Hemp legalization could be boon for banks

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Bankers in Kentucky, Colorado and other states where hemp is produced could soon be seeing green.

Congress last week passed a farm bill that removes the crop from the list of federally controlled substances, potentially providing a new revenue stream for agricultural lenders that, to date, have been wary of providing loans and deposit accounts to hemp producers and distributors.

President Trump is expected to sign the bill into law.

Prior to the bill’s passage, hemp cultivators cited a lack of access to banking services as one of their biggest impediments to growth.

Though numerous states allow hemp production, and the federal government liberalized its rules in 2014, Jonathan Miller, the general counsel for the U.S. Hemp Roundtable, said that many banks still feared the consequences of serving the hemp industry.

“We’re very excited and feel that there should be a dramatic change,” Miller said.

The legislation defines hemp as cannabis that has a TCH concentration of 0.3% or less, which means that the plant is not intoxicating. Hemp can be used in a wide variety of products — including fabrics, yarn, carpet, construction materials, auto parts, cosmetics and pharmaceuticals — but federal prohibition has constrained the industry’s growth.

At the moment, the most economically promising use of hemp is in CBD oil, which is marketed as a way to treat various medical problems. New Frontier Data estimates that the hemp-derived CBD market was worth $390 million this year.

That is far smaller than the U.S. marijuana industry, which was worth an estimated $8.3 billion in 2017, according to New Frontier. But the firm projects that following the federal legalization of hemp, the CBD market will enjoy a 27% compound annual growth rate over the next five years.

The opportunities for banks will be concentrated in those states that allow hemp production — a list that includes Kentucky, Colorado, Oregon, North Carolina and Vermont.

In Kentucky, the number of hemp growers has expanded from 20 to 210 in the last four years, and the number of planted acres has grown from 33 to 6,700 over the same time span, according to state data. That rapid growth, which was spurred by the loosening of federal rules four years ago, is expected to continue in the wake of legalization.

In 2016, the Kentucky Department of Financial Institutions issued guidance that was designed to allay bankers’ fears about a business that still had a hazy legal status. But state officials were unable to provide assurances to bankers about what examiners from federal regulatory agencies would say.

“I think when this farm bill gets passed into law, it will provide a significant opportunity for banks that have been kind of waiting on the sidelines,” said Charles Vice, commissioner of the Kentucky Department of Financial Institutions.

Once the new federal law takes effect, banks will not only be able to offer deposit accounts to hemp farmers, they will also be able lend money to the industry. That expanded access to capital is expected to enable investments that will spur the industry’s growth.

Don Childears, the president and CEO of the Colorado Bankers Association, said that his organization has gotten several phone calls from banks in recent days about the impending change in federal law. He said that the hemp industry offers new opportunities for Colorado banks, but also warned that the federal legislation includes certain provisions that financial institutions need to understand.

For example, if the amount of THC in the crop exceeds 0.3%, it is no longer considered legal hemp. Childears said this provision raises the possibility that the crop could be destroyed. “Then you have a bank without collateral,” he said.

The federal legislation also requires hemp producers to be licensed, and it bars people who have been convicted of felonies related to controlled substances from being involved in cultivation for 10 years.

“Ultimately, the farm bill legalizes hemp, but it doesn’t create a system in which people can grow it as freely as they can grow tomatoes or basil,” John Hudak, a senior fellow at the Brookings Institution, wrote in an analysis of the legislation.

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Ag lending Agriculture industry Law and regulation Kentucky Colorado Vermont Oregon North Carolina