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While the rest of the world is stockpiling toilet paper, California is buying marijuana. Sales from licensed retailers have spiked in the last week as users worry about future shortages and a lockdown. 

Unfortunately the spike in marijuana demand is having no effect on the price of hemp; it has fallen by 90 percent or so in the last few months.

Although the same plant, hemp is different from cannabis in the amount of the psychoactive substance THC (tetrahydrocannabinol) that it contains. Hemp plants contain no more than 0.3 percent of THC, while marijuana typically contains 5 to 20 percent THC. This means that cannabis plants with 0.3 percent or less of THC are hemp, while those with more than 0.3 percent THC are marijuana.

I talked with Charlie Stephens, the only hemp trader I know. Having started his career with Gavillon, Charlie, together with his brother Watt and fellow partner Jack, now runs Halcyon Thruput, a hemp drying and processing operation in Hopkinsville, Kentucky, that was recently acquired by Generation Hemp.

The hemp harvest kicks off mid-October and goes through to early December. Charlie told me that once harvested, hemp has to be processed and dried within a couple of hours; if not it starts to combust. His facility works 24 hours a day during the two months of the harvest, with farmers allocated two hour slots in which to deliver the crop.

“The primary product that we are left with after drying,” he continued, “is the biomass from which the CBD oil is extracted. The co-product of that process is bast fibre, the stock and stem material that can be used for fibre for clothes.”

The number of US acres under hemp has increased 100 fold (to 146,000 according to the USDA) since the crop was first partially legalised in 2014. (It was finally fully legalised in the 2018 Farm Bill.) That acreage increase has been driven by two factors: first, the US farmer’s need to diversify away from traditional crops that weren’t paying the bills; second, the expectation of a sharp increase in hemp demand for the production of Cannabidiol (CBD) oil.

Although CBD oil made from hemp contains virtually no THC, it is still believed to have a number of health benefits such as anxiety and pain relief.

“All the soft drinks and food companies had been expecting FDA approval for their products,” Charlie told me, “but the FDA came out and said they weren’t going to do anything, that they were sceptical of the health benefits of CBD, and that they wanted to do their own testing. That really threw a wrench in the market.

“Prices were $60-70 per pound last year, and have now fallen to around $6 per pound. The expected demand spike for CBD oil has not happened, and farmers are left with no choice but to sell their hemp for fibre and seeds.

“I believe that CBD demand is still growing,” Charlie told me, “but there is a lot of noise in the market and we all struggle to keep track of it. The big health companies are doing some serious testing as to health benefits, so we could have some progress there.

“I really believe that hemp will eventually develop into a mainstream commodity. It is an easy crop for farmers to grow. It is pretty much organic. It requires less water than cotton. It acts a sponge in the soil, sucking up all the heavy metal content, and for the lack of a better term it cleans the soil, which means it is nice plant to add into your rotation.”

“So you are bullish for the future?” I asked him.

“On the demand side the clothing companies want to trial it, to blend it with cotton. The clothing brand Patagonia recently announced that they will be making hemp blue jeans.

Meanwhile, Hempcrete is really taking off and there is a lot of potential for it as a building material. The cement industry is the second biggest GHG emitter in the world, and hempcrete is an alternative.

“One problem is that there is little infrastructure in the middle of the supply chain, and no one wants to build capacity without greater certainty on both ends. Another problem is that hemp has to be cheaper to compete. Production will need to be mechanised, industrialised and done at scale.

“I have just got back from Colombia where the government is encouraging farmers to switch from coca to hemp. Because of its climate, Colombia can grow hemp year round, which means that the industrial infrastructure can be used year round. This obviously reduces costs enormously. So I am particularly bullish on production in Colombia.

“As for the US market, it is difficult to find liquidity. Panxchange are doing a good job both as a trading platform and as a PRA (Price Reporting Agency), but a lot of the time no one has any idea as to what the price should be. And when you do find transparency the bid / offer spreads are massive.

“I believe that there is a huge opportunity for some of the bigger trade houses to get involved, but so far they are hesitant. Maybe they need more transparency and liquidity to get involved. It is a chicken and egg problem. They are waiting until the market takes off, but it will be hard for it to take off without them.”

PS If you would like to talk to Charlie directly, please contact me using the feedback or comments buttons, and I will put you in touch.

© Commodity Conversations ®

Many years ago, before the advent of internet and email, I placed a telephone order  for some office supplies: paper for the photocopier, pens, files etc. I also ordered 20 rolls of toilet paper.

A few days later a huge truck pulled up outside our ground floor office and the driver called through the window. “Are you the guy that ordered the toilet paper?” he shouted.

Somewhere along the line the order had got messed up; the truck was full of toilet paper: 20 packets of 200 rolls each. I explained to the delivery driver that we didn’t want or need 4,000 rolls of toilet paper, and finally managed to negotiate taking just one packet of 200 rolls. It took us years to get through it!

I remembered this story last week when I was in our local supermarket in Switzerland. I have never seen so much toilet paper: the shelves were full of it, and there were piles of it everywhere. I had seen a video of people fighting over toilet paper in Australia (of all places), and I suppose the Swiss wanted to be prepared in case of panic buying here. However, no one was panic buying toilet paper, and I suspect the supermarket had somewhat over-ordered.

My mission that day was not to buy toilet paper, but parmesan cheese. I couldn’t find any. I asked an employee. He pointed to some empty shelves in the cheese display and told me that they had run out. “Panic buying?” I joked. “Yes,” he replied. But he wasn’t joking.

I was wondering why anyone would panic buy parmesan, but then I saw the empty shelves where the pasta should have been. I realised that if you are stocking up on pasta, you would probably also want to stock up on parmesan. To test my theory I checked out the tomato sauces: there wasn’t a single can or bottle of the stuff left in the shop.

In theory, Switzerland is the one country in the world where you should never have to worry about running out of food. It is, as far as I am aware, the only country that maintains a three month strategic food stockpile.

Switzerland was also for a long while the only country in the world where every dwelling, school and office had to have a nuclear shelter. The shelter had to be kept clear, clean and stocked with enough food and drink to last until any nuclear holocaust ended.

As a child I had sometimes wondered what it would have been like to be the only survivor of nuclear war. Having lived in Switzerland for nearly 15 years I now wonder what the world would have been like if only the Swiss had survived a nuclear war.

Switzerland’s food stockpiles hit the headlines a few weeks ago when the government decided to no longer store the 15,000 tonnes of coffee that were part of their strategic stockpile. The government felt that coffee contained almost no calories, and hence was not a food. Their decision caused a social media storm, and the government eventually delayed their decision under pressure from local coffee companies. Coffee is important for Switzerland. Not only is the annual per capita consumption of 9kg double the 4.5kg consumed in the United States, 60 percent of the world’s coffee is traded through Switzerland.

As well as coffee, Switzerland stocks three of four months consumption of a whole list of staples including directly consumable foodstuffs such as sugar, rice and cooking oil, as well as products that need to be processed before consumption, such as bread grain. Fertilisers and animal feedstuffs are also stockpiled, as are petrol, diesel, heating oil and aviation fuel. Medicines such as painkillers and vaccines are also stockpiled.

The stocks are held and financed by 300 private companies. The coffee stocks are, for example, financed by a fee of 3.75 Swiss francs on every 100kg of imported beans, raising 2.7 million Swiss francs annually to compensate private companies for storing beans.

The government estimates that in total, the system of strategic stocks costs each of Switzerland’s inhabitants an average of about CHF 12 a year.

Although it may sound a silly idea, these stocks have come in handy recently. In 2018, the level of the River Rhine fell so low that ships carrying mineral oils and fertiliser could not get to Switzerland, and the Swiss dipped into their stockpiles. Also, during a global shortage of antibiotics in 2017, Swiss hospitals dodged a crisis because of their stock of the drugs.

In addition to these stocks, each Swiss resident is encouraged to have enough food and basic necessities at home to last them one week. In 2016 the government even produced a video (in German) to remind them of their civic duty to do so.

This basic list of necessities includes toilet paper, but apparently the government doesn’t include the stuff in strategic reserves.

Having failed to buy any parmesan I did pick up a packet of toilet paper on the way out. You never know!

© Commodity Conversations ®

Last week the UK’s Channel 4 Dispatches programme highlighted child labour on Guatemala’s coffee farms. Posing as researchers, the Dispatches’ team visited farms they were told supply Starbucks or Nespresso. They found children as young as 11 or 12 working long hours in gruelling conditions for as little as £5 per day.

The programme found that most of the children were working to help feed their families, and highlighted the piteously small amount of money that coffee farmers receive for their beans. The programme put the the average cost of a cup of coffee in the UK at £2.50 of which the coffee shop receives 88p, staff receive 63p, and the taxman 38p. The programme estimated miscellaneous costs at 28p and profit for the brand owner (ie Starbucks or Nespresso) at 25p. This leaves 10p for the coffee supplier, of which only 1p goes to the farmer. A fraction of that 1p goes to the coffee pickers.

You can perhaps argue whether that breakdown is accurate, but whatever the exact figures, the coffee farmer receives only a tiny proportion of the final sale price of his production. Poverty is widespread in coffee-growing areas throughout the world, and local families often have no choice but to send their children out to work at a young age.

Although it is no excuse, this situation is not new. In his book ‘Uncommon Grounds – The history of coffee and how it transformed our world’, Mark Pendergast writes, “Children begin helping with the harvest when they are seven or eight. Though many campesinos keep their children out of school at other times for other reasons, it’s no coincidence that school vacation in Guatemala coincides with the coffee harvest.’

It is not clear whether the Dispatches team filmed the children during school vacation, or whether the children were skipping school to work, but both Starbucks and Nespresso have made clear that child labour is unacceptable at any time in their supply chain.

In a statement George Clooney, Nespresso’s ambassador, said “I was surprised and saddened to see this story. Clearly this board and this company still have work to do. And that work will be done. I would hope that this reporter will continue to investigate these conditions and report accurately if they do not improve.”

Meanwhile, also in a statement, Nespresso’s chief executive said that the company had launched an investigation to find out which farms were filmed and whether they supply Nespresso. “We will not resume purchases of coffee from farms in this area until the investigation is closed,” he added.

Starbucks also said that it had launched an investigation into the claims brought by Channel 4. “We can confirm we have not purchased coffee from the farms in question during the most recent harvest season, and we will not do so until we can verify that they are not in breach of C.A.F.E. Practices – our ethical sourcing program developed in partnership with Conservation International that provides comprehensive social, environmental and economic standards, including zero tolerance for child labour.”

However, in an interview with The Guardian, the Dispatches’ reporter said that it was far too easy to to announce an investigation and halt supplies from these regions, but doing so will further punish the farmers and the desperately poor families who rely on them. “The reason these kids are working is that their parents – and the farms they work on – are not paid enough,” he added.

Unfortunately, problems in the coffee supply chain are not limited to Guatemala. A Thomson Reuters Foundation investigation published last December, uncovered extensive slave labour in Brazil’s coffee industry. The investigation found that coffee produced by forced labor was stamped slavery-free by top certification schemes and sold at a premium to major brands such as Starbucks and Nespresso.

The coffee supply chain has two problems that are common to many commodities sourced in poor countries: lack of transparency and low prices. It therefore really encouraging that the coffee industry is launching two initiatives to combat these two problems.

The first is FarmerConnect, which is built around a blockchain core powered by IBM. The second, again powered by IBM, is the Thank My Farmer app that will be launched later this year. Working in conjunction with FarmerConnect the app will allow consumers to know exactly where their coffee comes from and allow them to contribute directly to the farmer, and/or to support social and educational projects in coffee growing regions.

We will be writing more about these promising initiatives in coming weeks, and of course we give them our full support.

© Commodity Conversations ®

Image by Pixabay

Continuing on the theme from last week of government intervention, the following is an extract from my book The Sugar Casino, published in 2015:

In a freely functioning market supply and demand is, in theory at least, matched by price. If demand increases or supply falls, prices rise to encourage supply while at the same time reducing demand. If supply increases or demand drops then prices fall, sending a signal to producers to reduce output or to consumers to increase demand.

This process is what is often described as the “invisible hand”, the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically. Adam Smith introduced the phrase in 1759 in reference to income distribution and then used it again in “The Wealth of Nations” in 1776. He argued that an economy works best in a free market scenario where everyone works for his or her own interest – and where the government leaves people to buy and sell freely among themselves.

The American baseball player Yogi Berra once said, “In theory there is no difference between theory and practice. In practice there is”.

In practice, markets may not always be efficient, and governments may need to interfere to correct those inefficiencies. This might happen if producers club together into a cartel to raise prices, requiring the government to intervene to break up the cartel. But even without a cartel a sugar mill might be so big in a particularly region that it could in its own right be a monopoly employer or buyer of cane, forcing down wages and cane prices, or a monopoly seller, forcing sugar prices higher.

In addition, sugar producers might not correctly price what economists call “collective goods”: these could be the environmental costs of factory pollution or heavy traffic on the roads at harvest time. Individual producers might not also correctly value the benefits of research into new cane varieties or of infrastructure investment such as railways or ports. On a wider scale governments, rather than markets, may better provide collective goods such as education and health services.

Inefficiencies sometimes creep into markets due to a lack of information. To counter that a government could encourage the setting up of commodity exchanges to facilitate trade and improve price transparency.

But governments also interfere in markets, not to correct market inefficiencies, but to obtain specific policy objectives such as the alleviation of poverty or a fairer distribution of wealth. Interfering in the market in this way can however have a cost: it can create price distortions that prevent the most productive and efficient allocation of resources. This “economic loss” has to be measured against the “social gain”, say, of a more equal income distribution.

Governments may also interfere in markets for diplomatic reasons, for example by applying a lower import tariff on sugar from one country compared to sugar from another. Lower import tariffs might be applied to curry favour from a neighbour or in exchange for lower tariffs on other goods within the framework of a Free Trade Area (FTA). Altruistic governments may also reduce or remove import tariffs on sugar imports as part of a policy to promote growth in developing countries.  Such an example would be the EU’s “Everything But Arms” agreements.

In the agricultural markets some governments, in particular China, may try to keep cane prices high in order to maintain rural incomes and to slow down the migration of the population to the cities. Other governments (or more correctly politicians) may try to keep cane prices high for less altruistic reasons: to win political votes. India is an obvious example of this; perhaps Thailand is a less obvious example.

Governments may also often interfere in markets to maintain employment. It would certainly be more cost efficient, say, for Bangladesh to close down their few remaining sugar mills and import the sugar they need from Brazil or Thailand. (The same also applies, but on a much larger scale, to China.) However, closing factories can result in a politically unacceptable increase in unemployment. Sugar industry employees in Bangladesh and China might be better off making something else other than sugar, but a reallocation of that sort takes time. It would involve short-term hardship for the employees concerned and would be a difficult “political sell” in the short term. And everyone knows that politicians operate in the short term: their time frame is the next election.

© Commodity Conversations ®