Analysis

Can Cannabis Survive the Virus? Hemp Has A Leg Up

By Diana Novak Jones
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Law360 (April 7, 2020, 10:43 PM EDT) -- Before the coronavirus struck, the hemp industry was already wary about 2020 as oversupply problems and bankruptcies hit businesses in the new sector early in the year.

Now, the nascent industry is facing an economic downturn along with the rest of the nation. But experts say there are some bright spots for the businesses that can survive.

Since hemp's legalization in the 2018 Farm Bill, companies have struggled to find their footing amid the industry's rapid expansion. Problems with overproduction and a series of bankruptcies had already made this year's outlook somewhat grim, according to Eric Steenstra, president of hemp advocacy group Vote Hemp.

"It's kind of like this perfect storm," Steenstra said. "Overproduction of hemp. There's more processors than you could possibly need. We've got thousands of brands. How many brands do we need?"

They can't all survive, Steenstra said.

But the businesses that can ride it out may actually see some benefits from the pandemic's fallout. Access to government loans through the coronavirus bailout programs, delays in regulatory action and the potential for a new market are all possible because of the outbreak, experts said.

The Hemp Bailout

As restaurants, bars and boutiques are ordered to close, hemp has been spared from much of the shutdown.

Farming hasn't been shut down, according to Jonathan Miller, general counsel for the U.S. Hemp Roundtable, although other experts saw the potential for delays.

The majority of hemp is produced to make CBD, for which sales have been able to continue both online and in stores, Miller said. Natural food stores and grocery stores, which Miller says are big sellers of CBD products, remain open.

And while some states have ordered their standalone CBD shops to close, Miller says some have been able to stay open because they offer food.

While it's not clear how the hemp market will be impacted by a recession or other economic downturn caused by the virus, Miller said it is unavoidable.

The $2 trillion coronavirus relief package signed into law on March 27 is meant to infuse cash into the economy as the country fights off a collapse. Nearly $350 billion of that is meant for small businesses — but in the cannabis space, only hemp companies can apply.

Because marijuana remains illegal under the federal Controlled Substances Act, those businesses can't take advantage of Small Business Administration support, the agency confirmed in a tweet March 22. But at the same time, it noted that hemp businesses are eligible.

The money could come in the form of loans from the SBA through its Business Loans Program Account, Economic Injury Disaster Loans Program, Entrepreneurial Development Program or others, according to information industry group U.S. Hemp Roundtable shared with its members.

Another $9.5 billion went to the U.S. Department of Agriculture to support farmers impacted by the virus. The USDA's Commodity Credit Corporation, which runs programs to stabilize farm income and prices, also got a $14 billion replenishment, according to the agency.

U.S. Hemp Roundtable is encouraging its members to see what portions of the stimulus bill they qualify for.

"It could be some very helpful relief," Miller said.

A Regulatory Delay

This year was supposed to be a major one in terms of regulation for the hemp industry, with farmers getting ready for a major USDA deadline on THC content and testing in October and CBD manufacturers wondering when they can expect U.S. Food and Drug Administration guidance on their products.

But now, the focus for many regulators is squarely on stopping the novel coronavirus. So will regulation of the hemp industry slow down? Yes and no.

The USDA says it's proceeding as usual.

"The Agricultural Marketing Service continues to be open for business to provide services to the American people, including continuing the timely review and approval of hemp production plans submitted by states and Indian tribes," a USDA spokesman said.

"Any hemp harvested after Oct. 31, 2020, is subject to the sampling, testing, and other requirements in the interim final rule," the spokesman added.

By Oct. 31, farmers are expected to adhere to the USDA's interim final rule on cultivating hemp, which lays out strict requirements for testing the plants to ensure they have less than .3% of THC, the psychoactive compound that gives marijuana users a high, and are legal. In the meantime, with USDA approval, farmers can follow their state's production plans, which could reflect the interim final rule's regulations or ones from the 2014 Farm Bill.

What this really means is that farmers have until Oct. 31 to have their entire 2020 season wrapped, according to Franny Tacy, hemp grower and owner of hemp company Franny's Farmacy.

And by Oct. 31, farmers need "to have planted, tested, and harvested and be ready for market," Tacy said.

The virus could postpone planting, and farmers could be looking at a shorter grow season, Tacy said. It could be an opportunity to get the overproduction of hemp in check, she added.

Meanwhile, the processors and manufacturers that make CBD products are wondering if they'll still get critical regulatory news from the FDA, an agency playing a central role in the country's response to the virus.

The makers of ingestible CBD food items and products have been waiting for a response from the FDA about how their products will be regulated. The FDA has approved a pharmaceutical drug with CBD as its active ingredient, which means that the Federal Food, Drug, and Cosmetic Act bars CBD from being a dietary supplement or food.

But products continue to hit the shelves.

So far, the FDA has largely sent warning letters to companies that are claiming their CBD products cure or treat diseases. Recently, that has included CBD companies that have claimed their products can treat or cure COVID-19.

But in the weeks before the outbreak exploded, statements from FDA Commissioner Stephen Hahn and his agency about CBD products indicated that the FDA was collecting data and "thinking about going farther than it's gone before in terms of creating more certainty," said Saul Ewing Arnstein & Lehr LLP partner Jonathan Havens, a former FDA regulatory counsel.

For now, the FDA says its CBD work hasn't stopped.

FDA spokesman Michael Felberbaum said that during the virus outbreak the agency's work on CBD "remains ongoing."

But Havens said that while different groups at the agency work on different projects, there was no reason to expect the CBD regulations anytime soon.

"This is not a priority issue of the FDA as far as I'm concerned," Havens told Law360.

"I'm not expecting that we're going to see a rule from the FDA anytime soon, particularly with what the FDA is focused on," he said.

But that won't change many things for CBD companies, which have been operating without FDA guidance the entire time, Havens added.

"The CBD industry has been booming, and that's all been in the absence of regulations allowing them to do what they're doing," he said. "If they clarified it, it would be them saying you can't do what you're doing."

David Kramer, a senior associate in Vicente Sederberg LLP's hemp practice, said he continues to tell his clients selling CBD products to steer clear of making any medical claims. As long as they adhere to that advice, he doesn't think the FDA is going to be too concerned about the CBD industry for now.

"I think the delay is actually to our clients' benefit," Kramer said.

Hemp and the Defense Production Act

Hemp has popped up in one unexpected place amid the coronavirus crisis: the Defense Production Act.

The act, which allows the president to direct the country's businesses to manufacture products necessary for national defense, lists hemp among the "food resources" covered.

The food resources are defined in part as "seed, cotton, hemp, and flax fiber, but does not mean any such material after it loses its identity as an agricultural commodity or agricultural product."

Shawn Hauser, chair of Vicente Sederberg's hemp and cannabinoids department, told Law360 that the mention indicates that hemp cultivators and processors should consider themselves among the country's "critical" businesses. They could be called on to make products or materials to support national defense under the act, and have access to loan guarantees or other incentives, Hauser said.

It's not clear if CBD would be covered under the act, but Hauser said hemp food products, seeds and oil could be.

So far, there have been no federal orders directing the hemp industry to chip in as the country fights the coronavirus. But many hemp companies are already developing products like hemp fiber masks, looking for a role to play, Hauser said.

"We've shifted from an illegal business to a critical business," Hauser said. "I think that's an important takeaway."

--Additional reporting by Stephen Cooper and Sarah Jarvis. Editing by Jill Coffey and Emily Kokoll.

This year already promised to be a tough one for the cannabis industry, before the coronavirus compounded the many problems businesses have been facing. In this series, Law360 looks at the specific impact the virus is having on the nascent industry as it fights for a foothold in the U.S.

For a reprint of this article, please contact reprints@law360.com.

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