S., and requires a unique set of harvesting practices. And because the food industry has long represented a more stable and sustainable market opportunity for Canadian hemp growers, HPS and HGI have almost singularly focused on the production of hemp seed for food. Still, HPS and HGI are trying to learn as much as they can about CBD, Kostuik says.

Jeff Kostuik, a former research agronomist for Manitoba Agriculture, operates HPS’s small research combine.

 

Jeff Kostuik (left); Albert Vandenberg, Ph.D. (center), plant breeder for Hemp Genetics International; and Garry Meier (right) harvesting breeder plots.

“It’s very easy to be distracted by dollars in the CBD market right now,” he says. “You can spend a lot of money in a very short period of time thinking that you have the exact harvest methodology or way to handle the crop, but you may be off base.”

In other words, navigating the CBD market requires a rigor that HPS and HGI understand painfully well. Will it be a fad? What are the pitfalls? Where are the opportunities? Where are saturation points? All these questions must be explored and answered.

So, when and how will the companies enter the CBD market if they ultimately decide to do so?

 

A Value Proposition Built Around Quality, Production and Pricing

The role HPS and HGI play in North America’s, but particularly Canada’s, hemp industry is a niche but important one: Farmers use seed sourced from HGI, and HPS works closely alongside those farmers—from seeding to harvest—to ensure a top-quality product; then, that product is processed into hemp food ingredients. Kevin Friesen, vice president of operations, says the companies see their value proposition as three pillars: quality, high volume and competitive pricing.

“We leave it up to our customers to take those ingredients and to make them into novel products and market them to consumers,” he says. “That’s our role in the supply chain.”

HPS relishes this role of wholesaler. The company is believed to be the only hemp food ingredient manufacturer in Canada without a branded retail food product. (There are no HPS brand hemp flakes.) “That could be debated whether that’s the right path, but that’s the path which we so far have chosen,” Friesen says. “We’d rather [work with] our customers than compete against them.”

 

For HPS and HGI, the Future Is (Still) Food

Studying the fundamentals of the Canadian hemp market, one could easily see why companies operating in the space are taking such a pragmatic approach to CBD. Since hemp was legalized, the Canadian hemp industry’s focus has always been on food production—a massive market that has grown to include food manufacturers, health-food retailers, large-format retailers, food distributors, restaurant chains and online stores. Even today, despite the CBD frenzy, the production of hemp seed for food—de-hulled hemp seeds, hemp seed oil and hemp concentrate—is still the primary revenue source for Canada’s hemp growers and will only increase, according to Canadian Hemp Trade Alliance (CHTA).

HPS’ de-hulled hemp seeds and protein powder derived from crushed hemp seed meal.
Courtesy of HPS

CHTA Executive Director Ted Haney told Hemp Grower that he expects food revenues will continue to be the base of the Canadian hemp industry moving forward, especially with demand for hemp food as an ingredient (both as a protein and oil) in processed foods projected to surge following the U.S. Food and Drug Administration’s December 2018 decision to grant hemp food Generally Regarded As Safe (GRAS) status. And while there are no formal, industry-wide statistics on what percentage of hemp company revenues are derived from seed and food, Haney says the number is certainly over 80%. Now factor in the effects of hemp legalization in the U.S. In 2018 alone, Canada exported almost 5,400 metric tons (MT) of hemp seed valued at about $50 million USD. Over 70% of that export volume went to the United States, followed by European Union (EU) member countries and South Korea, according to a report from the USDA Foreign Agricultural Service.

In the coming years, as American farmers continue to figure out the best methods to grow and harvest hemp, the U.S. could become an even bigger exporter of hemp around the world. At the same time, demand for Canadian hemp within the U.S. could decline, with U.S. food companies potentially turning more to American farmers. Still, HGI has continually doubled exports into the United States year over year by capitalizing on demand from farmers who want certified seeds that can work well in the region. HPS, meanwhile, continues to see a spike in consumer demand for hemp-based food products.

“The largest cereal companies and health-food companies are much more receptive to including hemp in their recipes now that it’s legal in the U.S.,” Kostuik explains. “They had been so scared that the [Drug Enforcement Administration] would break their door down and confiscate all their hemp. We feel it’s a very huge opportunity for us.”

Fortunately for HPS and HGI, the legalization of hemp in the U.S. also coincides with a growing trend of Americans embracing plant-based protein foods. Hemp seeds contain a protein that is said to be more nutritious and more economical to produce than soybean protein, according to hemp products manufacturer and distributor Hemp Basics. Hemp seed protein can be used to produce virtually any product made today from soybeans, including tofu, veggie burgers, butter, cheese, salad oils, ice cream and milk.

“How do we compete against healthy products like pea and soy?” Friesen poses. The answer comes down to corporate storytelling and rebranding. The industry must start positioning hemp as a super powerful yet cost-effective protein source compared with other crops, he says.

“We see the fusion of sports nutrition and CBD, but you could also throw in those sports drinks some hemp protein, and I think that would be a pretty good marketing story.”

Garry Meier (left) and Jeff Kostuik.

A CBD Boom in Canada? Growers Need Regulatory Certainty First 

The demand for CBD has skyrocketed in recent years. Now CBD is everywhere, in seemingly everything, and practically everyone wants it: farmers, medical researchers, patients, investors, multinational corporations and health-conscious consumers.

That’s because CBD is believed to offer many of the same natural health benefits, such as relief from anxiety and aches and pains, as tetrahydrocannabinol (THC), but without the mind-altering effects. Simply put: CBD doesn’t get you high the way THC does.

But CBD is still subject to what hemp industry advocates say is an onerous and complicated regulatory treatment in Canada, which can be attributed in part to persistent confusion surrounding the differences between CBD, THC and hemp.

As most growers well know, CBD can be extracted from both hemp and what is now commonly referred to as marijuana or drug cannabis. Both are of the genus Cannabis (family Cannabaceae). The difference is that, in North America, hemp is required by law to contain less than 0.3% THC. That restriction does not apply to its sister cannabis plant.  

The irrigation system at an HPS contracted grower.
Courtesy of HPS

Yet Health Canada has not distinguished between THC and CBD, nor CBD derived from marijuana and CBD derived from hemp. Both CBD and THC are cannabinoids and, as such, they both fall within the definition of cannabis (not hemp) in Canada’s federal Cannabis Act. In other words, the Cannabis Act is regulating cannabinoids, not cannabis.

So, what is permissible under the law? Farmers can grow hemp with CBD extraction in mind, but the plant must be sold to a federally licensed processor to conduct actual extraction. However, the sale of natural health products containing any cannabinoid (including CBD) in Canada is still prohibited. Licenses and permits authorizing the import or export of cannabis (including CBD and CBD-containing products) may only be issued for cannabis destined for “medical or scientific purposes.” Meanwhile, transporting cannabis (including CBD-containing products) across Canada’s international border remains strictly regulated.

Given all these regulations, focusing on the food industry makes sense, especially when you factor in the CBD regulatory differences between the U.S. and Canada.

“The U.S. in a lot of ways has the genetics advantage when it comes to CBD,” Friesen says. “In Canada, we have our hands a little bit tied in regard to the CBD industry because, under our industrial hemp regulations, we can only use pedigreed varieties approved by Health Canada.” For example, hemp grown without pedigree seed in Colorado with high CBD levels would not be allowed to be grown in Canada as industrial hemp. For more on this, see the “Hemp Law” column in this issue.

Indeed, while Canada beat the U.S. to the punch and legalized cannabis for adult use in 2018, U.S. regulations governing CBD are currently seen as less burdensome and more hemp industry friendly. Under the 2018 Farm Bill, CBD derived from hemp with less than 0.3% THC and compliant with state CBD laws is legal. The Farm Bill also removed restrictions on the sale, transportation and possession of hemp-derived CBD products and allowed for the transportation of hemp-derived CBD products across state lines.

Without question, the CBD boom is difficult to ignore even for companies as grounded and pragmatic as HPS and HGI. Based on one estimate by CHTA, allowing the harvest, sale and processing of non-psychotropic cannabinoids could mean several hundred million dollars in annual revenue for the hemp industry.

 

Refocus or Remain Focused?

Beyond navigating Canada’s CBD regulatory landscape, much work remains in genetics and breeding. Based on estimates from HPS and HGI, most Canadian hemp crops currently may only contain 1%-2% CBD, meaning new breeding programs are needed to raise those numbers to make the crop commercially viable. For their own part, HPS and HGI now have some varieties with 3%-4% CBD, which put them in a good position to capitalize on CBD demand but raises more questions.

“What should our focus be?” Kostuik asks. “Do you try to look for the next best thing? Do you try to play catch-up with increasing CBD? Or (is) fiber going to be the next big thing?”

An HGI cross-bred genetic being evaluated as a future variety.
Courtesy of HPS

Commercial hemp fiber processing capacity doubled in Canada this year, and CHTA expects another doubling of capacity in 2020. That is good news for the hemp industry, but there is a far greater supply of hemp straw than processing capacity, says the CHTA’s Haney. Processing capacity will need to significantly increase to match supply and create a functioning national market for hemp straw, he says.

“You have to determine what the industry is going to want three, five, 10 years in advance,” Kostuik says. “You have to start the breeding program now, because it takes three to four years to get to that point. Hopefully, you can meet the consumer and industry demand in time.”

Pivoting to a focus on CBD or fiber will not be easy for a company built around producing hemp for food. But HPS and HGI have acquired the knowledge and experience to confront any challenges, seize on any opportunities and manage disruption on their own timetable.

“We’re not just in it to make a quick buck,” Kostuik says. “We want to make sure that farmers and processors can make money with hemp and that everybody can consume hemp and hopefully live a healthier lifestyle. I’ve been doing this for 20 years, and it really feels like it’s a rebirth—again—of hemp.”

Paul Barbagallo is a Boston-based writer and a former senior editor for Bloomberg News and beat reporter for Bloomberg BNA.