It’s long been obvious that one day soon China would dominate the global primary hemp product and phytocannabinoid market due to price, quality, and output. An ancient history as a producer of hemp and hemp products, with a huge domestic market aware of and not stigmatized against hemp, China is planning on dominating the global hemp market in almost all silos.
If you’re a U.S. or European hemp farmer, think where you want to be in 5 years, and aim for that. Such as start a farmers’ co-op and have your region specialize in one certain primary product the industry or market wants, processing in-house to add value and keep revenues. Or find a Fortune 100 customer needing fibre or seed and grow to its specifications. Branded products should be your goal, whether consumer or industrial; it’s a good discipline regardless of size or product. Consumers prefer local companies they can relate to run by real people, over nameless faceless foreign corporations far, far away. That’s how you can compete against cheaper production, with branding and interesting products, not joining the race to the bottom. There will always be a market for quality, innovation, convenience, freshness, and a heart-warming authentic story about the people producing it.
The reason I could sell certified organic HempNut brand shelled hempseed in the 1990s at a price well below the Canadian’s cost of goods for conventional was because I went to China for supply, paying 27 cents per pound of whole certified organic hempseed delivered to Hamburg, Germany. Since it takes 2.5 pounds of whole to get one pound of shelled, that gave me a huge cost advantage.
They now have their eye on fibre more than seed uses in the north of China it appears. That’s where my hempseed came from, too, the Harbin port. It’s tote adorbs that a U.S. hemp trade association recently got $200,000 from the USDA to promote its members’ U.S. hemp in China and Europe, like taking coals to Newcastle.
China will eventually own the low-end high-volume phytocannabinoid market, and continue to dominate hemp textiles. There’s no reason that its cost of goods for shelled hempseed couldn’t eventually be well below US$1 per pound ($2.20/kg), even 75¢. Or COGS as low as $9 per gallon of hempseed oil. That’s why it’s more important than ever for US hemp farmers to look to the future, innovations such as artisanal hemp for smoking as a tobacco-cessation tool, among others. Artisanal products are how you can compete with cheap cannabinoid producers.
The Chinese are growing several hundreds of thousands of acres of hemp and have labs ready to distill it as the market demands. The government is kicking-in millions of dollars to make it happen and throwing expertise at it. The world’s biggest market and world’s biggest API production (active pharmaceutical ingredients, the building blocks of medicines and products) is already right there, and they don’t need Canadian, U.S. or European hemp or consumers at all. Companies are going public on the strength of the hemp sector, and a few public companies are pivoting to hemp.
CBGa, THCv, CBT, CBL, even THC… China will eventually make them all. While bad for U.S. farmers, it portends affordable phytocannnabinoids in the future for patients and consumers. When they give a license to grow in Yunnan, in the south at a sub-tropical 24° latitude, max THC % is not an issue, “hemp” or not. It is an uneven playing field leveraging government + market + pharma and hemp history + natural advantages in China, versus oppositional government + lack of easy market + social stigma + highest-cost production in the U.S. Even Canada still treats hemp grown for fibre like a drug crop grown by criminals.
The world’s leading biotech, tobacco, and pharmaceutical companies and nonprofit organizations, all working with the government to make China the world leader in hemp and cannabinoids, and raise farmers out of poverty. Meanwhile in the U.S., farmers are burning crops over 0.01% THC and fighting with FDA and USDA for better treatment, a bankrupt HIA reduced to suing DEA to maintain relevancy.
Hemp farmers in the U.S. and Europe need to get a plan together for the future, a damn good one, and make it so. CO2 CBD extraction or stalks for textiles not even made in the U.S. won’t cut it anymore. It’s time we step up and make the regulatory, governmental, social, financial, and commercial commitment needed to once-again allow hemp to be a successful crop in the U.S. We have numerous advantages today compared to the past: during the “Hemp for Victory” program in the Second World War hemp was grown only for its fibre, mostly for ropes used on ships, in extractive mines (non-sparking), and in parachute rigging.
Today, we have many more primary hemp product (seed, oil, bast, hurd, resin) silos or segments, by end-use. Besides all the previous fibre uses, we now also have fibre for hempcrete, graphene, fuel, and biochar, seed for oil, fuel, food, and fodder, and flowers for silage, food, smoking cessation, cannabinoids, and terpenes. But the breadth of possible primary and secondary hemp products (made from primary hemp products, such as corn chips from the seed or animal bedding from the stalk) is distracting and the market noisy and unsophisticated. If Popular Mechanics declared in 1938 that hemp could make 25,000 products, imagine what that number might be today? Millions and millions, no doubt. That’s why China is moving fast and furious forward on hemp.
Download and read the following report from Arcview/Asia Horizon. While it is ostensibly about hemp, inevitably one day China (likely in Yunnan) will produce the now-stigmatized molecule THC as well, not only flowers but APIs for export and domestic use. And this report is solely about phytos, plant-based. Also inevitable is that as lab-grown cannabinoids are scaled-up and cost comes down, one day they’ll be cheaper than growing a plant to obtain them. And here, China is once again well-positioned to capitalize. –Richard Rose
Here are highlights from China: A Rising CBD Superpower, by Nicole Bugnacki, August 2020, The Arcview Group and Asia Horizon Copyright 2020 Asia Horizon Group Inc. & The Arcview Group. Quoting Fair Use excerpts of it here, nothing added:
China is likely to be a leading source of cannabinoids for the global supply chain for the foreseeable future – with newfound government support for the industry, one of the lowest cannabinoid production costs globally, and unrivaled large-scale manufacturing infrastructure and expertise.
China’s dominance in production capabilities, as well as its large and increasingly wealthy consumer population represents the two most attractive segments of the emerging CBD market. On the production side, the number of licenses to process cannabinoids in China is extremely limited. While there is no publicly available database, based on our on-the-ground due diligence, we have identified some 15 entities in the whole of China that have received government authorization to extract cannabinoids from hemp. Most are based in Yunnan province, which began issuing licenses in 2010, with a few in Heilongjiang province, which began regulating in 2017. We expect the total number of authorized participants to increase slowly over the coming 24 months – with state-owned or large tobacco and pharmaceutical companies to begin entering the industry.
Chinese cannabinoid producers are not only set to disrupt the global supply chain, but also to capitalize on the emerging opportunity for CBD consumer products within their own domestic market. China is an enormous market for consumer goods. There are 350 million millennials, their spending power is growing, and they are increasingly interested in health and wellness and beauty categories. Consumer interest for CBD products is tracking to experience the same exponential growth in China as it has in the West. Consumer purchasing trends in beauty and demographic makeup will lead to a very robust topical and beauty CBD segment in China.
It is important to understand that China’s consumer market in certain segments such as e-commerce and beauty already surpasses that of the United States. Asia Pacific is the world’s largest cosmetics market, with China’s appetite for beauty leading revenue share at the world’s largest cosmetics companies. The beauty category is indicated by consumer surveys as the most important luxury spending category, and year over year continues to have strong and growing consumer spend.
Looking at the other end of the demographic spectrum, healthcare for the large elderly population is one of China’s most pressing public concerns. The Chinese domestic market represents vast potential in an aging population with conditions treatable by CBD, treats, a cultural affinity for herbal medicines, and a growing affluence. China falls well above average benchmarks for an aging population, with 11.4% of the citizens 65 or older and 17.3% 60 or older. China has seen a near-doubling in life expectancy since the 1960s, and the senior citizen population is expected to double by the end of the decade. Domestic acceptance of prescribed plant-based medicine presents a unique scenario where China’s large elderly population may follow a similar pattern to their counterpart US Boomer generation as the most enthusiastic users of CBD-based medication. Whether sold as cutting-edge nutraceuticals, cosmetic products to millennials, or as TCM products to the elderly, the diverse potential of hemp-derived cannabinoids creates an opportunity of unparalleled scale.
The combination of seismic demographic shifts, expansion in discretionary incomes, and unique domestic infrastructure contributes to China leading global spend across multiple consumer product categories, including those impacted by CBD such as beauty, alcohol, and tobacco. As further explored in this report, we anticipate that China will continue to evolve its legal framework for hemp-derived cannabinoids with a pragmatic regulatory approach. With consumer demand growing internationally, and awareness of CBD increasing domestically, we believe China is on track to eventually become the largest non-THC cannabinoid market in the world.
China is the world’s largest industrial hemp cultivator, accounting for about half of global output.
Hemp cultivation is legally approved and regulated in Yunnan and Heilongjiang as of 2010 and 2017, respectively. Although the modern industry is now a decade old, China has a much longer history with cultivating hemp. Much of the existing information regarding industrial hemp cultivation is highly speculative and plausibly subject to under-reporting. Official data from the China National Bureau of Statistics report the average hemp fiber planting area reached 160,000 hectares (~395,000 acres) in the late 1970s before dipping precipitously. While the crop had historically been grown for industrial application (e.g., textiles and cloth), the 2015 legalization of domestic CBD cosmetics and market potential of flower and leaf cultivation for CBD as an export product has accelerated further cultivation and extraction. In 2018, approximately 20,000 hectares (~49,000 acres) were reported planted, yielding 106,000 metric tons. While 2019 data is yet to be available, industry estimates by the USDA suggest a planted area of approximately 66,700 hectares (~165,000 acres) in China.
Hemp, CBD Will Be Commoditized, Driving Producers to Source From China
There is growing demand for hemp extracts, including CBD oil, and may possibly be for other products in the future. If hemp for CBD or other purposes proves to be a profitable crop, competition from abroad will likely increase. Canada and Europe both have established infrastructure, management expertise, and markets. China has access to lower wage employees, unknown capacity, and the potential for more lenient regulatory standards in the future.
The CBD and the non-THC cannabinoid category will develop into a global industry much faster than the general THC cannabis category. Craft producers of hemp within local regulatory frameworks will distinguish themselves with whole plant products (including artisanally-grown CBD-rich flowers for smoking for example) and maintain pricing power in certain categories in some markets. As companies with established consumer brands enter the market and develop products containing CBD as an ingredient, they will exert traditional pricing pressures on hemp producers. CBD’s popularity as an ingredient in a range of product categories will inherently lead to a global supply chain.
Cannabinoids are increasingly viewed less as a novel ingredient inextricably linked to the cannabis plant, and more as APIs to be used in the manufacture of pharmaceutical, nutraceutical and CPG products. As is standard for APIs, there is tremendous pressure on producers to deliver their APIs at the lowest cost. A global supply chain will move hemp and cannabinoid production to geographies with natural advantages such as low CAPEX, low OPEX, suitable cultivation environment, suitable industrial infrastructure, and more. As a result, it can be anticipated that China will be as well positioned as a supply nation for the global cannabinoids market just as it is for other APIs and ingredients.
The Economic Crops Research Institute of Heilongjiang Academy of Agricultural Sciences (IHR) was established in 1964. It houses the Institute of Hemp Research (IHR).
There are currently 65 staff: 35 Technical Professionals, 16 Senior Professionals and 14 Phds. The institute has been researching industrial hemp since 1964. In the past 50 years, IHR has successfully bred 8 new varieties of industrial hemp (including seed, fiber and medicinal varieties), and collected more than 800 varieties. IHR has won a First-Place Prize of National Science and Technology Progress Award, and has published more than 30 papers and two books.
IHR’s current research focuses are industrial hemp breeding, cultivation, plant protection and processing, and industrialization. In recent years, IHR’s research focus has shifted to the technical standards of industrial hemp, detection standards and tissue culture, cloning and feminization technology, CBD water-soluble technology, molecular marker technology, and genomics. The research is conducted in partnership with domestic universities and enterprises, and its purpose is to promote scientific and technological achievements and accelerate the development of enterprises.
The Heilongjiang Government attaches great importance to the development of the industrial hemp industry. Heilongjiang has built an industrial hemp seed franchise licensing system and variety identification system, standardized methods of processing. In addition, Heilongjiang has formulated a list of pros and cons of industrial hemp, and also approved the establishment of an international industry cannabis research center, which holds an annual international industrial hemp conference. Heilongjiang’s Provincial Department of Finance allocated RMB7.7 million to build a breeding base for industrial hemp.
The Economic Crops Research Institute of Heilongjiang Academy of Agricultural Sciences has been engaged in the collection, identification and utilization of industrial hemp seed resources for half a century. At the same time, it has carried out industrial hemp molecular biology, genetic transformation, tissue culture cloning and feminization technology and high-yield and efficient cultivation technology research. Therefore, IHR has lots of opportunities to partner with organizations, research institutes and universities. It is also a supporting unit of Heilongjiang province’s international industrial hemp R&D center, so it can carry out cooperative research in varieties selection, germplasm resource exchange, cultivation technology, product processing-related fields, and pharmaceutical utilization.
Yunnan is more likely to develop towards the medicinal industry and there will be less use of fiber and seeds. In addition, the development of industrial hemp in various parts of China will be based on regional ecological characteristics. To pay equal attention to fiber use, seed use, and medical use, we should actively promote comprehensive utilization, coordination, and development to form a regional layout to avoid competition.
The Chinese hemp industry is mainly focused on closing the technology gaps in hemp breeding, cultivation and plant protection. In the field of cannabinoid breeding, domestic efforts are focused on closing the gap in high cannabinoid content variety plants as well as cultivation techniques for medicinal uses. Lowering the cost and availability of rare cannabinoids through extraction technology is another area of research. China should be able to lead the world shortly in the areas of automated production technology and processing technology. At the same time, IHR is pressing for the further construction of indoor and outdoor cultivation for medicinal purposes. I think where China leads is industrial hemp fiber selection and breeding, large-scale planting, and fiber preliminary processing. We should pay attention to the development, processing and utilization of fiber varieties, speed up the cultivation of new varieties, increase the hemp extraction rate, and create brands with Chinese characteristics. This would follow that we need to further develop and utilize hemp for protein as well as hemp seed oil. We recognize that CBD has additional value-add beyond fiber, and that can potentially focus on external and veterinary uses. However, we need to be careful that use in human medical applications needs to rely on support from research and more scientific data. China is a country with a large population and many consumers; Chinese companies should address the treatment of chronic diseases, make special features in the treatment of unhealthy diseases and health care, increase investment in research and development, and do better for the health and well-being of the people.
China Competitive Advantages. China Leads Low-Cost, High Volume Global Supply Chains: A Look at API Production
China supplies over 50% of APIs for pharmaceutical production globally. In some of the top selling nutraceutical categories, China produces 60% to 90% of ingredients, with a virtual monopoly in certain key categories such as vitamins and antibiotics. For example, there are only 4 manufacturers of Penicillin in the world, and 3 of them are located in China. While pharmaceutical and nutraceutical products may be formulated and manufactured into their final form factors in other countries around the world, firms are able to save 30% to 40% on ingredient costs by sourcing from China.
Economic Incentives Coincide with National Government Initiatives
As early as 2009, in Yunnan, regional governments have been promoting hemp cultivation as a way to raise the standard of living and incomes of farmers. The regional government had provided hemp seeds free of charge to encourage cultivation, as well as technical training and instruction. Today, hemp remains a much more attractive crop for Chinese farmers, who can earn 50,000 yuan or $7,400 per hectare, twice as much as corn. In Yunnan, this has already translated to roughly doubling the per capita income for thousands of farmers every year. Accordingly, provincial governments see hemp cultivation as directly linked to poverty alleviation, and expansion of hemp cultivation bases in 2020 is anticipated to bring three million people out of poverty. While hemp cultivation has been concentrated at a regional level in Yunnan and Heilongjiang, there is growing support and recognition of the industry at the national level. The Chinese government prioritizes economic growth as the country’s top state agenda. While hemp as an agricultural product has a strong economic impact and tremendous potential, the market demand for hemp-derived APIs has skyrocketed, and the Chinese government has taken notice. Cost advantages contribute to China’s leadership in API production, yet lower costs alone do not enable global leadership. China’s API manufacturing infrastructure is the result of strong regulatory and financial support from a government determined to grow their high-value biopharmaceutical manufacturing base.
National and regional government initiatives and support are powerful dictates of industry development and performance. Priorities include, among others: broadening farmer income channels, deepening integrations between agriculture and healthcare, investing in farming technology and seed genetics, and generally broadening agriculture investment in the form of fiscal support and subsidies.
China’s continued focus on agriculture also overlaps with biomedicine and pharmaceutical goals set forth in Made in China 2025, a strategic plan issued in May 2015. Under that plan, China aims to move away from being the “world’s factory”, producing cheap, low-quality goods facilitated by lower labor costs and supply chain advantages. The initiative encourages production of high value products and services, like aerospace, semiconductors, and pharmaceutical APIs. China’s pharmaceutical industry has received special attention and support, with benchmarks for achieving industrialization of 20 to 30 innovative drugs by 2025 and drug export to developed countries. China’s agricultural and biomedicine goals powerfully align with the promotion of hemp. These goals influence the approach of officials at national and regional levels, leading to economic incentives in chosen areas.
Proposals at the national level related to the development of China’s hemp industry are especially relevant in the context of China’s agricultural and biopharmaceutical focus. China is presently the world’s largest subsidizer of agriculture at an estimated $212 billion in farm subsidies in 2016, double that of the European Union and six times the size of the United States. Up to 200 million farmers in China rely on government subsidies and other aid to buy new farm equipment to produce strategic crops. With regards to biomedicine and pharmaceutical development, China has relied on grant funding, subsidies, and import controls, among others, to nurture its domestic development. As an industry that is important for future development, it is expected that hemp crops will similarly be a beneficiary of hefty subsidies. The support for agriculture and subsequent economic benefits, as well as immersion into biopharmaceuticals and higher value-added product exports, makes the Chinese hemp industry particularly well positioned to compete globally.
As we all know, the annual sales of industrial hemp products in the world now exceed $10 billion. It is expected to increase to over $100 billion in the next five years, which has the potential to grow into a trillion level industry. With the application of CBD in the field of medicine and healthcare gradually recognized by the market, industrial hemp and related industries have a broad space for development.
The north of China is suitable for the growth of industrial hemp, and there are locational advantages in the development of industrial hemp. In recent years, with the deepening of agricultural supply-side structural reform, industrial hemp has gradually become an advantageous industry for the adjustment of regional agrarian structure and the increase of farmers’ income.
However, there are still some problems in industrial hemp production and processing, such as low coverage of fine seeds, non-standard cultivation techniques, lack of special production machinery, insufficient processing capacity, and lag in the research of critical technologies.
Within the existing framework and funding channels, specific policy support will be given to planting, cultivation of high-quality varieties, development of agricultural machinery and equipment, development of high-end products, and tackling critical technical problems. By increasing the investment in science and technology, the key issues that restrict the development of the industry such as the quality of fiber and the low content of edible and medicinal CBD, as well as the problems of cultivation technology and processing standards in production are solved. China has increased its support for international exchanges and cooperation in the field of scientific research. China will speed up its academic exchanges with advanced countries and introduce and absorb superior scientific and technological achievements. We will integrate domestic and international research and development forces, bring together technology and talent from around the world, and carry out collaborative innovation in resources, breeding, harvesting, and processing machinery and other practical technologies to support industrial development.
Structural Advantages of Approved Provinces: Yunnan and Heilongjiang
Yunnan and Heilongjiang are both well-positioned as hemp cultivation centers with extensive agricultural experience, significant farming acreage, agricultural labor workers and low labor costs.
In 2013, CBD extraction from byproducts was officially permitted and, as of 2019, liberalization of CBD resulted in over 36,000 acres licensed for hemp cultivation for cannabidiol. Yunnan is also home to the world’s largest cannabinoid extraction plant, which opened in 2016. There are also half a dozen companies in Yunnan with licenses to process hemp for cannabidiol as of 2019.
In its first year since legalization, by November 2018 Heilongjiang harvested 30,000 hectares or 74,000 acres of hemp — nearly one-third the size of European and Canadian fields combined. The province also has processing and extraction facilities, with the goal of processing 70,000 tons of hemp skin, 10,000 tons of hemp seed, 10,000 tons of leaf flower, and 300,000 tons of hemp stalk by 2020.
Bayer opened its second largest, over-the-counter manufacturing site in Yunnan in 2016. More recently, Pfizer revealed plans to base its leadership team for established medicines in China, while Sanofi is creating a “China and emerging markets” unit. All of this is in addition to direct investments in Chinese pharmaceuticals and biomedicine as part of Made in China 2025, where China stands second only to the US in total pharmaceutical spending.
In regions where hemp is cultivated, there is a significant concentration of higher education institutions. For example, in Heilongjiang, Harbin Institute of Technology is recognized as one of the best Chinese science and technology universities. Regionally, Heilongjiang also houses Harbin Medical University and Northeast Agricultural University. In Yunnan, there are also several established institutions, like Kunming University of Science and Technology, and those specific to agriculture, like Yunnan Agricultural University.
Genetics R&D for China
The value of cultivating and processing hemp for extracted cannabinoids has become more apparent to the Chinese government authorities in recent months, driving a corresponding increase in research and development of advanced hemp genetics akin to those found in Western markets.
While Yunnan province has taken the approach to develop seeds domestically, Heilongjiang province is, instead, looking abroad. Heilongjiang province has opened up a very limited channel to import foreign genetics to help bridge the gap between what is currently available commercially in China versus abroad. Foreign seeds must first be approved for importation through a number of organizations, including, but not limited to, China Customs as well as the Institute of Hemp Research. Once foreign varieties are approved for import, the seeds must then undergo domestic trial runs before being given a Chinese certification. So far, the most notable commercial activity in genetics has been from publicly traded Zixin Pharmaceutical. Zixin Pharmaceutical completed an importation of three strains of hemp varieties from Holland in May of 2020. Two of the strains were high cannabinoid- producing varieties, and one was a grain and fiber variety.
China Competitive Landscape: Key Players in China Cannabinoid Production
We have identified some 15 entities in the whole of China that have received government authorization to extract cannabinoids from hemp. Most are based in Yunnan province, and a few authorizations are in Heilongjiang province. We also estimate that there are more than 60 companies that are licensed for cultivation in Yunnan and Heilongjiang.
Several of the Yunnan entities are already operational, but it is unclear whether and to what extent the authorized entities in Heilongjiang are operational. We consider the few entities that are operational in Yunnan to be robust market participants, as most of the companies that have received government authorization have not started operating. We expect the total number of authorized participants to increase slowly over the coming 24 months – with state-owned or large tobacco and pharmaceutical companies to begin entering the industry.
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Click here to download a free copy of China: A Rising CBD Superpower, by Nicole Bugnacki, August 2020, The Arcview Group and Asia Horizon Copyright 2020 Asia Horizon Group Inc. & The Arcview Group.
Written by Richard Rose.
There is no relationship or connection between Richard Rose or The Richard Rose Report and Asia Horizon Group Inc. or The Arcview Group, and no consideration was offered or accepted. This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing here constitutes a solicitation, recommendation, endorsement, or offer by anyone to buy or sell any securities or other financial instruments. Any views expressed herein are the personal opinion of Richard Rose. Information found here is not intended to diagnose, cure, treat, or prevent any disease. These statements and subsequent links found here have not been evaluated by the U.S. Food and Drug Administration (FDA). Hemp is not subject to international drug controls and is grown legally around the world. The information here is for educational purposes only and is not to be considered legal or medical advice. There are no warranties whatsoever as to the legality, suitability, ownership, purpose, or accuracy of this information. If you have medical questions, please seek a medical professional. If you have legal questions, please seek a legal professional. This information is provided on an “as is,” “as available” basis without warranties of any kind, express or implied. Void where prohibited. Specifications subject to change without notice. All patents, trademarks, service marks, and copyrights are the property of their respective owners.