Nova Scotia Agriculture - Market Research Reports: A Maritime Industrial Hemp Product Marketing Study

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A Maritime Industrial Hemp Product Marketing Study

September 1998

Appendix F

Table F.1: Market Questions for the Commercial Potential of Industrial Hemp
Question		Response	Maritime Implications
A.	Product-Market Structure
1.	How big is the market for industrial hemp in North America? What are the locations of greatest market concentration? Are there major geographic differences in saturation intensity?	Trade volumes are low, data is not reliable. Some imported hemp products cannot be tracked through statistics such as hempseed imports. Imports: Have increased over time. In 1997, $181,000 raw/retted hemp, mostly into BC from China & US. US imported $109,000. $91,000 tow & waste, over 50% into Quebec from Spain, Hungary, Germany, US. US imported $36,000. $78,000 true hemp yarn into BC, Quebec, Ontario from Hungary, Poland, Romania, US, Germany. US imported $872,000.	In 1997, No raw/retted or true hemp yarn imported into the Maritimes. NS imported $14,000 hemp tow and waste. Hemp processing and manufacturing non-existent in Maritimes save for several small cottage-industry crafts persons who import supplies.
2.	Who are the customers and why do they buy the product? Are there meaningful differences between types of customers?	Wide range of products manufactured from hemp. Much of current North American consumption is in textiles, edible oil/oilseed and body care markets. Unknown volumes. No developed market, enviro-advocates major consumers. Textiles driven by eco-hungry consumers. Health benefits from essential fatty acids of oil and seed is major determinant. Oil penetrating qualities drive interest in body care markets.	Wide range of potential market opportunities. Aging demography interest-in the ability of oil to penetrate skin. Maritimes have little or no history in manufacturing many product forms.
3.	What are the basic determinants of demand?	Environmental concerns, price of substitutes, supply cycles, proximity to markets and costs of transportation, level of consumer awareness, public acceptance, marijuana interest, processing costs in exporting countries-low wage countries have processing advantages. Quality a key issue.	"Canadian produced" will be the marketing strategy once production comes on-line. Likely no distinction between Maritime hemp and other Canadian hemp.
4.	What is the growth profile of the market? Is the market becoming more specialized? More diverse in terms of customers or products?	Media reports and advocates suggest demands for hemp products increasing. Signs evident but has not fueled increased world production. Media reports increased environmental awareness and consumer's searching for new health food products has expanded client base. Some industrial users are coming on-line as value-added products and markets are developed.	Growth areas present opportunities for Maritime growers and processors. Price competitiveness will be an issues and will be affected at least in the short term by lack of established processing and value-added facilities.
5.	Is demand sensitive to price changes? Changes in income?	Both hemp fibre and seed are price sensitive. Evidence that past surges in world production have depressed prices as supply outstripped demand. hemp supplies are not homogenous and considerable variations in quality can occur. Asian and some European textiles considered best in the world. Given that many products are higher-value niche market products, incomes would affect demand.	Remains to be seen if large increases in Canadian production depress prices Maritime hemp will likely face a highly price-competitive market.
6.	Are companies developing new value-added products?	Many new products are being developed and tested both within and outside North America. New used for fibres are being developed for textiles, hemp beers have been released, much R&D with composite materials for building industry, automobile panel prototypes have been developed.	Variety of value-added opportunities available if markets and technological issues can be addressed and substantial R&D can create unique products.

B.	History of the Industry
1.	What is the industry's growth and profitability record in North America and elsewhere?<	Declining production over all since the 1960s. Surges in production over this period depressed prices. Many countries subsidize hemp production. The degree of profitability depends on the characteristics of the resource and processors/manufacturers ability to add value to raw hemp grain and fibre. The surge in North American wholesaler and product developers suggests industry profitability. The industry can be characterized as highly oligopolistic with a few wholesalers (previously) and now Canadian producers controlling the bulk of the supply. World production has fallen in recent decades. Largest producer, India, exports little. Increased demand for hemp products has not fueled increased production except in Europe. There has been no domestic supply, the number of companies trading in and manufacturing hemp products has increased dramatically in the 1990's.	Relatively small world production base coupled with increased Canadian production could depress prices. Economies of scale will be important but to date, Maritime production is insignificant (150 ac. versus at least 5,250 ac. in Canada).
2.	At what stage is the industry in its life cycle-infancy? Growth? Maturity? Steady-state? Decline?	Infancy in North America. Despite hemp's long history, on a global level it has not been grown to any great extent on this continent in 60 years. Some uses, such as rope, have enjoyed thousands of years of history but many modern product development has only occurred over the past decade, or years in some cases.	Early stage of the market suggests much market and product development is needed. The Maritimes have not been on the leading edge in either agronomics or product development.
3.	What are the industry's prospects for the future?	Consumer and industrial demand is expected to increase significantly in the future. Competitive prices, consistent and high quality, market development, consumer awareness and product development will be keys to growth and longevity.	Given the developing nature of the industry, the opportunity to increase production is only limited by grower interest and the ability of the market to absorb production that exceeds previous import levels.

C.	Resource Base, Technology and Cost
1.	How significant are economies of scale and what is the minimum entry size?	Economies of scale will be extremely important. Key Canadian growers and processors are becoming vertically integrated and contracting production to ensure adequate supplies. Point of economic efficiency is unknown. Economics of the industry should be better understood by next growing season. Minimum entry size regulated through Health Canada licensing. Commercial growers 4 ha.	Maritime production at present small scale and without processing infrastructure. Once processing and value-added facilities are in place, economies of scale should become apparent. Production will in all likelihood have to increase dramatically and market commitments will be needed to warrant investment into costly processing and value-added infrastructure for fibre markets.
2.	What are the key cost variables and cost trends? Have costs been rising or falling?	Cost structure of the industry not clearly understood. Key growers and processors have limited experience in commercial trading of hemp in the domestic marketplace. Necessary machinery is a key cost variable.	Limited production base may be insufficient for investment into technology. but market demand may limit production activity.
3.	What processing technology is required for higher value-added products?	Processing technology considered antiquated. New processes are under development and testing for many aspect of production including harvesting, processing and new value-added product manufacturing imported from Europe. Much proprietary information and somewhat limited market information available.	Lack of infrastructure will limit growth of the Maritime industry.

D.	Financial and Operating Considerations
1.	What sort of capital investment is required for entry? Are there any major barriers to entry and exit?	Cost of seed is single greatest expense in planting hemp. Substantial capital investment for fibre markets as machinery is expensive and in many cases not yet tested on a large commercial scale. Difficult to estimate capital investment necessary. Small pulpers from the US can cost US $100,000+. Full scale decortification facilities can run several million. Some Eastern European harvesting equipment is available for <$100,000. Licensing remains the most important barrier to entry. No major barriers to exit the market.	Limited scale of production in the Maritimes will limit investment opportunities and competitiveness with larger Canadian growers and processors and overseas imports.
2.	What level of operating costs will be incurred? Do these vary significantly with scale of operation?	To date, agronomic and economic for commercial production can only be estimated. There is much variability in published estimated costs. 1998 is considered the first test year. Growers will not know the full extent of costs until after the crop has been harvested and processed. Operating costs are expected to vary significantly with scale of operation. One Manitoba estimate suggests Total costs ranging from $245 to $300 per acre for hempseed and $40/ac to harvest residue stalk.	Given the small acreages involved, Maritime costs of production will likely be higher than larger operations located elsewhere. Variability in yield and ultimately the harvesting processing methods used will probably make cost comparisons difficult.
3.	How are raw materials and finished products warehoused and shipped? Given service and cost considerations, how adequate are the available modes of transportation?	To date, Canadians have relied mostly on wholesalers located in the US and in some cases Canada. Fibre markets differ significantly than the oilseed or grain market. Bulky raw fibres can not be shipped great distances. The modes of transportation used to ship the various hemp products have not been investigated to any great extent. Available modes of transportation for imports are assumed adequate.	Markets pursued will dictate how Maritime growers and processors transport raw or finished products.
4.	Are there physical constraints to production, processing or marketing?	The most important physical constraint is proximity of production to processing facilities in the fibre market. Another major constraint in throughput capacity of current harvesting and processing equipment not specifically designed for handling the unique properties of hemp. May not be enough available land within 50-60 km of pulp mills or other processors.	The Maritimes have no limitations in available transportation modes. Limited interest in many of the potential fibre sources we contacted suggests value-added products manufactured form fibre will need to be shipped out of the region which may ultimately affect competitiveness.

E.	Marketing
1.	What are the means and methods on marketing the product? Are market channels well-organized or underdeveloped?	Market channels for processed hemp are not well-developed. Raw hemp is imported into North America and even re-exported to Canada via the US. It is difficult to provide useful market information at the producer level as markets are not yet developed. The only active markets are for clothes, apparel and hemp oil. Wholesalers and importers have traditionally provided hemp to North America. Contracting is emerging as production comes on-line. For example, natural Order R&D is contracting with Manitoba growers and Saskatchewan oil-pressing processors to provide The Body Shop in the UK with supplies to manufacture body care products that will be shipped back to North America. To the extent that they are functioning, they appear well-organized but limited products in the marketplace suggest price competitiveness will be less of an issue until supplies increase.	Some Maritime growers have been approached by larger groups outside of the region. Such relationships should help fast-track the Maritime industry so that it is more in-line with companies with more experience in the marketplace.
2.	What makes a product competitive in the industry?	Price is a key issue, especially as it related to substitutes such as synthetics or cotton for textiles, or wood pulps in paper making. Quality and consistent grade are vital in the textile industry for spun or woven materials. To date, Maritime producers have not harvested nor produced their first hemp products. Ultimately, some volume must be traded before Maritime competitiveness can be assessed.
3.	What are the packaging requirements of the various product types?	The most noteworthy is the special processing and bottling of hempoil which can turn rancid quickly. Yarns have traditionally been manufactured into clothes and apparel with no different packaging requirements. Unclear what packaging needs of various products are until trade occurs. Packaging is not an issue for fibre.	Unclear until markets are more fully developed.
4.	How significant is Brand consciousness? Reputation? Customer loyalty? Customer turnover?	Unclear the extent to which enviro-conscious consumers may exhibit brand consciousness and loyalty. A local garment manufacturer suggests repeat customers are very evident with hemp clothing and apparel.	Unclear until markets are more fully developed.
5.	What regulatory requirements must be met for a product to reach the market?	Licensing an permit system exists which discourages farmer participation. It has delayed planting in the past and farmers are only just learning the system. Samples from the field must be tested for THC and fall within a maximum of 0.3%. Textile manufacturers must maintain uniform grades for yarn.	Regulation do not discriminate or favour geographic areas across Canada.

F.	Competition
1.	What are the trends in market standing among the various producing areas? Which areas are considered the industry leaders in price?	his is difficult to answer concisely given the variety of hemp products produced and being developed. At present, only niche markets exist. The industry is growing and there is the general perception demand for hemp products is also on the rise. Hemp has traditionally been sourced from overseas. Traditional textile use is a niche market but is mainly sourced from Asian and Eastern European sources.	To date, no Maritime hemp has been marketed.
2.	Who are the competitors? Are their geographic limits to competition? Is the focus of competition local, regional, national, or international? What role do imports play in the market place?	Traditional overseas suppliers. Unclear until a volume of trade has occurred demonstrating the competitiveness of Canadian grown hemp products. Most of the specialty paper makers exist outside North America. A small number of specialty paper manufacturers have emerged in North America. Imports have played a major role in the marketplace. Traditionally, hemp has come from Asian and Eastern European sources as well as US wholesalers. It is unclear what are the distribution channels and as such, gaps can not be identified or discounted.	To date, no Maritime hemp has been marketed.
3.	What is the trend for the use of hemp as a substitute for other products?	Much literature exists on the competitiveness of hemp with other products for grain, oil, pulp and paper, textiles, animal bedding, etc. Some has been substantiated and some refuted. There are many substitutes for hemp. Clearly, they are what is used today with hemp generally regarded as the "new kid on the block".	The Maritime situation does not differ from the rest of Canada in this regard.

G.	Environmental Issues
1.	What environmental impacts can be expected from production and processing of the product?	Hemp is generally regarded as being much more enviro-friendly than many of its substitutes. Traditional methods of pulping, however, can lead to greater effluent, energy consumption and disposal problems. Given that maximizing the economic of growing hemp is based on use of the whole plant, environmental impacts can be expected be less (as less chemicals are needed) or no worse than substitutes. For example, cotton is said to be one of the most chemical-intensive fibre crops.	The Maritime situation does not differ from the rest of Canada in this regard.

H.	Key Success Factors and Strategic Forecasts
1.	What are the keys to being successful in this industry: that is, what does a firm have to be sure of doing right in order to succeed?	Need a supply of hemp and established markets to justify capital costs associated with harvesting, manufacturing and creating value-added products. Provision of a price competitive product. Highly developed marketing and distribution channels.	See response.
2.	What are the constraints to potential producers for production and introducing value-added products into the market area? (e.g., corporate ties, and the purchasing and delivery arrangements between current suppliers and consumers)	Must create new markets. Little knowledge of, or experience with producing this crop. Uncertainty of profits. Regulatory system requires licenses and permits and Health Canada has not demonstrated an ability to process these in time to plant the crop so agronomic potential is achieved. Supply, quality, market demand, corporate ties and the purchasing and delivery arrangements between growers, processors, manufacturers , distributors and consumers must be developed. Economically justified expansion of production.	Maritime growers have no history in the marketplace and are building relationships for the most at ground-zero.
3.	What are the future trends in consumption and production; end uses, supply demand substitutes, cost of production, transportation and handling, marketing, pricing, and the impact of environmental concerns?	Hemp production across the world has a long and varied history. Phasing out of EU subsidies may affect some European producers as the true economics are experienced for the first time in many years. New products are being developed. Marketing efforts are also being aimed at using hemp as a substitute for wood, other agricultural fibres, etc. The US still has not passed legislation allowing commercial cultivation of industrial hemp. This provides a competitive advantage for Canadian growers and processors as they develop new used for the crop.

Last Update: May 1, 2007