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A Letter To Mitch McConnell

Dear Senator Mitch McConnell,

As you are now looking at bailing out airlines, restaurants, and other industries; please don’t forget about helping the hemp farmers in your backyard and CBD brands across the country.

The 2018 Farm Bill gave this industry life. Now, it needs your help.

The hemp sector is supposed to grow to $22 billion in the next three years. Right now, because of COVID-19, hundreds of thousands of jobs and thousands of small and medium-sized businesses may be lost. I hope you remember this industry as you look at the upcoming $1 trillion dollar coronavirus COVID-19 stimulus package.

I am a U.S. Navy Veteran who attended Columbia University after my five years of service. I previously worked at a venture capital firm before getting into the hemp sector. CBD products help remove pain and suffering from consumers and medical patients, and that is worth protecting. Like all nascent markets, it was very fragile even before the coronavirus, as you will see in the Industry Outlook below with this black swan event. Without immediate intervention from the federal government, it will be terminal.

I am calling you to inject $1 billion of stimulus money into hemp/CBD VC Firms and Private Equity firms in the space to keep things going.

Here are three legislative moves that you can easily make to help save this industry:

  • SAFE Banking Act passed now to allow CBD/Hemp to get critical capital from banks and SBA loans and to stay in business. Result: $1 billion of investment and critical liquidity.

  • IRS tax code changed to allow HSA/FSA to buy hemp/CBD products with proven outcomes. Result: $200-$400 million of tax-free purchases for people with chronic conditions.

  • Change supplement rules in Congress to include CBD for a two-year probationary period, because currently as it is a  “gray area” it has kept investors on the sidelines killing businesses and jobs. Result: $2 billion dollars of revenue and a lot of consumers getting plant-based pain alternatives. Also, supply for CBD coming from U.S. farms versus other countries.

If you and Congress don’t intervene now, then as you will see from the Industry Outlook, a lot of jobs and household incomes will be lost. We cannot kill off a $22-billion-dollar American sector.

Industry Outlook - Here's What Will Happen

There are 2,600 CBD companies that we are currently tracking (and those are just the consumer-facing brands). Our prediction is that this time next year, half of them will be gone.

These brands employ thousands of workers. It will have a “death blow” effect on American farmers. This is going to be a vicious cycle coming to the hemp sector in the next three to six months because of this Black Swan event, where companies that were already capital-strapped will be fighting off bankruptcy and will have to firesale their inventory and flood the market with downward pricing pressure. This will likely create a self-reinforcing feedback loop where other previously profitable companies will have to match prices, and thereby put their operational profits at risk.

This continues ad-infinitum until prices are at commodity levels and even the formerly profitable companies can not stay solvent without making drastic changes cutting their employees. Currently, there is a glut of product sitting on shelves, in raw CBD oil, and also hemp biomass. We see this excess inventory in the market as a ticking nuclear time bomb ready to go off unless regulation changes quickly making it easier to market and sell finished goods online and in stores (i.e. Congress doing something now to protect these small businesses from the current FDA restrictions).

Without intervention, discounting inventory will become the new norm, with even more fake testimonials and claims. This will make it hard for good companies to be heard above the noise, and it will hurt everyone in the ecosystem.

We know this is true because this just happened with the hemp farmers in Kentucky and across the country, who just underwent a similar pricing war on CBD oil and biomass resulting in pricing falling over 90 percent. Most of them lost any profits for 2019/2020 (if not out their entire business). One hemp company already went into bankruptcy in your own backyard and more will follow.

If you remove these three legal hurdles now, that company and the industry may be saved. You can also see the ripple effect that had on the oil extraction processing companies across the country, who are not even running their machines because the pricing war dumped so much inventory on the market. If not, as a result of the coming brand pricing war, hemp prices will continue to fall and farmers will not be able to afford to plant next year.

Lastly, because capital has been a problem in the cannabis sector for the last four quarters, a lot of companies are currently underfunded. Overlay those problems with existing banking issues, there is a lot of predatory debt out there with hemp/CBD companies still not able to get traditional SBA loans. That debt will be coming due soon.

Hopefully, with a bailout of this CBD industry and hemp farmers, this gets fixed. Without it, the market opportunity will be lost. So as you can see now, even before the COVID-19 outbreak, this industry was sick. Now it’s terminal for most companies without your help.

With deep respect and urgency, David K Metzler, CEO, CBDCapitalGroup

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