Kentucky Hemp is Poised for Progress but Uncertainty Remains

Jul 31, 2017

Hemp field
Credit Evelyn Simak, Wikimedia Commons (CC BY-SA 2.0)

Hemp is deeply rooted in Kentucky's history. The commonwealth was once the leading producer of hemp in the United States. The industry faded over time and has been stifled by federal classifications and confusion. Now, two Kentucky congressmen, with support from Kentucky's senators, are looking to lift federal restrictions on the crop. But, as hemp is poised for progress, industry uncertainties remain.

Kentucky Congressmen File Hemp Legislation

Much has changed since 1st District US Congressman James Comer filed his first industrial hemp legislation in 2013. Then, acting Agriculture Commissioner for Kentucky and republican representative, Comer was trying to set the groundwork for implementing pilot projects across the Commonwealth. Today, he said wants to see industrial hemp move across all state lines without ambiguity.

To do that, the crop would need to be removed from the DEA’s Schedule 1 controlled substance list. Hemp is only legal in states with certified industrial hemp pilot programs like Kentucky. The federal government currently classifies hemp as an illegal substance due to its similarities to marijuana.

Credit James Comer, Twitter

Friday, Comer filed the Industrial Hemp Act to reclassify the plant from a controlled substance to an agricultural crop. “It is simply time to take it to the next level,” said Comer.

The crop has proven itself as “economically viable and sustainable.” The only thing holding hemp back is regulation.

“Right now there is no distinction between industrial hemp and marijuana. Obviously marijuana is a drug… I like to use the example of broccoli and cauliflower. If you look at broccoli and cauliflower you can see similarities because they're in the same family but they're very different.” Comer explained.

What separates the distinction in the 2014 Farm Bill, and has allowed states to grow industrial hemp under permitted pilot programs,  is the amount of legal THC the plant can possess.  Section 7 U.S.C. § 5940 defines industrial hemp as “the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.”

Comer’s legislation seeks to increase the amount from .3 to .6 percent. This is significant for growers looking to produce hemp that can be processed into an oil.

Congressional Support

Besides strong bipartisan support Congressman Comer said he has also gained favor with the House Judiciary Committee. “One of the main cosponsors is Representative Bob Goodlatte from Virginia. But what's interesting about Goodlatte is he's chairman of the Judiciary Committee. The judiciary committee is where this bill used to go to die.” Comer said.

The Attorneys General Jeff Sessions however has not shown support. Comer said he has concerns regarding Sessions, “based on statements he said in the past,” although Comer said both “Senators McConnell and Paul have had limited conversations with him about industrial hemp.”

Secretary of Agriculture Sonny Perdue does seem open to industrial hemp according to Comer.  “In fact I was with Secretary Perdue three times this week. So we're getting to know each other very well and I believe we're going to have a great working relationship.”

Senate Letter to DOJ

In June, Republican U.S. Senator Rand Paul joined four Democratic counterparts in a letter to Attorney General Jeff Sessions expressing concern over possible rollbacks to industrial hemp protections.

The letter alludes to financial institutions having either closed or are considering closing accounts containing funds related to the industrial hemp pilot program. The letter claims this is due to federal uncertainty of the industry’s legal status: “...we are worried that the fear and uncertainty of government action - that the Department of Justice will roll back certain protections for legal industrial hemp entities - is causing financial institutions to close these accounts.” The letter goes on to ask the DOJ to not take action against financial institutions doing business with the industry.

The letter points to language in spending bills as an example of efforts to prohibit government interference in the project. Senate Majority Leader Mitch McConnell has said hemp has the potential to be a new commodity market in Kentucky and has sought to clarify federal rules pertaining to grants.

Paul’s letter says allowing the commercial research of hemp has opened doors for students, farmers and small businesses. It mentions that hemp is in products ranging from auto parts to food to soaps and lotions.

Banking Guidance

In 2016, the Kentucky Department of Financial Institutions issued guidance under Bank Secrecy Act and Anti-Money Laundering laws related to the hemp programs. This letter acknowledges the lack of federal regulation clarity: “Because industrial hemp production is currently authorized pursuant to state and federal programs, DFI does not perceive that participation in such an authorized program should serve as the basis for categorizing the customer as high risk for BSA/AML purposes.” [BSA/AML = Bank Secrecy Act/Anti-Money Laundering. These laws require depository institutions to identify suspicious activity, money laundering or terrorist financing.] The letter adds DFI does not believe relationships with long-standing customers should be “diminished or terminated” due to participation in the hemp program.

Kentucky’s program allows farmers to grow hemp as agents of the Kentucky Department of Agriculture and allows the product to be transported, processed and sold across state lines. This so long as the farmers meet certain parameters like designated GPS coordinates for their fields, providing notices before harvest and transportation and notifying the state police of a memorandum of understanding.

hemp plant starters
Credit Nicole Erwin / WKMS

Farm Banking Issues

The letter to DOJ alludes to banking issues that Alyssa Erickson of Kentucky Hempsters said she is familiar with in working with processors in the state. Kentucky Hempsters is a marketing and promotional firm with a hemp research field in Simpsonville. Erickson met with Senator Paul’s staff earlier this year and presented them with two letters. One was a processor in Kentucky who had been participating in the program for two years and had their business and personal accounts frozen. The other was a farmer who was going to cash a check for “hemp labor” and was told to find another bank to do business.

John Taylor runs a scale extraction refinement process and manufacturing facility in Kentucky called Commonwealth Extracts. "I had a farmer, one of the first farmers we paid last year. Was so proud. Gave him his check for $18,000 for the little bit that he grew which ended up being a bit of a disappointment because of the yield. He had his bank account closed because I wrote 'hemp payment' in the memo line." Taylor said the bank told the farmer to move his money elsewhere.

"We've learned since then we don't write 'hemp payment.' We just write 'payment' as ridiculous as that sounds," he said.

Erickson said farmers have also had issues with farm insurance. She said while state programs acknowledge that hemp is a sanctioned research program, some federal programs are not covering full farm insurance. "The farmers we worked with the past two years, facilitating research on their fields for them, doing different experiments, they actually were unable to grow this year because had they had a claim on their insurance, they would not have been able to qualify for their full farm insurance,” she said.

Other media outlets have pointed to instances of hemp farmers turning to bitcoin.

There is an apparent disconnect between state law allowing the industry to grow and misunderstandings at the federal level from agencies being directed by the government, Erickson said. "Farmers are risking by participating in this program. They're paying to participate first of all. Second of all, they're taking the risk of no crop protection, having potential issues with banking, insurance and all sorts of things." According to the KDA, hemp program participants are responsible for the costs and data collection. There is a limited market and KDA warns that a complete loss of potential profits is possible.  

For those willing to take the risk, Erickson said regulations are “not making this easy.” She said farmers and operators often don’t have time to deal with the paperwork and nuances of the program, “and it's getting to a point where they aren't going to be able to take the time and money to keep growing a crop that is potentially risking the rest of their operation or their livelihood in some way or another because of the DEA not understanding what we're trying to do here."

This is the fourth year of the Industrial Hemp Pilot Program in Kentucky. This year, KDA approved close to 13,000 acres of hemp production. Kentucky Governor’s Office of Agricultural Policy Executive Director Warren Beeler recently said auto manufacturers are looking to hemp fiber for dashboards and side panels on cars. Erickson said companies like BMW are using hemp fiber in their models. Countries including the United Kingdom are looking to hemp as a means of biodiesel. Numerous other applications for hemp have been discovered, from medicinal use to water filters to batteries.

Understanding Hemp CBD/THC

According to the Kentucky Department of Agriculture, in 2016, state pilot program participants reportedly planted more than 50 varieties of hemp. However, close to 60 percent of the reported acreage in the state was dedicated to phytocannabinoid research. “Phytocannabinoids are a broad class of chemicals produced in the floral material of the plant; these include THC and other compounds of nutraceutical interest such as Cannabidiol (CBD)” or hemp oil.

The KDA references scientific research that suggests that “phytocannabinoids have proportional relationships.” This is a concern for the KDA because as growers “ increase the hemp plant’s CBD or other phytocannabinoid production” being able to meet federal requirements not only becomes more difficult for growers working with an already experimental crop, but jeopardizes the growers ability to then process and sell their crop if they violate the .3 federal mandate.  The KDA was forced to destroy crops this year because of  such violations.

“The CBD is a different animal because the FDA is very interested in cannabidiol. So my bill talks about THC levels. It allows some variation with the THC levels depending on what the current state law is in that particular site where the CBD oil producer is domiciled.” Congressman Comer said.

Comer’s bill does not specifically address CBD because Comer says that could prohibit his legislation from moving forward. “The problem with with CBD is the FDA; to fully address all the challenges that CBD has would probably require another bill that would have to go into other committees that would make it more difficult.” Comer said.

Simply addressing the THC levels is controversial enough. “That's never been done before in any bills that have been been in Washington. Now, the bill that I have in Congress takes a huge step toward deregulation of hemp,” Comer said.

Comer stressed that the legislation would help “solve 85 percent of the problems that the CBD oil producers have in Kentucky, but 15 percent of the problem is that the Food and Drug Administration and that's something that I think is going to require a different type of legislation,” he said.

Erickson said the law is not currently clear as to what defines ‘research and development,’ how things can be marketed and the limits of legalities. According to the DEA, “marijuana (cannabis)” is listed as a Schedule 1 controlled substance “with no currently accepted medical use and a high potential for abuse.” Hemp itself is not listed in the ‘Orange Book.’ But the list also doesn’t specifically parse out cannabis and marijuana. The DEA clarified this in a 2001 statement with regards to THC levels.

Hemp seeds
Credit Nicole Erwin / WKMS

There are three main areas of hemp production, CBD, fiber and seed.  With the CBD market seeking “full fledged pharmaceutical support” Comer said that complicates things. It took seven months to finalize the Industrial Hemp Bill according to Comer. Leaving one day for deliberation before Congress moves to recess until September. “I would love to file that a few months earlier but hopefully everyone's been watching the news and you could see it's very difficult to get a majority in Congress to pass anything. Congress is way behind right now anyway,” said Comer.

Comer said with the healthcare bill dead for the “foreseeable future” he expects a number of items to “pop across the radar screen.”

“I'm going to be with a big percentage of the members of Congress and the key committees over the next few weeks during this recess period,” said Comer. He hopes to use this time to educates states without industrial hemp programs about the significance of the crop for all US farmers.

John Taylor said his business, Commonwealth Extracts, was created out of his personal journey dealing with seizures. "My life began to spiral out of control in terms of the frequency and magnitude of these episodes that I would have. Things got very bad for me personally, I was having seizures about every two months. I was at the end of my financial rope." At the time he had small business owner health insurance. His doctor prescribed him more medication. He said he gave his doctor 'a piece of his mind' and turned to the Internet for help, where he discovered cannabis. He said he went from a having seizures every 60 days to three episodes in seven years.

Motivated by a desire to be healthy, Taylor put a business model together through the industrial hemp research program. "We realized very quickly that Kentucky had no means of processing. No mechanization. Nothing in terms of what it actually took to make these products available."

Taylor serves on the board of directors of the Epilepsy Foundation of Kentuckiana. According to their website, there are 90,000 people in Kentucky and Indiana living with epilepsy. He has received calls from people finding relief in hemp-based therapies, which he admits is anecdotal, but moving nonetheless. He said low-THC medical marijuana was personally less intoxicating than prescribed Dialantin and Lamitcal. "I wasn't overwhelmed with intoxication. I still have cognitive recognition. I could think and remember and I didn't feel inebriated."

Hemp Oil Processor at Kentucky Hemp Works
Credit Nicole Erwin / WKMS

Taylor said he believes at the time marijuana was placed on the DEA list, there was no way to distinguish between the species. "Here's the irony of our laws: that same variety of cannabis grown under an industrial hemp program is called hemp. Not marijuana. Because it is a variety of cannabis sativa that has a THC level of less than 0.3 percent. It is the legal definition and the legal threshold of THC that makes something marijuana versus hemp. It is the same plant."

Taylor contends if there isn't a medical value for hemp or marijuana, then why is there a government patent for cannabinoids as antioxidants and neuroprotectants? "No politician I've ever talked to can look me squarely in the eyes and answer the question," he said.

Erickson said, "The federal law has to change in order for the industry to keep up with its development. Since day one of the pilot programs it's done nothing but expand and continue to show that it's a huge opportunity and has got great potential for agriculture, manufacturing, shipping, research, entrepreneurs in general.”

A (Brief) Kentucky Hemp History

Kentucky has a deep-seeded legacy in hemp cultivation. Introduced in the late 1700s, hemp was one of Kentucky’s top staple crops by the early 1800s and the commonwealth led the nation in its production, foremost in the Fayette County area. Hemp was used as clothing and bagging for the southern cotton industry and was used to variable degree as rope and caulking in the naval industry.

Kentucky’s hemp industry was successful in large part due to slave labor. Profits from farming the crop varied widely. Congressional support for the hemp industry also varied, particularly in the naval industry.

Aside from domestic competition from Missouri, Russian imports (their hemp was controversially considered to be superior) added continuous pressure to Kentucky farmers.

Eventually, technology improved and demand waned and Kentucky farmers moved to other crops like tobacco. There was a brief resurgence during WWI and WWII, but the marijuana scare in the 1940s, and hemp’s relationship with marijuana, contributed to the end of an already faded industry.

[Editor’s Note: This background is derived from A History of the Hemp Industry in Kentucky by James F. Hopkins, published by University Press of Kentucky in 1951, reprinted in 1998].

Credit Nicole Erwin / WKMS

Looking Ahead

Erickson said she would like to see hemp treated as an agricultural crop rather than a controlled substance. She said there has been little response from the federal government on this issue, which has been a cause of frustration amongst colleagues. She said language from Congress authorizing legal businesses operating under the farm bill would lift a weight off of companies, bankers and insurance groups trying to look out for themselves and their clients.

"The banking issue just again comes from the misunderstanding of the federal law and the misguidance of the DEA and some of the statements they have released over the past six months or so and the confusion they have caused," she said.

John Taylor said he has a bank that has been been mostly cooperative but noted a difficulty in securing credit card processing. He’s working on setting up a fifth credit card processing company and said his online transactions have been down for three months because of the language used by the DEA. "There is only a small number of banks that provide credit card processing. And they look to the DEA's guidance on what is and is not legal. And according to the DEA I'm just as illegal as marijuana."

Commonwealth Extracts is growing nonetheless, Taylor said, despite feeling ‘bearish’ about getting legislation to pass in Washington. "We definitely feel like we're in the right place at the right time." Most of his business is in non-hemp botanicals and nutraceuticals. "We've expanded beyond cannabis as a way to hedge our bets,” he said.

Erickson said she banks with BB&T and has three hemp companies and has had no issues. She said it’s a pivotal point where federal laws have to catch up to state laws.

John Taylor said, "You only have one chance in our lifetime to ever have anything happen like this." He added that Kentucky has a ‘lucrative cash opportunity’ in hemp and likened its potential to Silicon Valley.

Looking ahead to the next five years, Congressman Comer said, “I want hemp to be looked at just like corn and soybeans and tobacco are looked at...You know we don't need to have all of our eggs in the same basket. Farmers need more tools in their toolbox.”

Getting the government “off the farm” is the best way to insure investment from the private sector, Comer said. “It's the fear that the federal government or an overzealous attorney general or DEA is going to come in and create problems, which makes no sense because industrial hemp is not a drug. It's an agricultural crop.”

And the more options farmers have to grow a profitable crop the better off they're going to be, said Comer.