“The future of the hemp industry in the United States is anything but certain.” – page 71
The Interim Final Rule
On October 31, 2019 the US Department of Agriculture published an Interim Final Rule titled “Establishment of a Domestic Hemp Production Program.” The Rule can be found at Hemp Interim Final Rule 10-31-19.
And the Department’s Secretary, Sonny Purdue, even took the time to sit down and film an announcement about the rule. There are lots of social media choices, but the YouTube version is as good as any and available at Secretary Purdue – YouTube Hemp .
Notwithstanding the “Interim” modifier, the Rule goes into effect immediately. The public has 60 days to comment. Those comments will be taken into consideration by the USDA, which is then required to publish a final rule within two years.
The Rule is a requirement of the 2018 Farm Bill, which de-scheduled hemp from the scheduling provisions of the Controlled Substance Act. The definition of hemp has not changed: it is the Cannabis Sativa L plant and its derivatives containing less than 0.3% THC on a dry weight basis.
The Interim Final Rule makes it clear that the FDA retains authority under the Food, Drug & Cosmetics Act to regulate hemp products marketed and sold as food (or as a supplement to food), dietary supplement, drug, or cosmetic. To date, the FDA has not issued regulations nor approved any hemp-derived CBD foods, food supplements, or dietary supplements. In California, the Department of Public Health issued an FAQ in July 2018 that provided that “the use of industrial hemp as the source of CBD to be added to food products is prohibited.”
The Rule sets out the standards for (i) the USDA’s approval of State and Tribal hemp production programs, and (ii) to the extent any State or Tribe does not have a program, the USDA’s hemp production program. At a minimum, the programs will include: (i) licensing requirements for hemp producers, (ii) requirements for reporting land used for hemp production, (iii) testing for total THC concentration, (iv) procedures for disposing of non-compliant plants (known in the trade as “hot hemp”), (v) ongoing compliance provisions, and (vi) procedures for handling violations.
To summarize: the 2018 Farm Bill and this Interim Final Rule legalize and provide rules for the production of hemp. Neither the Bill nor this rule deal with hemp-derived CBD products, which remain subject to FDA rules and approvals. No hemp or hemp-derived CBD foods, food supplements, dietary supplements, drugs, or beverages have been approved by the FDA, and many states, including California, have specifically prohibited the use of industrial hemp or hemp-derived CBD in food products.
State & Tribal Plan Requirements
The Supplementary Information section of the Interim Final Rule is 100+ pages (of the total 160 pages). It first goes through the requirements for the estimated 100 State and Tribal plans, then the requirements for the USDA plan. The State/Tribal Plan section is probably the key section, however, as the USDA estimates that there will be 6,700 licensed producers under these plans, and only 1,000 under the USDA plan. Some of the key aspects of the State/Tribal Plans are set out in Parts A-D:
Part A describes the requirements for identifying the land to be used for hemp production: each field and greenhouse shall be identified, and each producer shall be identified. Producers must be licensed. Producers that are legal entities must provide the names of their “key participants”. I have written an article that describes the differences between “entities” and “key participants” in this proposed rule under Title 7, and the definitions of “legal entities” and “beneficial owners” in the existing CDD rule under Title 31. Failure to reconcile these differences will create confusion for banks and hemp producers seeking banking services. see RegTech Article October 31.
Part B describes the sampling and testing for THC. There are two controversial aspects here. First, the sampling must be done within 15 days of harvest, which will create logistical strains for producers, as any sample that comes back with a THC concentration of more than 0.3% will require that the entire crop be disposed of. Second, the THC test will be of the total THC, which is THC and THCA: it is believed that most current hemp strains that are currently be tested at under 0.3% THC will not be under when (what is known as) total THC is tested. However, there is a “Measurement of Uncertainty” or “MU” built into the testing standard, which is essentially a “plus or minus” based on the accuracy of the testing. That may alleviate some of the concerns. Finally, only DEA-approved testing labs will be used for testing. There are currently not enough of these labs to test expected crop yields in enough of the producing states.
Part C deals with the disposal of non-compliant plants, or “hot hemp”. This must be done by law enforcement or DEA registered reverse distributors. Note that these distributors could be treated as high risk customers for purposes of a financial institution’s CDD/EDD program.
Part D deals with compliance and enforcement procedures, including annual inspections of hemp producers. Given that the biggest issue with hemp is the 0.3% THC levels, there are interesting provisions for producers that are (frankly) unlucky with a non-compliant crop. The Interim Final Rule provides that a producer cannot be found to be negligent (the standard for sanctions) for growing hemp with less than 0.5% THC; a negligent violation requires a corrective action plan; and three negative violations in five years will result in a five-year ban from hemp production. Negligent violations cannot lead to criminal violations.
Parts E, F, and G deal with information sharing and other more technical issues.
Regulatory Impact Analysis
About one-third of the document (pages 71 to 117) is taken up by the required regulatory impact analysis that attempts to answer questions like what will it cost to implement the rule, what are the benefits, etc. In answering those questions, the USDA goes to great length to describe the history and potential future for the hemp industry in the United States. For example, at page 82 the USDA provides that as of 2018 there were 3,543 licensed hemp producers in twenty-four states with ~78,000 acres of hemp under cultivation. The USDA estimates that 2/3 to ¾ of cultivated hemp is intended for “flower” or CBD production, with ~1/6 for fiber, and ~1/6 for grain. Flower can yield anywhere from a loss of $17,000 per acre to a profit of $6,000 per acre (according to the Supplemental Information) based on the following price ranges: hemp fiber $0.07 to $0.67 per pound; hemp grain or seed $0.65 to $1.70 per pound; and hemp flower $3.50 to $30.00 per pound, depending on the CBD Content. The USDA seems to conclude that hemp grown for fiber and grain is marginally profitable. Although state-by-state hemp acreage is not included in the interim final rule, other sites referred to by the USDA, including www.votehemp.com generally have acreage data that supports the USDA’s data that there was ~78,000 acres of hemp under cultivation in 2018. Using the Vote Hemp data, it appears that production is concentrated in a few states:
Montana 22,000 acres North Dakota 2,778 acres
Colorado 21,578 acres New York 2,240 acres
Oregon 7,808 acres Nevada 1,881 acres
Kentucky 6,700 acres Wisconsin 1,855 acres
Tennessee 3,338 acres Vermont 1,820 acres
North Carolina 3,184 acres
The USDA believes that there is ~160,000 acres under cultivation in 2019, with more acreage expected to be planted in 2020. This is double what it was in 2018, which was double what it was in 2016.
NOTE: The November 2018 passage of the Farm Bill resulted in a surge in the number of registered hemp producers and acres under cultivation. Hemp cultivation figures are changing quickly, become dated very quickly, and are inconsistent. For example, the USDA acreage totals are consistent with those from www.votehemp.com, a pro-hemp site. That site shows California with zero acres of hemp cultivation. However, the California Department of Food & Agriculture (CDFA) reports that, as of August 2019, there are 258 registered hemp growers and 34 seed breeders with 16,899 acres under cultivation (there are 419 people and entities on the list of registered growers and seed breeders as of October 28, 2019).
Impact on Banking
Although the cultivation of hemp is now legal in the United States, hemp-derived CBD products (edibles, tinctures, beverages) remain subject to FDA regulations and approvals, and none have been approved. However, other than warning letters from the FDA, there is little in the way of federal enforcement. To my knowledge, there is no state or federal regulatory agency guidance on providing banking services to hemp producers or those that are selling hemp-derived CBD products.
As set out above, the “hemp” definition of “key participant” is different than the BSA definition of “beneficial owner” (I have written about the need to reconcile these definitions: see RegTech Article October 31 ). To the extent a bank has a program to knowingly provide financial services to a hemp producer, it will need to recognize that those producers may struggle to provide beneficial ownership information, and that information may not reconcile with what they provide to the USDA or their State or Tribal licensing authority under the key participant requirements. From a customer due diligence perspective, knowing which customers are licensed cannabis businesses as well as registered hemp growers (and possibly DEA registered reverse distributors), and tying the beneficial owners and key participants, will be challenging.
With the publication of the Interim Final Rule for hemp production, banks’ policies relating to cannabis – whether an outright prohibition, risk-based exceptions, or full program – should be reviewed to ensure that hemp producers and hemp-related “service providers” (also known as Tier 2 and Tier 3 entities) are properly accounted for.
The new Hemp Production Regulation
Pages 117 – 160 of the text is the actual new regulation or rule. This new rule is added onto title 7 of the Code of Federal Regulations as Part 990 – Domestic Hemp Production Program.