With Federal Rules Looming, Can Hemp Farmers Still Strike Gold?

Many American farmers were handed seeds of opportunity in October, when the United States Department of Agriculture released its much-anticipated regulations for farming hemp. The new federal rules came nearly a year after Congress legalized hemp farming, and almost half a decade after the Colorado Department of Agriculture established its own program for farming hemp. And this state's rules don't exactly line up with the ones just announced by the feds.

Two years after voters approved Amendment 64, legalizing recreational marijuana, Colorado decided to opt into the 2014 Farm Bill, a federal law that allowed states to create pilot programs for hemp licensing. As a result, Colorado is now one of the largest producers of hemp in the country. While every Colorado farmer growing hemp will probably have to change a few things once the federal regulations take hold, those same regulations also bring credibility to an industry essentially stuck in a federal gray area, according to Corey Cox, an attorney with Vicente Sederberg who represents clients in Colorado's hemp industry.

Rather than fully adopting the USDA rules, Cox notes, the CDA can create its own plan for hemp farming rules that fits within federal guidelines...and that's exactly what the state ag department plans to do. As the CDA finalizes the proposal it will send to the USDA for review by early 2020, we caught up with Cox to talk about how federal legalization will change Colorado's hemp and CBD landscape.

Westword: How would you gauge the reaction of your clients within the hemp industry after the USDA rules came out?

Corey Cox: I think people were fairly negative, actually. I think the USDA rules take a hard line that any hot hemp [hemp comprising more than 0.3 percent THC] is marijuana, and that it must be destroyed by parties authorized under the Controlled Substances Act. The USDA rules also talk a lot about [Drug Enforcement Administration]-registered testing labs and DEA-registered product destruction, so my clients were surprised at the level of involvement the DEA still has at this point.

The lack of alternative destruction for hot hemp was disappointing, too. That mandatory-destruction provision and the rules as a whole will likely lead to more hemp testing hot than we see today, which will be difficult for the majority of hemp farmers who grow hemp for CBD, CBN and other cannabinoids.

It's important to realize that even though these rules aren't necessarily the perfect scenario, the existence of federal rules on the cannabis plant really legitimizes the hemp industry. ... This is ultimately a positive step forward that will help hemp businesses succeed in the long term. It's still better to have these rules than to not have them at all.

But don't the USDA rules also allow some leeway for plants, as long as they test below 0.5 percent THC?

If you're in that 0.5-to-0.3 percent THC range, the rules say that you don't commit a negligent violation of the rules by growing it — but the USDA still takes the position that hemp in that percentage range is marijuana and that it must be destroyed. The farmers wouldn't be arrested; they'd be issued a corrective action plan, which would go in their files, and then they'd be in a compliance obligation. If their plants test over 0.5 percent THC, they have to destroy it and they're penalized for producing it.

What does DEA certification for hemp entail for testing labs? Is that similar to state licenses from the Colorado Department of Agriculture or Marijuana Enforcement Division?

The USDA rules seem to require that, at minimum, these testing labs be registered with the DEA to possess and test controlled substances. The way I read it, that's going to be a baseline requirement, and then states can go beyond that. So any hemp-testing labs in Colorado that aren't registered with the DEA will likely need to become registered to continue to test hemp under the USDA's new framework.

Some labs may already be certified, but I think a lot of labs that are currently testing hemp will need this registration. The business owners I've talked to are concerned about the availability of these DEA testing labs. There's real concern over a potential testing bottleneck, where there just aren't enough registered labs that can test all of the hemp that is expected to be grown in Colorado next year.

What other adjustments will Colorado hemp farmers have to make in order to comply with the feds?

Colorado's laws and regulations are designed to promote flexibility, so I think the state Department of Agriculture will be able to make some adjustments on the margins to comply with the USDA. Sampling is something we could see changes in. Right now the CDA samples the top two inches of the flower, but the USDA still tests all of the flowering material. That could affect THC testing.

Right now, the CDA tests hemp on a random basis, and my understanding is that a pretty limited percentage of hemp is actually being tested on an annual basis. Under the USDA rules, basically every lot harvested of a single variety of hemp will need to be tested. The CDA doesn't necessarily need to do all of that testing itself — that's where the DEA-registered labs are supposed to come in — but if you're a hemp farmer in Colorado now, then you will be subject to a much higher level of testing under these USDA rules than you were previously.

Let's say I'm a corn farmer but wanted to try growing hemp on a few acres of my land as a test run. Will the increased testing and sampling make that more difficult or expensive?

I think it could. The USDA rules also call for third-party sample collectors. So under the rules, the farmer is basically responsible for paying for the sample collectors, the testing costs — and if the THC tests too high in the hemp, then the farmers are also responsible for the disposal costs. I think the sample and testing costs will increase, and potentially the disposal costs, as well, if you need to hire third parties instead of just cutting it down yourself. Some small businesses may not be able to cover the added costs, especially if their hemp tests hot and they don't have a harvest to sell anymore.

Could those increased costs end up reaching the consumer?

I think so. Many businesses are already doing THC testing on their own, to ensure that what they're cultivating is hemp and not marijuana. Businesses will continue to do that, but there is this added level of state-mandated testing, and businesses will likely pass that cost down the supply chain and to the consumer. However, I'm still interested to see if these new rules and the added legitimacy they bring to farms will increase the supply enough to buffer out any increased operational costs, if those increased operational costs are significant enough.

With the added legitimacy that federal acceptance and regulation brings, how do these USDA rules open doors for Colorado's hemp industry and its farmers? Will they be able to spread their wings more in other states?

Oh, yes. Look at Texas, for example. That is a huge market that has been historically very resistant to all things involving the cannabis plant, including hemp. Following the 2018 Farm Bill, though, Texas passed significant legislation that allows hemp cultivation within the state, and, perhaps more important for Colorado businesses, to allow the sale of CBD products within their state. State markets are now increasingly open to selling hemp-derived CBD products.
Do the USDA's hemp farming regulations address CBD products at all, or is that only up to the Food and Drug Administration?

The FDA looms very large over any type of product a consumer eats, drinks, smokes or applies to their skin — any type of consumable product. These recently released USDA rules only focus on the cultivation of hemp. They don't address any type of processing or extraction, and they don't address the use of finished product.

The FDA's position, which has been its position for several years, is that it is unlawful to add CBD to food or market CBD as a dietary supplement. The FDA essentially believes that any product someone can eat, drink or swallow is unlawful if it includes CBD. Nothing in these USDA rules changes that. In fact, the USDA rules emphasize further that the FDA still has authority over these finished products.

The FDA is still working through this issue. It collected over 4,000 public comments in May and June while looking at this issue, and the agency is still evaluating it. I'm not too optimistic that we'll see major movement any time soon, so the FDA remains a huge obstacle for any business that is selling a consumable product with CBD.

How hard is it to own and operate a hemp business now? Are there still banking obstacles and other federal conflicts that hemp businesses face, like the legal marijuana industry?

Some things are easier in the hemp space. For instance, if you want to start a business involving hemp, the licensing and registration requirements are so much easier than in marijuana. There are very limited disclosures, there are very low application fees, and the applications are turned around very quickly. In the hemp space, there's also much greater access to banking and insurance, because hemp is not federally illegal, and there is also greater access to the U.S. Patent and Trademark Office and the availability for intellectual-property protection. I think hemp has advantages in those kinds of areas.

In the marijuana space, though, you have more flexibility in the actual products you can produce. The FDA hasn't asserted a meaningful regulatory authority over businesses that comply with their state marijuana laws, so people are able to make and market a wide variety of marijuana products. Edibles, vaporizers, suppositories — very innovative marijuana products — would raise significant challenges or hurdles with the FDA in the hemp space.

Your primary considerations as a marijuana business are just state laws and regulations, and that's a pretty small world of laws. When you're federally legal, there is a much wider range of applicable laws that you have to consider and deal with. So there is a trade-off between the two industries.

We do see a lot of marijuana companies and brands that want to do both, launching hemp-CBD products to expand their market access. It gives them opportunities to build their brands in states where they don't have a marijuana license or marijuana is illegal, or just want to get their brands in front of demographics that you won't see at marijuana dispensaries. We also see marijuana companies trying to incorporate hemp-derived CBD into their marijuana products, for cost efficiencies. Plant counts are limited in marijuana cultivation, so it allows companies to use that all for THC, and then they can source the CBD from hemp.

How does that work out chemically, mixing THC from marijuana with CBD from hemp?

Well, I'm not a scientist, but it's my understanding that once it's all isolated cannabinoids, you really can't tell whether it came from hemp or marijuana. After all, it's really all cannabis.

How much can Colorado tweak the USDA's rules? Is there any wiggle room for the CDA's program?

Yes, I think there is some room. The USDA rules allow states to develop their own regulatory plans, and there are some areas where the states still have control. I understand that the CDA has its plan about 80 percent done as of [early November], and has incorporated some feedback from the Colorado Hemp Advancement and Management Plan Initiative into the CDA plan. I think the legal framework in Colorado provides the CDA with a lot of flexibility to adjust here, so Colorado is positioned better than other states who have to change these things through their legislatures.

With federal acceptance, do you think we might see fewer of these reports of law enforcement seizing tons of hemp after confusing it with marijuana? That sure seems to be happening a lot.

I really hope so. We were disappointed that the USDA rules didn't address that issue more directly, such as having a uniform transport manifest in there. I think a lot of this comes down to the education and awareness of law enforcement. I really hope these USDA rules legitimize the hemp industry; it's federally legal with a federal regulatory framework in place now. Hopefully the involvement of various federal agencies with these rules will promote a better understanding of hemp and marijuana at a state and local level so we see a reduction in those arrests.