DENVER, April 3, 2019 /CNW/ --
A surge in hemp production means big business for hydroponic suppliers.
- Hemp production set to massively increase in the United States this year.
- Increased production driving high demand for hydroponic supplies.
- Hydroponics companies are responding with expansion and acquisitions.
Sugarmade Inc. (OTC:SGMD) (SGMD Profile) has strategically acquired several companies to meet demand and expand its foothold. Canadian-based Tilray Inc. (NASDAQ:TLRY) has expanded production in both Canada and Europe while Canopy Growth Corporation (NYSE:CGC) (TSX:WEED) is developing projects in the United States, and Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) has received massive outside investment to fuel its growth. Companies such as Aphria (NYSE:APHA) (TSX:APHA) are enlarging their indoor grow operations as they too rush to meet demand.
To view an infographic of this editorial, click here.
The legalization of hemp in the United States has ignited further growth in a massive new industry. Already under development through state laws and federally approved test sites, this historically valuable cash crop is now legal for cultivation across the country. With demand for CBD soaring, growers are scrambling to capitalize on an unprecedented opportunity.
However, sudden growth means a sudden need for supplies, skills and experience, none of which can be conjured from thin air. Obtaining these creates challenges for growers and opportunities for suppliers, and the match between those two varies across the map. As the hemp rush unfolds, some are doing better than others at rising to the challenges of hemp farming.
Challenges for the Hemp Industry
December 2018 saw the passing of the 2018 U.S. Farm Bill and with it the legalization of hemp cultivation in the United States. While the crop had previously been cultivated on test sites and through state-level laws, this was the first time in a century that this once-important cash crop was officially allowed by the U.S. government again. The move has created a whole new playing field, thrusting Sugarmade Inc. (OTC:SGMD) into the spotlight.
Sugarmade is a hydroponics supply company catering to the hemp market. As such, it has seen an extraordinary few years of growth. Even before the Farm Bill, the hemp industry had been growing. CBD, an active ingredient extracted from hemp, has become an incredibly popular product in the last few years. The plant is used in foods, oils, vaping fluid, drinks and health treatments. Research indicating its potential to support health and well-being has fueled consumer interest. The existing producers of hemp have seen profits soar, and now that the floodgates have opened, other businesses are rushing to get in on the act.
This creates massive challenges both for the industry and for individual businesses. Though hemp is now legal, it is tightly controlled, and producers must be able to grow hemp in accordance with strict rules, as well as to validate that both their facilities and their products meet these standards. That means employing skilled staff and using high-quality equipment.
The challenge of obtaining that equipment is made all the greater by the sudden and widespread nature of the expansion. Scores of companies all looking for equipment at once puts pressure on suppliers. If they have the supplies and the reach to widely distribute those supplies, then there's a huge opportunity for growth. If they don't, they'll struggle to meet customer demand.
The struggle to meet that demand is likely to create a situation of haves and have-nots, in which some growers are able to expand while others fail to fulfil their objectives. Who succeeds and who fails will be decided to a large extent by who can find a reliable hydroponic supplier.
Despite the romantic image of farmers turning over a patch of land to a new crop, most hemp farming occurs indoors using hydroponic systems. That's why companies such as Sugarmade are such a critical link in the hemp-farming process.
The hydroponic equipment needed to grow consistent high-grade hemp is varied and complex. A broad range of lighting equipment is needed to control photosynthesis. Specialized nutrient mixes provide plants the food they need to grow. And measurement solutions and environmental controls are necessary for staff to measure, monitor and control the myriad of factors that determine the quality, strength and health of the plants.
Given the circumstances, companies with expertise in hydroponics are imperative to provide supplies, but due to the previously restricted market, they've been relatively small. All that is changing in the rush to meet the needs of the burgeoning hemp market. Larger companies are desperately needed, and Sugarmade appears set to become one of those companies.
Sugarmade's strategic intent is growth on two fronts, organically by brand expansion and through acquisitions. The company has a few deals in the pipeline that are pending audit and funding.
"Sugarmade plans to integrate these businesses fully as soon as is possible, making us one of the larger suppliers to this growing marketplace," said Jimmy Chan, CEO of Sugarmade. "Additionally, we are in the process of vetting other possible acquisitions to further enhance the portfolio of hydroponic and cultivation supply products. We are certainly excited about our prospects for the remaining part of this year and into next year."
The Local Picture
Even with such bold moves, it's not possible for a company to expand everywhere at once, and hydroponic suppliers must choose where to focus. A focus on states with a strong presence in hemp is a good way to ensure a large market for supplies.
One area that's rich in potential is Kentucky. A state with a strong history of tobacco growing, Kentucky is facing the reality that people are moving away from smoking. Hemp offers an alternative cash crop that some of the state's farmers have been quick to leap upon. Approximately 16,000 acres of hemp were planted in Kentucky last year, and this is expected to nearly triple to 42,000 acres in 2019. The state has already received five times more applications to grow hemp this year than last. Sugarmade is catering to this boom through a supply agreement with Kentucky-based Hempistry Inc., which will help Hempistry achieve the nearly tenfold increase in hemp growing it has planned this year.
Sugarmade is also developing strong distribution channels in California, one of the first states to change its laws and embrace the rise of hemp. California's large population and positive attitude towards CBD and hemp makes it another prime target for expansion.
By becoming an integral link in hemp production in these high-production states, Sugarmade grows organically by brand expansion, locks in revenues and is positioned to capture an outsized market share across the United States.
Competition Heats Up
The rapid rise of hemp and hemp-related markets has meant that a growing number of companies are jockeying for position in the hemp and CBD sectors, and some of them are seeing serious expansion.
Tilray Inc. (NASDAQ:TLRY), a Canadian company, has been expanding through acquisitions. The company recently acquired Manitoba Harvest, the largest hemp foods company in the world, to give it a position in a strategically important portion of the hemp market. This comes alongside other initiatives such as a move into Europe. These strategic moves have won praise for Tilray's leadership team.
Another Canadian company and one of the largest in the sector, Canopy Growth Corporation (NYSE:CGC) (TSX:WEED) is making strong moves to expand south in the wake of the Farm Bill. It has established a hemp-production facility in New York state and acquired hemp enterprise AgriNextUSA. This allows the company to make the most of America's swing towards hemp and work to become a leading player as the market heats up across North America. Canopy Growth already has an extensive range of licenses and distribution deals north of the border, giving it a strong base from which to build its U.S. business.
The excitement around hemp has drawn interest from companies outside the sector. Altria, the tobacco giant behind the Marlboro brand, is looking to expand its opportunities as tobacco faces ongoing challenges. Like many Kentucky farmers, Altria is looking to hemp and related products for potential solutions. It recently closed a deal to invest C$2.4 billion in Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON), providing Altria with a way into the hemp sector. The funds will give Cronos resources to expand during this critical phase of market growth in the States.
In testament to value, Aphria (NYSE:APHA) (TSX:APHA) is fending off a hostile takeover by Green Growth Brands. In addition, Aphria recently received a license amendment to expand its growing space, which makes it an appealing prospect for other companies looking to increase their capacity.
The hemp bonanza has just begun. Like every new market, shakeouts and consolidations are bound to happen. The strong will survive while the weak will fail. The same holds true for the hydroponic suppliers. Given the circumstances, it's inconceivable that many small suppliers will survive. The victors will be those who can get to markets early and scale through agreements and acquisitions. Sugarmade is making all the right moves to not just survive but also thrive.
For more information about Sugarmade, please visit Sugarmade Inc. (OTC:SGMD).
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