To say 2019 has been a monumental year for industrial hemp doesn’t fully capture the sweeping changes the industry has seen. Thanks to the 2018 Farm Bill, hemp was removed from the Controlled Substances Act, making it a federally legal crop. With that change, existing and emerging hemp businesses moved into new tax territory, free from the federal tax burdens associated with cannabis.

1. Put Section 280E behind you

Prior to 2019, hemp growers were subject to Section 280E of the Internal Revenue Code, which limited business deductions to costs of goods sold. Van Asten emphasizes those restrictions applied to hemp businesses’ 2018 returns, but these businesses are free of 280E for the 2019 tax year.

While businesses growing cannabis crops that exceed 0.3% tetrahydrocannabinol (THC) are still subject to Section 280E, “now, a hemp company is able to deduct all of their normal operating expenses like any traditional business can,” Van Asten says. He also points out that hemp businesses no longer have to contend with the numerous cannabis-specific state and municipal excise taxes.

2. Know your state regulations

Even though hemp is federally legal, cultivation requires a license issued under a U.S. Department of Agriculture (USDA) plan or in a state with a USDA-approved industrial hemp production plan. Not all states have approved programs, though. Van Asten stresses staying informed and in-line with your state regulations to ensure you’re entitled to licensed hemp cultivation tax benefits.

“Know your regulatory environment. Obtain your special licenses,” he says. “Several states have limited pilot or research programs. Others have prohibited hemp production. Several states held off commercial growing until 2020.”

3. Stay current on testing requirements

Van Asten underscores the importance of THC testing. Hemp, as defined in the 2018 Farm Bill (formally called the Agriculture Improvement Act of 2018), can’t exceed THC concentrations of 0.3%, and state regulatory programs have provisions for destroying crops that exceed those limits.

“If your crop tests out above 0.3%, you’re technically no longer growing hemp. You now have a Schedule I drug growing in your field,” Van Asten says. Staying compliant avoids potential conflicts—tax-related and otherwise.

4. Explore separate business entities

With hemp’s new standing as a legal crop, Van Asten says choice of business entity, such as sole proprietorship or limited liability corporation, now holds different implications for hemp growers, and they must decide which is best for their operations.

“It’s more a strategic decision, like a traditional business,” he explains. “But farmers who grow hemp along with other crops may want to set up a separate business entity for the hemp portion of their farm.”

Van Asten says this separates the business risks of hemp versus more established crops, but it also segregates the hemp business with outside investment in mind. “An investor may not be interested in a traditional farm, but they might have more interest and willingness to invest in a hemp operation they know is scalable,” Van Asten says.

5. Understand your tax obligations

Hopkins says many hemp farmers operate as sole proprietors. As such, they’re required to make quarterly estimated tax payments. “For self-employed [owners], nobody’s withholding for you, and you need to make those payments yourself or face penalties,” she says.

Fulfilling your income tax withholding obligations as an employer is also important. Hopkins says this can become a little muddy for self-employed farmers who hire family members. Income tax withholding rules differ depending on the relationship.

The IRS states that all children employed by a sole proprietor parent are subject to income tax withholding. However, children under age 18 are not subject to social security (FICA) or Medicare taxes. Similarly, children under age 21 are not subject to Federal Unemployment Tax Act (FUTA) taxes. Different rules apply for spouses and for parents employed in farming activity as well.

If you’re not operating the business as a sole proprietor, family members are likely employees of the business, not of you as the business owner. As such, the exclusions available under sole proprietorships no longer apply. Special rules also apply to contracted crews and foreign ag workers on seasonal visas. “If you’re new to it, find a good payroll provider to help you,” Hopkins advises. A good payroll provider can help you correctly navigate tax withholding requirements for all types of employees.

6. Take advantage of farmer-focused tax credits

Federal tax credits available to traditional agriculture extend to farmers legally growing hemp. One credit Hopkins recommends seizing is the fuel and road use credit. This allows farmers, under certain conditions, to get a refund of excise taxes paid on specific fuels used for farming.

Hopkins explains that diesel fuel for cultivating agricultural or horticultural commodities, including hemp, could qualify for this credit, as could diesel used in the handling and storing of raw materials. “This one you definitely don’t want to miss because you’re [probably] paying excise taxes you’re not subject to,” Hopkins says.

7. Deduct allowable expenses for soil and water conservation

When non-ag businesses improve land to prevent erosion and flooding, expenses typically go unreimbursed. “But if you’re a farmer, you can elect to deduct some of those expenditures,” Hopkins says. “Having this ability can really help a farm reduce their tax burden.”

Hopkins says expenses for grading, constructing and/or protecting waterways, eradicating brush and planting windbreaks all potentially qualify. Improvements must be done under a plan approved by the Natural Resources Conservation Services (NRCS)—either a farmer’s individual plan or an existing county or state program. (For more information, visit the NRCS website.)

8. Claim your qualified business income deduction

As part of the Tax Cuts and Jobs Act of 2017, certain trades and businesses can deduct up to 20% of the net income of a qualified business activity. “This is not related to specific expenditures, and there are a lot of nuances, but farmers are eligible,” Hopkins says. “That’s one you really don’t want to ignore.”

9. Don’t overlook the basics, such as a business plan

Many of Velazquez’s clients were entrepreneurs in other industries, yet they struggle as first-time hemp operators. “It starts with the real basics, the business plan,” she says. “What is your goal? How are you going to accomplish it? What’s your timeline? You need to put those basics to paper.

“Entrepreneurs have great conceptual vision of what they want to do with the business line, but I’ve found that many fail to drive that through a real business plan,” she adds. “The most successful ones I’ve seen have that plan in place and live by it. It’s updated frequently, like a living document.”

10. Get the right people on board

Non-hemp experience doesn’t always translate well for entrepreneurs launching a hemp business. “They may be entrepreneurs, but hemp is new [to them],” Velazquez says. “They need a crash course in how to run this type of new business. If they don’t have the skill set, they need to ensure they have people on the team who do.”

For example, a financially savvy relative with zero farming experience doesn’t automatically make a great chief financial officer. “Inefficiencies in your operation end up in the financials,” she says. “You need the right people in your organization, in the right places, doing the right things.”

11. Plan for ERP software

To be competitive, Velazquez believes hemp business owners should look to enterprise resources planning (ERP) software, which integrates various types of separate business applications into a single management system. “We have a variety of disparate systems doing different things,” she says. “You need one place where you can see all the details for the enterprise as a whole.”

When business applications don’t communicate, business owners may not always see the big picture until it’s too late to make adjustments. For example, if labor and production applications aren’t integrated, the impact of unexpected labor on final production costs may not be apparent until tax time. “When you look at things in a silo, the financials are not as good as they can be,” Velazquez says. “You’re only as good as the information you have.”

12. Investigate federal business tax credits

Velazquez underscores that general business tax credits now apply to legal hemp businesses. “Many hemp clients are just not aware that these exist,” she says.

Some examples include:

• Research and Experimentation Credit. Properly documented research and development (R&D) activities could potentially qualify for this credit. “A lot of hemp operators are doing some very new and cool things. They’re breeding genetics, what we would consider in the tax world to be true research and development,” Velazquez says.
• Opportunity Zone Credit. This credit benefits businesses that invest in economic development and job creation in IRS-specified zones, typically distressed communities. “These are credits that would reduce, dollar for dollar, their tax liability,” she says.
• Domestic Production Activities Deduction. Also known as the Section 199 deduction or the manufacturing deduction, this deduction incentivizes businesses to keep manufacturing activities on U.S. soil. With hemp no longer a Schedule I substance, Velazquez says vertically integrated hemp businesses and hemp processors could qualify.
  

13. Understand cash versus accrual accounting

Under cash-based accounting—the traditional method for farming operations—taxes are paid when cash is received, and expenses are deducted when they are paid. With accrual-based accounting, revenues and expenses are recorded when they’re earned rather than when they’re paid.

Hale says many hemp farmers have contracts with buyers who are fronting money to farmers during the growing process. “Most of those farmers are going to be cash basis farmers, so they’re going to pay income tax on that money when they receive it, regardless of when they deliver the product,” he says.

Prior to the 2018 Farm Bill, accrual accounting sometimes benefited growers limited by Section 280E. While farmers still have the accrual option, Hale doesn’t usually recommend it. “If they’re going to be accrual, they have to start counting inventories and receivables and payables [differently],” he explains. Doing so would mean extra work without equivalent benefit for most farmers.

14. Take advantage of depreciation rules.

Depreciation involves expensing over an extended time period the cost of an asset you’ve purchased. The Tax Cuts and Jobs Act increased farming depreciation allowances significantly. The Internal Revenue Code also allows businesses to deduct the cost of certain assets, up to specific levels, as expenses rather than depreciating them over time.

“This new crop requires some specialized equipment adapted for cultivation and harvest,” Hale says. “Any of that equipment is eligible for the same depreciation rules as any other business. With most ag equipment, farmers can either depreciate it over time, or they can elect to write it off the first year up to some really high amounts.”

15. If new to farming, consider leasing equipment

“Agriculture is a very capital-intensive industry. [Existing] farmers already have equipment,” Hale says. “All they have to do is customize a few pieces for hemp and off they go. If you’re coming into farming from scratch, I would suggest maybe looking at renting equipment until you get comfortable with it.”

He says agricultural lenders are very familiar with leasing equipment. “That might be something to consider instead of trying to buy everything,” Hale says. And, under cash accounting, leasing expenses would get deducted the year they’re paid out.

As the newly legal hemp industry matures and more businesses enter the market, Hale expects a bit of the Wild West ahead for farmers. “It’s exciting, but it’s new,” he says. “Anytime there’s something new, there’s going to pitfalls and land mines and kinks that have to be worked out.”

But whether you’re an experienced hemp farmer or new to the field this year, these tax tips can help you improve your bottom line this tax season—and keep you on track for improved operational efficiencies, along with increased profits, for years to come.

Jolene Hansen is a freelance writer and frequent contributor to GIE Media publications. Reach her at jolene@lovesgarden.com

© iQoncept | AdobeStock

Commercial hemp is a new U.S. agricultural market, but as happens with all agricultural crops, the market will continue to grow, and eventually hemp will become a commodity crop, just as wheat and corn are, for example. But where does the hemp market currently stand as far as value and production volume compared to more mature physical markets? And what can we expect to see in the near and long-term future for this fledgling U.S. crop?

Perspective: Volume and Price

To give some context to the U.S. hemp market’s current size, we can look at the current volume of more mature markets.

The U.S. market for specialty sand (proppants), which is required for the extraction of oil and gas, is approximately 120 million tons per year, based on PanXchange data. In comparison, according to the U.S. Department of Agriculture (USDA), world corn production in the 2017-2018 crop year was 1 billion tons (337 million tons from the U.S.), and world wheat production for the same period was 927 million tons (75 million tons from the U.S.). Production estimates for U.S. hemp still vary widely, but if 437 million pounds were harvested with a 50% crop loss (based on Vote Hemp’s estimation of losses in 2019 due to THC overage, mold, etc.), that would bring the U.S. hemp market production to 218.5 million pounds (109,250 tons) in 2019. Note that corn and wheat trade internationally in 60,000-ton bulk Panamax vessels, so just two global market transactions would total 120,000 tons—more than the entire 2019 U.S. domestic hemp market by volume.

Granted, a substantial price differential exists, as higher valued crops naturally trade in smaller transaction sizes. Using the values of exchange-traded futures (commodities traded on market exchanges that are promised to be delivered in the future), corn and wheat traded at around $136/ton and $178/ton USD, respectively, in the second week of December 2019. If hemp biomass is trading at $8/pound, 1 ton would be valued at $16,000. This should give you good insight as to how much non-CBD, non-specialty industrial hemp will be trading in terms of both price and volume.

Customs of the Trade

Many differences between hemp and other commercial agricultural crops stem from the hemp market’s immaturity.

In the most mature markets, the number of market participants has long since experienced a dramatic consolidation. This is most noteworthy in world markets versus domestic-only markets. Research from Oxfam, for example, shows the ABCDs of agriculture (ADM, Bunge, Cargill and Louis Dreyfus) move more than 75% of world market grains. Mature markets are thus consolidated and insulated with extremely high barriers to entry for new participants. All major players are known to one another.

In hemp, the challenges are very different, including:

• Oversupply. There are scores of farms in the U.S. with 20 to 40 acres and a dearth of large industrial buyers.
• Attempting vertical integration “from seed to sale.” One initial challenge in building a liquid physicals (cash) trading market in hemp is connecting buyer with seller, as the independent farmers described above have less open market demand. It’s noteworthy that the ABCDs, most of which have been around since the 1800s, didn’t significantly expand into vertical integration until early this century in U.S. and world ag markets.
• The lack of credit and performance history among U.S. hemp businesses. Many sellers were duped in 2019 by companies that invested significantly on branding, yet by harvest time, stories poured in about purchasing companies’ financial distresses. Purchase agreements were scrapped due to a lack of working capital and falling prices.

In mature cash markets, one’s word is one’s bond, and it’s why traders say, “You’re only as good as your last trade.” The adage refers to the insulation of these larger markets. Trades are negotiated “on spec,” meaning on a cited specific quality. Quality is tested by the buyer, and any variances are usually negotiated in the final price. Defaults due to quality are exceptionally rare. Payments between trade houses or with producers are usually made at the time of document/title transfer (“cash against documents”) and by letter of credit for ocean-bound destination buyers. Moreover, if you intentionally default on a trade, the industry will learn of it quickly and will see your business as too high of a risk.

In contrast, today’s hemp market is at least three to five years from this consolidation and level of trust among players. In 2020, most buyers will not accept an offer without a certificate of analysis and sample. Sellers will rarely accept a bid without pre-payment, yet that still doesn’t guarantee success in today’s buyer’s market. This is the single biggest obstacle to more liquidity in today’s cash market.

Supply, Demand & Price

In mature markets, a good trader has up-to-the-minute estimates of total market supply and demand. It is essential to assessing current market values and forward prices. In today’s hemp market, too many unknown variables exist to paint a clear picture.

In early 2019, hemp production was estimated by licensed acres, a far cry from actual physical tonnage brought to market. Today, we’re getting a clearer picture of that, but instead of relying on the USDA for forecasts based on decades of data aggregation, the USDA is turning to industry journalists and analysts for help.

The demand side is murkier still; until recently, estimates were only quoted in terms of retail consumer packaged goods’ (CPGs’) value, not supply. These give little to no indication of biomass and refined products demand. It’s the tail wagging the dog and all part of the hype that hemp will be the panacea to farmers’ losses in traditional crops. (See “December 2019 Hemp Market Update: PanXchange Benchmark Pricing.")

Based on that report, we believe demand for hemp refined products will be significantly lower than most had hoped, but we won’t have a clearer picture for six to 12 months.

Evolution to a Mature Market

The hemp market has many challenges yet to overcome in its march toward maturity and liquidity. (See the “Commodity Market Evolution” chart above.) More transparency is needed into true supply and demand, and long-term reliable suppliers and buyers need to emerge. The market is in desperate need of working capital coupled with proper storage.

We are two or three years away from the big trade houses coming into the hemp market to provide working capital and take the risks that provide much needed liquidity. It’s needed and likely inevitable.

In the meantime, these tactics can help you weather the market’s early growing pains:

1. Hope is not a strategy. Do not rely solely on dollar-based estimates of the CBD market. Consider that in Charlotte’s Web end-of-September 2019 financial statements, the only hemp products sold were grown on their own 891 acres, which speaks to vertical integration and how few acres are needed for $95 million in sales.
2. Look for whole-hemp-stalk uses whether you’re a producer or processor. I predict that in the long run, by volume, CBD products and smokable flower will be specialty markets dwarfed by demand for industrial fiber applications, many of which are not yet developed.
3. Think higher volume and lower margins if you are not already carving your niche as a CPG products supplier or buyer.
4. Keep your options open with as much working capital and storage as possible.
5. Establish larger and long-term agreements to add stability to your crop-year planning, but also aim to diversify in the cash market, avoiding reliance on any one trading partner.

Julie Lerner is the founder and CEO of PanXchange, Inc., which provides physical commodity markets with benchmark pricing services and an institutional grade electronic trading platform.

One farmer plants four acres of marijuana on the slope of a fertile hill. Another farmer 10 miles away tends four acres of hemp in an idyllic green valley. They grow different crops and do not compete for customers or sales.

But in today’s world of cannabis, they might eye each other with suspicion and alarm. There may even be a lawsuit.

The reason? Drift. That is, pollen from male hemp plants (commonly used to pollinate female hemp plants in crops grown for seed or fiber) could drift across those 10 bucolic miles, land on female marijuana plants and fertilize them. In agriculture, the term drift normally refers to pollen from genetically modified corn drifting to fields of non-genetically modified corn, thereby contaminating the crop and posing significant financial setbacks.

Drift wasn’t much of an issue in cannabis prior to the Agriculture Improvement Act of 2018, also known as the 2018 Farm Bill, which expanded on existing hemp cultivation pilot programs and legalized hemp cultivation on a national level. The increasing viability (and legality) of industrial hemp farming, enormous demand for cannabidiol (CBD) products and a shift toward outdoor cultivation by state-legal and cost-conscious marijuana cultivators in search of better margins have coalesced to bring this issue to a head. Now that farmers from California to Maine are devoting tens of thousands of acres to hemp (and in many states, marijuana), drift issues are blossoming.

The problem with drifting pollen is straightforward: It effectively destroys crops grown for flower, whether marijuana or hemp grown for CBD. Though regulated differently, hemp and marijuana belong to the same genus and species, Cannabis sativa L. The plants can mate with each other and produce offspring.

Cannabis is a dioecious plant, meaning that male and female features occur on different plants instead of the same one. Female marijuana plants produce flowers that farmers grow for their cannabinoid content. Male plants are not used in marijuana cultivation, in part because they do not produce as many cannabinoids.

Also, marijuana growers typically weed out the plants with male characteristics from their crops because if pollen from a male plant fertilizes a female’s pistil, the female plant will dedicate most of its energy toward creating seeds. This emphasis on seed development significantly reduces cannabinoid production, and marijuana growers do not want seeds in their valuable flower. Historically, the higher the concentration of cannabinoids—especially tetrahydrocannabinol (THC)—in a crop, the more valuable the crop. According to a 1998 study in the Journal of the International Hemp Association, pollination by male plants decreased the yield of essential oils in cannabis flowers by about 56%.

What Does This Mean For Hemp Growers?

Like marijuana, much hemp cultivation also relies almost entirely upon female plants. Most of the hemp grown in the U.S. today is grown for CBD oil—“In the U.S., … about 87% of the 288,000 acres [are] expected to be used for hemp-derived CBD processing in 2019,” reported research firm Brightfield Group in sister magazine Cannabis Business Times’ October 2019 issue—and males are only necessary when growing industrial hemp for fiber and seed. In today’s market, a hemp crop high in CBD content can be sold for a higher price than a hemp crop grown for textile production.

Male cannabis plants create a lot of pollen. According to a Michigan State University study, a single male can produce 350,000 pollen grains. In fact, a 2000 study in the Annals of Allergy, Asthma and Immunology of airborne pollen counts in Midwestern states found that in the month of August, when most outdoor cannabis plants begin to mature, 36% of all pollen came from cannabis plants. And that pollen can travel many miles.

(See "Buffer Zones: How Far Can Cannabis Pollen Travel" below.)

For farmers intent on cultivating female plants with high cannabinoid content, pollen drift from male plants can be disastrous. If male hemp plants are planted too close to female marijuana plants, the males can pollinate the females. That can cause the marijuana to “seed out” by lessening yields, cannabinoid content and potency of the product you sell.

In addition, as more and more cultivators begin to grow hemp for fiber production, pollen from such a heterosexual farm could drift to a hemp field where the plants are being grown for their cannabinoid production, decreasing the field’s cannabinoid yield.

Many regulators are aware of cross-pollination concerns and have established regulations designed to mitigate the issue, such as minimum distance requirements between outdoor hemp and marijuana farms. However, these buffer zones are often arbitrary and ineffective.

In recognition of the problem, the U.S. Department of Agriculture recently awarded researchers at Virginia Tech University a $500,000 grant to study pollen drift. The research could prove “critical to establishing appropriate isolation distances for crops and making informed regulatory decisions,” associate professor David Schmale, Ph.D., told Virginia Tech Daily.

Professor Shane Ross, Ph.D., added: “Long-distance pollination is of concern due to the possibility of unintended cross contamination between different hemp varieties, such as those used for fiber and for CBD.”

Enter the Courts

Regulation can only accomplish so much. Legal hemp cultivation remains in its infancy. As hemp agriculture roots and spreads, the industry will likely encounter more and more conflicts between farmers. Such conflicts will inevitably land in our nation’s courts, where these cross-pollination disputes are often novel issues.

Due to the plant’s longtime status as a Schedule I controlled substance, those growing marijuana and hemp illegally were not resolving their disputes in front of judges. However, litigation has ramped up in recent years, especially in states such as Oregon and Washington, where industrial hemp and marijuana have coexisted for several years. Colorado, too, has seen a number of cross-pollination cases.

Our law firm has been involved in one case that illustrates some of the difficulties drift can present. Our client, Koala Hemp LLC, sought to cultivate outdoor hemp in the southern part of Colorado. The local regulations require that an outdoor hemp farm must be at least five miles from the nearest outdoor marijuana grow. If a hemp farm seeks to cultivate within five miles of an established marijuana grow, the hemp farm must provide evidence to the local jurisdiction that its crop will not contain any male plants.

Our client produced evidence that it was only using feminized seeds for cultivation. But a marijuana grow within five miles objected and petitioned the court for a temporary restraining order, prohibiting our client from planting its hemp crop until the court could resolve the dispute.

The plaintiff contended that it is impossible to establish the gender of a hemp seed, and that the gender of a germinated hemp plant cannot be determined until the plant reaches maturity. The plaintiff further alleged that since the gender of a hemp plant cannot be determined until maturity, the risk of cross-pollination and harm to the plaintiff’s marijuana crop was imminent and irreparable.

Without diving any further into the merits of the case, the temporary restraining order was ultimately lifted, though it delayed our client from planting hemp crops for nearly two weeks. Due to shifting weather patterns, our client missed a window of time with ideal conditions to plant the crop. Instead of a germination rate close to 60%, a drought that plagued the region resulted in a germination rate of less than 5%.

Our client is countersuing the plaintiff and seeking damages, which are expected to be close to $1 million.

In states where outdoor hemp and outdoor marijuana overlap, more and more cases have been filed by outdoor marijuana cultivators alleging that male plants from nearby hemp grows have pollinated the female marijuana plants, devaluing marijuana crops to the tune of dozens or hundreds of thousands of dollars. Similarly, as hemp cultivation explodes nationwide and pollen drift begins to impact production, disputes between neighboring farmers will almost certainly end in the courtroom.

From a legal perspective, damages are fairly easy to prove. Pollen from a nearby male plant has cross-pollinated a marijuana crop. If not for such cross-pollination, the marijuana would have yielded a certain amount of biomass at a certain THC content, and a higher THC content commands more money. The same applies for hemp crops grown for CBD.

But the biggest hurdle in a cross-pollination case isn’t damages—it’s causation. Tracking down the source of the pollen is an extremely difficult endeavor. In 2019, U.S. farmers cultivated approximately 511,442 acres of hemp, according to Vote Hemp, a four-fold increase from the acreage in 2018.

Many of these farmers source the same seeds to propagate their fields. Our client in southern Colorado, for example, breeds and sells feminized hemp seeds to dozens of hemp farmers across the state and the country. Even if genetic testing could determine that a male plant germinated from our client’s seeds has pollinated a marijuana grow, how do we find out which field was responsible? Which county or state did the pollen originate from?

Pollen doesn’t simply stop drifting because it has reached a state border. Drift litigation will require expert witnesses, which will drive up the costs for both sides of the dispute.

As both outdoor hemp and marijuana cultivation gain widespread traction nationwide, farmers with limited knowledge and experience in cannabis cultivation will attempt to profit from the booming industrial hemp industry. Hundreds of millions of dollars will be spent on developing acreage for hemp cultivation, exacerbating pollen drift issues across the country.

Whether through lack of experience, uncertified seeds that were not what the label promised or simply because hemp farms might become too big for a small group of farmers to maintain, we anticipate more male plants will slip through the cracks, fueling massive amounts of cross-pollination litigation nationwide.

Photos by Peter Garritano except where noted

Last November, just before Thanksgiving, Mark Justh and Dan Dolgin decided to spread liquid dairy manure across the hemp stalks left behind from their fall harvest. The co-owners of Eaton Hemp and JD Farms in upstate New York saw this as an opportunity to bridge one season to the next and, as an organic farm certified by the U.S. Department of Agriculture (USDA), the work kept them close to their roots. Even when it would appear as though their work with hemp was done for the year, the crop just doesn’t stop giving back.

This green manure plow down is part and parcel of the team’s overall ethos. From the farm’s earliest days, even before hemp began disrupting the agriculture marketplace, Justh saw JD Farms as an opportunity to go all-in on an organic business practice and lifestyle.

Eaton Hemp, the organic hemp food brand born out of JD Farms’ foray into the U.S.’s newest agricultural market, was the first licensed business to plant the crop in New York state in 80 years. That was in 2016. Now, only four years after its first seeds went into the farm’s fertile ground, Eaton Hemp sits on the vanguard of the hemp industry’s organic grain market while actively conducting small-scale research and development in the cannabidiol (CBD) space. Business partners Justh and Dolgin have kept busy. This is a necessary part of the lifestyle in the quickly evolving hemp industry.

“It’s been a long and winding road through the industry, and there’s ups and downs,” Dolgin says, “and I think you just have to learn to ride them out and find a workaround.”

The company now markets its Eaton Hemp Super Squares—neat little raw bars that come in dark chocolate sea salt, cashew coconut mango and walnut apple cinnamon flavors—and Eaton Hemp Toasted Super Seeds, which come in Himalayan pink salt, ancho BBQ and maple cinnamon flavors, all following trends gleaned from organic food distributors. Eaton Hemp’s product lines, launched in April 2018, are sold online and in more than 200 retail markets in the New York tri-state area.

“What we found out when we brought our product to market is that people know hemp, but they know it more as CBD now,” Dolgin says. “They don’t know it as food as much, so they give you a quizzical look when you say you [make] hemp food or you have snacks. Then, when they taste it, it’s really quite amazing to watch. Their eyes light up and they’re like, ‘Wow, this is delicious,’ and then they understand all the nutritional benefits.” With high omega-3 and -6 fatty acids, the seed is a powerful source of protein that has been reported to alleviate inflammation and boost immune health, making it an easy choice for today’s dietary, environmentally and health-conscious food consumers.

Eaton Hemp comes from JD Farms’ 2,000-plus acres of farmland as well as other organic farms they contract with throughout the U.S. to diversify the business’s growing climates and account for weather volatility. But the story behind Eaton Hemp comes from the gently rolling foothills of upstate New York, where Justh happened upon an old dairy property in 2008. By the time Dolgin joined the business in 2015, the state was gathering its regulatory senses for an industrial hemp research pilot program. From there, JD Farms took off running and hasn’t stopped since.

* * *

They’d been warned about the plant’s tenacious coil, but Justh says, “What we realized is that ... it was almost like the hemp would weave a tapestry around all of the moving parts of your combine.”

While the hemp industry is itself part of a vast, global agricultural ecosystem, so too is JD Farms part of something larger than itself. The whole idea was that Justh wanted to return, in a way, to the rural landscape of his youth. After a career in international finance, which he started in the mid-1990s, the quieter side of life in the U.S. economy appealed to him. As his three children were growing up and he was working across the globe, he found the idea of getting back to his roots hard to resist.

A growing awareness of sustainable agricultural practices was a prime mover for Justh, who credits things like Wendell Berry’s back-to-the-land poetry and Michael Pollan’s The Omnivore’s Dilemma with his decision to move into the farming world. By then, though, his central Pennsylvania hometown region had succumbed to suburban sprawl, and so Justh took to the internet and started scouting farmland north of New York City.

After long days at JPMorgan, he’d unwind by scrolling through available acreage on landandfarm.com. In the Hudson Valley, he found himself competing with families who were looking for second homes. Justh was in the market for pure farmland, and he moved his sight lines deeper into the state to Madison County, which sits between Syracuse and rural Cooperstown, best known as the site of the Baseball Hall of Fame.

In the small town of Eaton, Justh found the remnants of a regional dairy industry on the brink of extinction. He landed a 1,500-acre farm that seemed almost too good to be true.

“When I saw this one, what I saw here was that there were a number of streams and small rivers and creeks that went through it,” Justh says. “It had agricultural infrastructure, but it was left fallow because the prior owner had sadly basically gone bankrupt.”

At that point, hemp wasn’t on Justh’s radar. His ambitions were focused on the bucolic work of practicing sustainable farming. He set out into the organic hay business with the intention of selling 1,000-acre harvests as feed for central New York’s rebounding organic milk market. “I thought, ‘Well, I will be able to convert this to organic over time,’” he says, “and that was the initial vision of the farm.”

Early on, he used sorghum-sudangrass as an effective cover crop in his rotation. He was learning the trade and feeling out what was going to work best on his farm. But he wanted a firmer, high-canopy crop that could also do some damage to encroaching weeds. It helped that hemp could pull double duty as animal bedding and feed for JD Farms’ pasture pigs and cows. The idea proved irresistible.

“The original impetus for hemp was, ‘OK, what can I use as a weed suppressant that’s going to grow very quickly and I can harvest and it might have a myriad of uses?’” Justh says. “Well, it had all those things—except it was illegal. And thus enters Dan into my world.”

* * *

Before converging with Justh at the farm in Eaton, Dolgin had worked for years in national security. He worked for the Director of National Intelligence and then the National Counterterrorism Center in Washington, D.C. Around 2010, he left government and took up work in private sector consulting in New York City. He was asked to be the chief security officer for a company that was trying to win one of the initial medial cannabis licenses in New York back in early 2015. That company didn’t win a license, which, for Dolgin, may have been just the ticket he needed to spin unexpectedly toward the nascent hemp industry.

In his networking among the medical cannabis set in New York, Dolgin met Justh, who was still mulling hemp as a cover crop up in Eaton. The idea of getting into the hemp space was intriguing, especially because Dolgin was familiar by then with the state government systems that could legalize a pilot program under Congress’ Agricultural Act of 2014 (the 2014 Farm Bill) requirements.

Dolgin thought, “Well, life is what you make when you’ve got these various crossroads—when you can’t really see the forest for the trees—but you certainly know it’s going to be an exciting journey.” The two agreed to partner and dive into the hemp industry together. Justh’s agricultural ambitions blended neatly with Dolgin’s political savvy.

Simply to get the HGI seeds in the ground, the guys at JD Farms were directed by the DEA to have a uniformed armed guard accompany them.

The 2014 Farm Bill mandated a partnership with a research institution. The State University of New York (SUNY) at Morrisville, located just up the road from Eaton, was on board. Jennifer Gilbert Jenkins, Ph.D., assistant professor of agricultural science at the school, became the point person for JD Farms’ work with the support of the university’s dean and president.

“Dan and Mark came to SUNY Morrisville and said, ‘We’re working with the legislature on a bill to legalize industrial hemp production, and we think that the bill is going to require there to be research partners with academic institutions,’” she says, referring to their efforts to establish a state program under the 2014 Farm Bill. “‘Would SUNY Morrisville be interested?’ And we said, ‘Heck yeah, that sounds like fun.’” She’d only been at the school for two months, and hemp research quickly became her focal point.

Because there wasn’t really an agricultural foundation for hemp in the U.S., a lot of the early work under JD Farms’ license involved planting seeds and observing what happens. This was research starting from square one. The SUNY Morrisville team took close notes on things like weed emergence, germination rates, insect populations, moisture content and so on. Canadian research provided guidance, as our northern neighbor legalized hemp cultivation in 1998, but much of the scientific record leaned on hemp’s similarity to wheat as a row crop. “I didn’t want to treat hemp like wheat,” Jenkins says. “I wanted to treat hemp like hemp.”

Because hemp was only legal in that narrow context of the 2014 Farm Bill, growers like Justh and Dolgin needed to acquire a permit from the Drug Enforcement Administration (DEA) to import hemp seed. With no domestic source at that time, growers looked to Canada and Europe to begin operations. Justh and Dolgin linked up with Hemp Genetics International (HGI) in western Canada for their supply. Simply to get the HGI seeds in the ground, the guys at JD Farms were directed by the DEA to have a uniformed armed guard accompany them.

When the seeds went into the fertile soil of Madison County in the spring of 2016, it was the first time in 80 years that anyone had planted legal hemp in New York state. Justh and Dolgin had before them a 30-acre bumper crop that would jump-start the state’s newest industry.

The original iteration of New York’s bill, however, required hemp growers to burn their crop at the end of the season. The intention was based entirely in plant research with no allowance for any commercial sales. Justh and Dolgin, now acquainted somewhat with the early stirrings of the domestic industry, helped draft a new state bill that would allow a commercial outlet for hemp farms licensed for research purposes. In August 2016, Gov. Andrew Cuomo signed the legislation into law, giving JD Farms enough time to plan ahead for a real harvest that fall. Swift action, as it turns out, has proven vital in this industry.

“What we’ve found in terms of farming in general is that farms can survive small mistakes,” Dolgin says, “but big ones are a lot tougher.”

* * *

That first year, with those 30 acres planted at the Eaton farm, was a good one. But the lessons learned came with their fair share of challenges.

What the team quickly began to learn is that Cannabis sativa L. is a very different plant than sorghum-sudangrass or anything along those lines. There were the little things: hemp stalks wrapping around power take-off drives and axles. They’d been warned about the plant’s tenacious coil, but this seemed like no big deal to farmers who’d been cutting hay for the past few years.

“What we realized is that, truly, it was almost like the hemp would weave a tapestry around all of the moving parts of your combine,” Justh says. “It was pretty terrifying to pull out literally woven blankets of hemp from your combine.”

It was a learning curve, and Justh and Dolgin both worked closely with Jenkins and her team to more intimately understand this unique plant.

“When they talk about hemp being somewhat difficult to harvest, you really have to treat it with respect and dignity,” he says. “That’s because if you don’t, you’ll—unless you have a very good insurance policy—have burning combines and things like that. So, you want to really take it slow and be thoughtful when you’re harvesting it, and really understand that it is a special crop on harvest—hence why they make rope and textiles out of it.”

And then there were the larger issues, like figuring out what to do with this crop. They brought former ad executive Bryan D’Alessandro onto the team as CEO the following year, in 2017, to shepherd the work of JD Farms into what would become Eaton Hemp. With a background in marketing strategy and branding, D’Alessandro brought a skill set that would complement the agricultural learning curve Justh and Dolgin were riding.

They had a license, and so they knew they had a valuable asset that they could shop around among prospective acquirers or buying partners. But they soon came to believe their own lifestyles could guide their plans; D’Alessandro showed them the pathway toward developing their own brand within the evolving natural food space. Justh, an ultrarunner who boxes Muay Thai, saw this opportunity as a true-to-form outgrowth of what he’d been doing for the past several years.

“It’s funny, because it was really hard to see beyond the next hurdle at that point,” Dolgin says. “It was really, really hard to consider the larger picture.” Now, in 2020, when he talks about the rapidly developing legal hemp industry, he makes a point of telling farmers they’ll need to line up buyers before putting seeds in the ground. But back then?

That’s the story of hemp in early 2020: learning how to set expectations in line with supply and demand curves that haven’t yet settled into predictable patterns.

“We brought [D’Alessandro] in to help us really formulate a plan and launch the brand, which is now Eaton Hemp,” Dolgin says, “but it took two, three years of both growing on the farm and also exploring the space, figuring out what products we wanted to make, finding co-packers, distributors, so on and so forth.”

As recently as 2016, finding capable co-packers in the hemp space was a near impossibility. Lining up business partnerships was a shot in the dark for anyone able to work with a research license in the early days.

“I think because we had a diverse portfolio, we could take the risk in that initial year,” Dolgin says. “[We said to ourselves] well, let’s see how this grows and let’s kind of follow along and see what the market naturally leads us to. We explored a number of different opportunities and thoughts—and the fiber aspect and the seed and everything in between.”

With that first harvest, the team could begin tasting the actual seeds. Could the natural food industry be some sort of commercial outlet here? CBD wasn’t as popular on the market like it is today; the guys at JD Farms were looking squarely through a sustainable agricultural lens and trying to think one or two steps ahead of where they were.

* * *

For all the bright spots the trio saw in 2016, the next year flipped the script. All told, that second hemp crop was a wash. “Had we started in 2017, I don’t know if we would [still] participate in the industry,” Dolgin says, “because everything that was good about ’16, at least agriculturally speaking, was bad about ’17.”

The spring saw a cold, wet start to the planting season, and the team at JD Farms planted earlier than they did their first year. They also quadrupled their bets and planted about 150 acres.

“We reduced the density and we planted … not as deep into the soil and really got wiped out,” Dolgin says. “I mean, it rained. It was one of these years where you’re just sitting inside, looking outside and shaking your fist at the sky, but there’s really nothing you can do.”

The team saved the season by doubling down on goldenrod crops for essential oils. Still, they swathed and windrowed the hemp crop, which allowed them to save what was left after the weeds died down.

As organic farmers diving into the hemp business, Justh and Dolgin learned they couldn’t plant their hemp crops on the same land they used the previous season. Hemp is a nitrogen-depleting crop, and they found the soil was in need of nutrients the following year. Now, the Eaton team plants nitrogen-giving clover crops between seasons. It was important to knock out a few of those big lessons early on.

“For us, it was definitely: don’t plant it in the same fields twice, don’t plant it quite as early, don’t plant it as shallow as we did, then also hope it doesn’t rain as much as it did,” Justh says. “So, those were our lessons as we went into 2018.”

By that point, SUNY Morrisville had begun growing hemp crops on its own campus farm, and Cornell University had joined JD Farms as a research partner. Jenkins’ former student, Chris Domanski, even went on to join JD Farms as greenhouse manager at the company’s newly built 5,000-square-foot climate-controlled facility.

But all of those lessons and progress are for naught without a commercial plan in this industry. Especially since the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) passed, the hemp market has become a bustling and nuanced place, where it takes a keen eye for opportunity and a healthy risk tolerance to succeed.

“No one is going to knock on your door just because you put hemp in the ground and pay you good money for it,” Dolgin says. “You [may] have 30,000 different uses for hemp, but there’s not 30,000 markets, for sure. And even the markets that do exist, you really have to either have a buyer in place or know that you’re going to do something with it.”

* * *

As Eaton Hemp came into its own and the hemp crop expanded at JD Farms, Justh and Dolgin were looking at the big, emerging players in the hemp food space, like Manitoba Harvest. “We were thinking, ‘OK, there’s an industry here, and we are first to market in the U.S.’ Obviously, things are happening in other states, but the beauty of where we are in New York was that we’ve got 20 million people downstream.”

Of all the possible end uses for the varieties of hemp they were growing, Justh and Dolgin knew they had to zero in on a legitimate marketplace to continue the business. D’Alessandro’s background was key.

“The beauty and the challenge of hemp,” Dolgin says, “is that it lends itself to basically any product you could imagine because the hemp seed can be pressed for oil, grown for flower or just kept whole or de-hulled.” They began developing different products, taste-testing this and cooking up that. The 2018 Farm Bill was coming into view, and so too was the organic hemp food market on a broad scale.

With D’Alessandro guiding the development of the Eaton Hemp brand and the message behind the company, the team tooled around with possible ideas: pancake mix, pizza crusts, raw bars, crackers. They co-branded a line of Sfoglini pasta out of Brooklyn using hemp flour from Eaton Hemp, “which was nice just to kind of test the market,” Dolgin says. The pasta line partnership continues to this day.

And in the greenhouse, where the team runs R&D work on a CBD variety breeding program, Justh and Dolgin also experimented with the leaves of their hemp plants.

“The other real surprise and revelation was that the leaves of the plants at a young age taste really good,” Dolgin says. “I mean, not bitter at all. Nutty and buttery. And if there was a bitterness, it was a natural deliciousness to it and not an overwhelming aspect.”

They sold baby greens to ABC Kitchen in Manhattan in 2017 and 2018 and toyed around with the various angles into hemp as a food product.

“What we’ve really started to build is more of a lifestyle brand than anything,” Dolgin says, “and trying to really steer ourselves in that direction and get this in the hands of athletes and doctors and folks who are in the health and wellness space is really what at least the beginning part of this year is definitely going to be for us.”

Justh and Dolgin talked to regional managers at Whole Foods and other big box retailers to find out what product categories were moving. The long game was coming into view.

“We look at the farm as kind of a blank canvas, and then we kind of add all the paints and the textures and things like that,” Dolgin says. “We knew with our network and our contacts that we could bring in the right people and really develop something that was interesting that really played into the taste and flavor profile. … What we found when we started looking at other players in the market was that most of what was happening in the hemp food space was still in the big bag, commodity bulk products like Hemp Hearts and flower. And we wanted to take more of an elevated value-add or premium approach.”

The key was to keep the spotlight on hemp, rather than hiding it somewhere on the tail end of an ingredients list.

And ever since moving from ruminations on cover crops to the company’s sprawling work in the organic hemp food space, the team behind Eaton Hemp knows that’s where the spotlight belongs: on this crop.

The policymakers in New York state seem to know this, too. JD Farms was a 2017 winner of one of the state’s $1 million Industrial Hemp Processors Grants, part of a broader funding platform for the industry in what’s considered a promising state. (More than 18,000 acres of hemp were licensed statewide in 2019.)

But the question now is where all of this is headed. Dolgin worries about a false sense of security for farmers who don’t yet have a plan or a market in place for their hemp.

“A lot of people are hearing these fantastical stories and wanting to put their entire farm [into hemp], and sometimes you kind of have to save farmers from themselves, and I think the state is now realizing that,” Dolgin says. “So, they propped up the industry, but they also have to help them kind of set some realistic expectations.”

That’s the story of hemp in early 2020: learning how to set expectations in line with supply and demand curves that haven’t yet settled into predictable patterns. Most eyes are turned to the CBD extraction market. Justh and Dolgin say they know enough to keep one eye on that segment’s emerging trends, but hemp is already proving to be a formidable agricultural force.

“We were looking at all aspects of the plant,” Dolgin says, “and realized at that point, to carry on the paint analogy, that by throwing paint at the canvas and seeing what sticks, we could learn what looked right.”

Eric Sandy is digital editor of Hemp Grower and sister magazines Cannabis Business Times and Cannabis Dispensary.