The future of CBD: Is the hemp market hurtling towards a crash?

27 May 2019 --- Consumer interest in cannabidiol (CBD) is booming, with CBD-infused products proliferating at an astounding pace. Whether the cannabis extract has indeed proven its potential as a new consumer staple, or is slated to become another “has-been cure-all in the supplement aisle,” remains to be seen. According to a new Rabobank report, which takes a hard look at the future of this emergent market in the US, questions remain about just how mainstream it can become amid huge legal ambiguity, with the possibility of a crash existing. 

“My fear is that the hemp market is hurtling towards a crash. I think that farmers are producing more biomass can be processed by existing facilities, but even with the current limited production capacity, processors are likely producing far too much CBD,” Bourcard Nesin, Analyst – Beverages at Rabobank and co-author of the report, tells NutritionInsight. “When signals from the end-market start to tell processors to pull back, we could see processing capacity crash – leading to a deeper, and perhaps catastrophic, crash in hemp biomass prices – which could put a lot of farmers at risk,” he adds. 

In the report, analysts lay down a framework for what presently drives CBD demand and present alternative theories for how the market could develop over the next five to ten years. In addition, they highlight potential markets the extract could thrive in, depending on much needed regulatory clarity, such as the sports drinks and sleep aid space.

Even with the extract’s unprecedented shift into the mainstream, spotlighted concerns for its future are prominent. Entering the industry now poses significant legal and reputational risks for all players, for example, making it difficult for companies to achieve scale, find good partners and raise cheap capital. Moreover, the market for CBD’s primary plant source, hemp, may be at risk from imbalances in the supply chain.

While some aspects of the industry appear profitable, an opinion put forth by the analysts is that heady profits may not be sustainable, even in the very short-term. “If this market adjustment occurs, which could happen as soon as this fall [of the hemp market], we will likely see massive consolidation in the processing part of the business,” says Nesin.

“As processors become bigger and more sophisticated, they can start offering the kind controls and cultural practices necessary for the hemp industry to realize its potential and assuage the legitimate regulatory and safety concerns of large CPG companies. That being said, most companies with a reputation to protect will avoid doing anything that violates FDA rules,” he observes.

Although hemp was removed from the Controlled Substances Act (CSA) in December 2018, and hulled hemp seeds, hemp seed protein and hemp seed oil were certified with Generally Recognized as Safe (GRAS) status, confusion around the legality of CBD in food and beverage applications remains. So, following industry requests, the FDA has announced that it will hold a public hearing on May 31 to discuss developing a regulatory framework for the use of cannabidiol (CBD) in foods and beverages.

The Rabobank report also notes that this legal-limbo is also keeping large food and beverage companies without Canadian – where recreational and medicinal marijuana use is legal – marijuana investments on the sidelines, which limits the R&D spend-and-distribution that could propel the CBD market forward.

For companies that don’t want to break the law or potentially endanger consumers by making CBD products, the Rabobank analysts put forth one consolation. They argue that even with demand rising and discoveries of new applications for the cannabis derivative, there is yet no major first-mover-advantage in the CBD food and beverage space.

Legal ambiguities on the production and sale of CBD products
According to the US National Institute of Health, unlike THC – the primary psychoactive component in cannabis – CBD is “devoid of psychoactive activity, with analgesic, anti-inflammatory properties.” The relaxative compound can be found in high concentrations in hemp, a variety of cannabis, recently made federally legal in the US by the 2018 Farm Bill. The new legal status of hemp as a source of CBD is a major factor in the explosion of industry interest in CBD as an ingredient, the report iterates. But the overt absence of uniformity in regulation of CBD in food, beverages and supplements, has presented a significant challenge for both producers and consumers seeking clarity.

“The lack of regulation puts a huge burden on ethically-run companies to be the de facto regulators of the industry, ensuring that their products don’t pose a risk public health and working to minimize their exposure to illegal activity,” Nesin tells NutritionInsight. “CBD's halo as a ‘miracle cure’ could face serious backlash if consumers were to understand how poorly regulated the CBD extraction industry. A similar backlash is possible if the medical benefits of CBD turn out to be apocryphal.”

Sourcing will present a major hurdle for both new and existing industry players. “Larger food and beverage companies will struggle to find a source for CBD with the scale, sourcing practices and safety protocols needed to bring a product to market. People say the hemp industry is the ‘wild west,’ but it is much worse than that: It is ‘Mad Max’,” he highlights.

The standout caveat highlighted in the report, which further convolutes the marketing and sale of CBD products in the US, is the federal illegality of CBD-infused food, beverages and dietary supplements. Classified as a drug by the Food and Drug Administration (FDA) – prescribed for some fairly rare forms of epilepsy – the extract legally prohibited as an ingredient in food & beverage products. The FDA has been very clear that they are imposing these restrictions “to preserve the incentive to study CBD as a pharmaceutical product,” notes Rabobank.

Still, seeing as the CBD product range continues to diversify in the market, not much concrete action has been taken to enforce these restrictions. As is the case with many supplements and ingredients, the report stresses that the FDA has done little more than send strongly-worded letters to violators, with its focus trained on companies that make egregious and dangerous claims about their products. It is this overarching illegality that raises the cost of capital and dissuades more powerful retailers and brand-owners from investing in the new industry.

Blurring the lines between pharma and food
The report emphasizes an emerging sports-recovery drink market that is centered on the anti-inflammatory properties of CBD. Earlier last April, the extract was infused in a line of sparkling water by Weller. The Rabobank analysts note that a new product with scientifically proven anti-inflammatory benefits could totally revitalize a sports drink market, which is generally viewed as “unhealthy and out-of-line” with consumer demand. This is something on the mind of the beverage and cannabis industries. US-based cannabis company Canopy Growth has reportedly spoken of this goal explicitly. 

Sports drinks, however, are squarely within the traditional-beverage-industry wheelhouse, notes the analysis. In this sense, there is potential for CBD to take the food-as-medicine category to another level. The sleep-aid market, reportedly worth more than US$70 billion annually in the US, offers a key opportunity. A target formulation of CBD in a beverage with scientifically-proven sleep-benefit would be the purest “pharma” play for CBD beverages, and a product like this could be thought of as a natural Ambien competitor, the analysts highlight.

The evolution of CBD
As CBD gets commoditized, products will need to connect with consumers outside the context of their primary ingredient, the report indicates. While some brands will survive the inevitable purge following the “peak of inflated expectations,” more cautious companies could have a window to develop products in a much lower-risk environment. As such, the analysts suggest that the industry is approaching peak hype around CBD. Once farmers, investors, brand owners, and consumers begin to “readjust expectations from their current stratospheric status,” it will be much easier to size-up the long-term opportunity that CBD-infused products represent, the report concludes.

By Benjamin Ferrer