Evaluating the Economics of Industrial Hemp in Texas

Farmers in the American agricultural system are working to make market receipts and government payments cover their cost of production. According to USDA Economic Research Service (ERS), “Net farm income, a broad measure of profits, is forecast to decrease $9.1 billion (12.1 percent) from 2017 to $66.3 billion in 2018, after increasing $13.8 billion (22.5 percent) in 2017.” The decreasing profit margin has producers across the country looking for profitable cropping alternatives to diversify their operations with a profitable alternative. Industrial hemp, Cannabis Sativa L. (Cannabacea), is a plant that was grown extensively in the United States prior to the enactment of the Controlled Substances Act of 1970. Industrial hemp was banned due to its genetic relationship to marijuana as hemp and marijuana share a botanical name. The difference between industrial hemp and marijuana is industrial hemp has a decreased delta-9 Tetrahydrocannabinol (THC) concentration (less than 0.3 percent on a dry weight basis) by law than marijuana (Congress, 115th, 2018). In comparison, industrial hemp has higher levels of CBD (cannabidiol) and marijuana has a much higher levels of THC. THC contains the psychoactive properties that has raised concerns. The Agriculture Improvement Act of 2018 (2018 Farm Bill) changed federal policy concerning industry hemp, including the removal of hemp from the Controlled Substances list and directed the USDA Risk Management Agency (RMA) to develop crop insurance products for hemp. The bill legalized hemp with specific restrictions and expanded the definition of industrial hemp from the last 2014 Farm Bill. This allows the USDA Farm Service Agency (FSA) to potentially provide farmer support for growing hemp and gives insurance companies the ability to legally insure the crop. The 2018 Farm Bill policy change has many farmers excited about the possibility of growing hemp as a profitable cropping alternative. The 2018 Farm Bill legalized the commercial production of hemp and authorized states to submit state plans to administer hemp programs. While the potential for a new basic crop for producers is very exciting, there remains fundamental questions. Producers do not have all of the necessary information needed to analyze whether this crop is a good financial decision. The primary objective of this thesis was to create Texas specific enterprise budgets for CBD, Fiber, and Grain production methods. These four types include, but are not limited to: CBD Vegetable Model, CBD Large Scale, Hemp grown primarily for Grain, and Hemp grown primarily for Fiber. A secondary objective was to incorporate risk in each of the budgets by simulating a range of realistic market assumptions to determine the likelihood or probability of an economic profit. Information from pilot projects underway in Kentucky, Tennessee and South Carolina and discussions with industry leaders was used to develop the costs of production for growing hemp in Texas based on differences in climates and soils. Based on 2019 input and output prices, the average net revenue for the CBD Vegetable Model ($3,344.63/acre) and CBD Large-Scale Model ($8,175.51/acre) were both positive while the Grain Model (-$839.98/acre) and Fiber Model (-$1,225.64/acre) were negative. When considering risk, the only production system that is expected to generate a positive net revenue more than one-half of the time is the CBD Large-scale Model. Both the Hemp Grain and Hemp Fiber Models have less than a 6% chance of generating a positive net revenue. The results of the risk analysis indicate that contracting with a reliable processor prior to planting is essential for Texas producers as experience thus far in other states indicates that producers have had more success growing hemp than they have had in getting paid for their hemp