It isn’t easy to make a business case for hemp. The crop has so much potential. But then, it has had such a checkered past too. Sure, there have been some successes, but farmers can’t be blamed for remembering the hemp co-operatives that bled red ink, or for recalling all the big talk about hemp fibre facilities that, in the end, never put a shovel in the ground.
So, why have a group of investors, including some farmers, decided to give it another try, investing in Blue Sky Hemp Ventures, based in Saskatoon?
What’s different this time around? And why do they think they will succeed in a tough marketplace where others have not?
But there’s more too.
Why early hemp efforts choked
Industrial hemp has been legal to produce in Canada for more than two decades, leading to early efforts to develop an industry focused on two main value streams; seed for food or cosmetics, and fibre. (Hemp contains both long fibre, for things like rope or textiles, and hurd, a cellulose-rich fraction that can be used to make products ranging from cat litter to fibreboard and insulation.)
Some players, like Manitoba Harvest Hemp Foods, did build successful markets for seed food products. But despite efforts their fibre plans fizzled largely because hemp fibre is a high-volume, low-value crop.
“Those early efforts struggled,” says Devin Dubois, VP of corporate affairs and counsel for Blue Sky Hemp Ventures. “It’s not economical for farmers.”
Manitoba found hemp can’t compete as a broad acre crop grown for the fibre because it would have to displace relatively lucrative oilseed, legume or cereal crops in the rotation.
Although there has been progress worldwide in developing new products using hemp fibre — for example, in Europe BMW is using hemp in some of its car panels — there is still an issue in connecting the dots.
“Large companies that could potentially use this product as an input to displace others, like the auto industry, didn’t have a real grasp of the supply chain,” says Dubois. And it’s tough from the push end too. “If you are going to supply GM or Magna Auto with a new input to displace what they’re currently using, that’s a tricky thing to do. They are going to need 40,000 tonnes of a particular grade, at a specific timing every year, and because you’re new, they need a $20 million security bond or whatever to back up that performance.”
No wonder it’s been a steep hill.
CBD adds the dollars
Now, with new cannabis laws and rising demand for its non-THC cousin, CBD, some heavy hitters have begun to take notice, including a top analyst in the Canadian energy sector, Andrew Potter, (who has worked for Scotia World Markets and was vice-president at Cenovus Energy). Potter had left the energy sector, and was looking around for new opportunities when he began to get excited about the hemp industry, and he got in touch with Dubois’s business partner Wilson Johnston, an agronomist and farmer who has been running a precision ag consulting company, FieldAlytics, together with Dubois for several years.
“Andrew said, I’m thinking about some concepts with industrial hemp but I don’t know anything about production. I know you’re in agriculture, do you know anything about growing hemp?” recalls Dubois.
That led to a meeting in Calgary with Potter, Wilson, Dubois and certified financial analyst Mike Rimel, who had worked with Potter in the energy sector and is now their chief financial officer.
The four formed a corporation together in November 2017 and began the long process of fleshing out the creative new business model that would be needed if success in the hemp sector was to be achieved this time around.
“Andrew was really jazzed about the long-term potential for industrial products from fibre and hurd and realized there are issues with the supply chain and scale,” says Dubois. “It just took somebody with industrial business chutzpah, and potentially some money, in order to take a swing at that. But also on the production side, we needed to be able to pay a decent price for the crop.”
They quickly realized that they needed to generate a strong financial incentive to grow as a multi-purpose crop where all its fractions (flower, seed and fibre) have value.
“That concept came out of the energy sector where how you make money as a low-cost producer is through monetizing all the factions that come from whatever you’re processing,” says Dubois. “The Holy Grail in terms of the economics of producing and processing hemp on the Prairies is a tri-purpose crop that has value in the flower for extraction, but has value in the seed for food, and value in the stalk. We knew that if we could offer a contract for production on the whole acre, and be able to access these multiple revenue streams, we could make it.”
A different business model
The snag is to figure out how to efficiently transport and use all the byproducts. The first step was to build a seed processing facility in Saskatoon to make bulk food ingredients for other large food manufacturers like hemp seed oil, proteins and de-hulled hemp hearts, focusing initially on a tangible market that is easy to understand and where there is immediate market demand. On the other end of the building is a Health Canada-licensed extraction facility to extract CBD from hemp flowers.
“That side of the building is licensed very differently from the food side, where we are dealing with the Canadian Food Inspection Agency, and have third-party food safety audits, and HACCP (Hazard Analysis Critical Control Point) management programs,” Dubois says. “The extraction side is Health Canada, so it’s hyper-secure, and our license, even though we process hemp, is a cannabis processing license.”
The company makes CBD distillate, using a primary extraction that is distilled down to a more concentrated CBD. “The extract is 80 per cent CBD and maybe three per cent THC by volume. We also have isolation to take that product into a pure CBD compound which is a crystalized white solid that is 99 per cent CBD,” Dubois says. “Those ingredients are sold to other licensed processors in Canada to make retail CBD products like tinctures, vapes, gel caps, etc.”
The Health Canada rules and regulations may be stringent, and were a major reason it took them two years to become operational, but it’s also a huge selling point for their CDB export sales.
“There’s a lot of export appetite for Canadian-produced CBD extract because we have uniform and strict federal standards on the production of it versus the U.S., which is just a menagerie of different state regulations and laws,” Dubois says.
They are currently working with a group of producers near Rosetown, Sask., who are growing biomass for the Saskatoon facility, which is where the final piece of the puzzle makes the economic case work. Saskatoon is a primary processing facility that takes the whole hemp plant material wrapped up in dry round bales straight off the field, deconstructs it into flowers, seed and fibre, and conditions the flowers ready for extraction.
This is different from more traditional centralized, high-capacity processing facilities.
“The issue is breaking down that initial plant close to the source of production because 90 per cent of the plant is fibre,” Dubois says. “It’s a concentric model with primary processing facilities close to the source of production and a more centralized facility to deal with concentration and refinement of these products to really make a higher-value product.”
More value and flexibility for growers
That also means that growers can have both more value and more flexibility when it comes to choosing hemp varieties and how they treat the crop.
“With current genetics, growers have to pick what their primary aim is,” Dubois says. “They always are looking for that secondary value, but if the primary intention is capturing high-quality flower, then they may be sacrificing seed quality in some measure.”
It leads to tough management decisions too. In broad acre agriculture, the routine approach is to swath the hemp and let it field dry. “When focusing on the flower crop, there is a bit of mechanics involved because you end up with two different swaths: a top swath for flowers and a fibre swath lower down to cut the straw,” Dubois says.
“What we do is have growers bale it in large round bales and that’s what building a processing centre was about, to break down the crop in a location close to where it is grown rather than taking the combine to it.”
“We’re preparing for the tri-crop dream where potentially we can harvest the whole plant and get all the fractions of the crop, but right now, the plant genetics are less conducive to serving three purposes all in one fell swoop,” Dubois says. “So, there’s a bit of flexibility in how we need to treat these plants.”
Opportunities are there
Blue Sky Hemp Ventures is not the only company venturing into the hemp space and seeking to crack the nut of different revenue streams, and the future may depend on forming partnerships and a more localized primary processing model, particularly on the fibre end of the market.
“It will take a company that can generate enough value on the two existing revenue streams from this crop to link up with the right off-take partners and industrial users to be able to build a cheap, consistent supply of an input,” Dubois says. “You can’t justify the logistics to ship raw fibre anywhere. I think the closer you can process that initial fibre to the field and separate it into long fibre and hurd close to the source, it makes a better economic case for shipping a higher-value product from that location.”
Hemp, if the model can mature correctly, has a bright future, especially in Western Canada, says Dubois.
“We have opportunities to get these products into a retail package here because there’s really no one else doing it, and the economics of our land in Western Canada. With the cost of our land and the potential financial return for growing this crop, it all makes sense economically,” Dubois says.
“It’s a crop that can fit into rotations economically and agronomically, and it provides the potential to produce this crop more efficiently than anyone in the world. It does grow in other places like Kazakhstan and the Ukraine, but we have the political and regulatory certification and reputation for quality that people want, especially when it comes to a regulated, or quasi-medicinal product like CBD.”
Don't expect a fast buck
The hemp world is still no place for the faint of heart or for those wishing to make a fast buck.
“It’s been an exercise in patience and durability,” Dubois says. “We weren’t uninjured by the cannabis crash because it’s an associated industry, but we came through it. Some of our growers are also invested in the company and it’s been an interesting experience for them too. Everyone on our team, our investors and growers have been patient and they believe in the business case, which is not just about building a high-value company, but figuring out this business, and building an ecosystem that serves growers and local processing all together…. The crux of this business is what we can produce from an acre of land.”
With the regulatory environment soon set to change, Dubois says there will be more challenges and more competition, but also a lot of opportunities for companies with the right business model.
“There’s every indication that CBD will be removed from the restricted market and will become a natural health product, in which case, every vitamin manufacturer will put this on the shelf in the grocery and drug stores,” Dubois says. “There is no one currently making that supply, so that’s where we see the industry getting a lift, and there’s every reason, from a regulatory perspective through to an economic and agronomic perspective, that the Canadian Prairies should own this industry globally.”
There have been some sharp growing pains for the company, and it’s not been an easy journey through the regulatory process, which has caused many delays and made cash flow tight. The company is just finally moving some sales of extract out, which in itself is also a complicated and highly regulated process.
“We have controlled costs all the way to get to this stage, and in the early stages we had no human resources or offices,” Dubois says. “Over the last six months, we have gone from six to 30 employees. It’s still in a somewhat painful management stage, but despite all the bumps and bruises along the way, all indicators are that we’re on the right path. Now we have to find a place for the fibre, and our long-term excitement is more about that than anything else.
“This is a continuing effort,” Dubois says. “We have every intention of being successful.”