Breaking the Chains: Applying Lessons from Global Agriculture Supply Chains to Cannabis and Hemp

The world of agriculture is constantly evolving, and the cannabis and hemp industries are no exception. With the legalization of these crops in many parts of the world, farmers and entrepreneurs are faced with new challenges and opportunities. While many of us may think of global supply chains in terms of retailers, such as picking up snacks at the local supermarket, agricultural commodities have a different story to tell. Their supply chains are complex networks involving production, processing, and distribution that span the globe to deliver food products from farmers to consumers. These supply chains play a critical role in meeting the increasing demand for diverse and affordable food products, which is necessary to feed the growing global population.

THE HIDDEN ROLE OF GLOBAL BANKING IN AGRICULTURAL SUPPLY CHAINS: HOW CERTIFICATION SCHEMES ARE MITIGATING RISK FOR CANNABIS AND HEMP PRODUCERS

To truly grasp the workings of global agricultural supply chains, we cannot overlook the significant role played by global banking system historically in high-risk crops, and cannabis shall be no different. Cannabis and Hemp are simply missing a risk mitigation tool, well, it did until programs like RHS and CUMCS were introduced.

While it may be the elephant in the room, banks have facilitated the flow of capital and financed operations for companies involved in agricultural commodities trading, thus creating global markets. Farmers, traders, and processors benefit from banks' financing by being able to purchase necessary inputs, invest in technology and infrastructure, and manage the risks associated with production and distribution. Banks also offer financial services, such as foreign exchange transactions and hedging, that help companies manage currency risks and fluctuations in commodity prices.

When looking back on history, no one can deny that incumbent banking and private financing played key roles in facilitating trade finance, which is the financing of international trade transactions for every agricultural commodity bought and sold or traded across the continents. Trade finance includes a range of financial products and services such as letters of credit, guarantees, and insurance, which help to manage the risks associated with cross-border transactions. Trade finance is particularly important for agricultural commodities trading, where transactions often involve long distances, multiple parties, and complex logistics.

Voluntary certification schemes, such as Good Agricultural Practice (GAP), aim to promote sustainable and responsible farming practices. When these schemes, such as RHS, are integrated into agricultural programs, banks recognize their significance, along with the farm's dedication to the programs. Given the high risks associated with growing cannabis and hemp, these certification schemes have become crucial in these industries. By participating in a recognized certification scheme, producers can showcase their commitment to producing high-quality products that are both safe for consumers and the environment.

CERTIFICATION: THE KEY TO ACCESSING FINANCIAL ASSISTANCE FOR HIGH-RISK CROPS

Certification has historically enabled producers of high-risk crops to access financial assistance from banks, private financiers, and other lending institutions. This is because certified producers are viewed as lower risk due to their commitment to transparency and their access to established markets, and are therefore more likely to be approved for loans or other forms of lending. Furthermore, some lending institutions may even offer lower interest rates to certified producers as a result of the reduced risk.

Participating in a globally recognized voluntary certification scheme for high-risk crops like RHS and CUMCS can assist producers in obtaining financial assistance through incumbent banking, private financiers, or other forms of lending. This is due to the evidence of their commitment to sustainable and responsible practices provided by the certification scheme, which lowers the risk associated with lending to them.

The involvement of banks in agricultural commodities trading has also helped to create global markets by providing liquidity and enabling price discovery. Banks provide liquidity to the market by offering loans and other financial products that allow traders to hold inventory and manage risk. This liquidity is essential for ensuring that buyers and sellers can find each other and trade in a timely and efficient manner. Banks also participate in the trading of agricultural commodities, either directly or through their clients, which helps to increase market depth and transparency.

The involvement of banks in agricultural commodities trading has been instrumental in creating global markets for agricultural products, and there are lessons that can be learned from this experience when looking at the emerging global medical cannabis and industrial hemp markets.

ACCESSING FINANCIAL SUPPORT AND MANAGING RISK IN HIGH-RISK CROP SECTORS: THE ROLE OF CERTIFICATION AND BANKING

Farmers in high-risk sectors like cannabis and hemp can leverage banks and financial institutions to provide liquidity through the use of risk management tools. However, banks typically require agricultural schemes as risk management tools prior to lending. As the cannabis markets continue to grow, there will be a need for financing and other financial services to support their growth. Banks can play a role in providing financing, insurance, and hedging tools to manage price risk. Participating in voluntary certification schemes can demonstrate a commitment to sustainable and responsible practices, making it more likely for banks to lend to them.

WHY INCUMBENT BANKING AND VOLUNTARY CERTIFICATIONS ARE IMPORTANT IN HIGH-RISK CROP SECTORS

Certified agricultural networks have established best practices, standards, and regulations over many years that help ensure agricultural products are produced sustainably and traded fairly. These practices and certification programs can be leveraged in the medical cannabis and industrial hemp markets to establish similar standards and increase market transparency and trust. In addition, the established relationships between banks and certified agricultural networks can be used to support financing and risk management in the medical cannabis and industrial hemp markets, allowing for their growth and development.Global networks in the certified agricultural sector have established best practices, standards, and regulations that have been developed over many years. These practices have helped to ensure that agricultural products meet certain quality standards, are produced sustainably, and are traded fairly. This experience can be leveraged in the medical cannabis and industrial hemp markets to develop similar best practices, standards, and regulations that can help to ensure the quality and sustainability of these products.

Global networks in the certified agricultural sector can provide valuable experience and expertise that can be leveraged to support the growth and development of the medical cannabis and industrial hemp markets. By building on the best practices, standards, and regulations established in the agricultural sector, and by leveraging relationships with banks and other financial institutions, the medical cannabis and industrial hemp markets can be developed in a way that promotes sustainability, quality, and market transparency.

To be clear, gaining access to these global networks in the certified agricultural sector is not automatic. Farms or plantations must first commit to implementing the best practices accepted by that particular network or community. This commitment can create challenges for farmers when attempting to implement action items like voluntary certification under specific agricultural schemes like the Responsible Hemp Standard when dealing with the global industrial hemp value chain, or Control Union’s Medical Cannabis Standard when dealing with the international import and export of medical grade cannabis destined for pharmaceutical level supply chains.

Due to the nascent nature of both the medical cannabis and industrial hemp markets, many banks are hesitant to get involved due to regulatory concerns and in some areas of the world, the legal status of these crops. However, this is not a new phenomenon in terms of global agriculture. There have always been high-risk crops that required risk assessments by third-party validation prior to investment.

We have to recognize the lack of standardization and regulation in the medical cannabis and industrial hemp markets, and how those lack of regulations (private or governmental) are making it difficult to establish consistent financing and risk management opportunities for the farmers participating in those sectors.

As you read this, you might be under the impression that cannabis and hemp are too distinct for traditional concepts that have created and stabilized other global markets to be applicable to them. It's not uncommon to hear statements like "one-plant" narratives limit the potential of this plant, insinuating that global brands, financial institutions, regulators, NGOs, and others can't see beyond the single ∆9-THC molecule that has hindered this plant's progress. However, I'd like to argue that such beliefs are misguided. Just like any other crop, cannabis and hemp require a stable and sustainable supply chain to ensure long-term success. It's achievable when we permit validation of a transparent supply chain, similar to how we validate other high-risk agricultural commodities.

So let's look at examples of high-risk crops from the past that have been stabilized due to the influence of voluntary certification schemes include coffee, cocoa, and bananas. These crops were historically subject to market volatility, as they are often grown in developing countries with weak infrastructure and regulatory frameworks. However, through the implementation of certification schemes such as Fairtrade and Rainforest Alliance, these crops have become more stable and profitable for farmers. These certification schemes require farmers to meet certain standards related to environmental sustainability, fair labor practices, and product quality, among other criteria. As a result, these crops are able to access premium markets and prices, which helps to stabilize their production and ensure the sustainability of the agricultural sector in these regions.

EXAMPLES OF HIGH-RISK CROPS THAT HAVE BEEN STABILIZED BY VOLUNTARY CERTIFICATION SCHEMES DESIGNED BY THE PRIVATE SECTORS:

1. Cocoa: Cocoa is a high-risk crop that is vulnerable to pests, diseases, and weather events, which can affect production and quality. As a result, banks and other financial institutions often require risk assessments and third-party validation to ensure that cocoa farmers are implementing sustainable farming practices and minimizing risk.

2. Coffee: Coffee is another high-risk crop that is vulnerable to pests, diseases, and weather events, which can affect production and quality. Banks and other financial institutions often require risk assessments and third-party validation to ensure that coffee farmers are implementing sustainable farming practices, such as agroforestry and soil conservation, and minimizing risk.

3. Cotton: Cotton is a high-risk crop that is vulnerable to pests, diseases, and weather events, which can affect production and quality. Banks and other financial institutions often require risk assessments and third-party validation to ensure that cotton farmers are implementing sustainable farming practices, such as integrated pest management and water conservation, and minimizing risk.

4. Palm oil: Palm oil is a high-risk crop that is associated with deforestation, habitat destruction, and human rights violations. Banks and other financial institutions often require risk assessments and third-party validation to ensure that palm oil producers are implementing sustainable and socially responsible practices, such as zero deforestation and respecting the rights of indigenous peoples.

5. Soy: Soy is a high-risk crop that is associated with deforestation, habitat destruction, and social conflicts. Banks and other financial institutions often require risk assessments and third-party validation to ensure that soy producers are implementing sustainable and socially responsible practices, such as zero deforestation and respecting the rights of local communities.

Ultimately, understanding and managing risk is crucial for all players in the cannabis and hemp supply chain, whether it's for the production of cannabinoids, fiber, or seed protein oil. However, the meaning of risk can vary at different stages of the supply chain. For farmers, it may mean managing stressed watersheds, while for producers and manufacturers, it may mean avoiding exposure to harmful chemicals and heavy metals. For banks, risk may involve validating the claims of farmers and buyers, while for brokers, it may mean ensuring accountability. By identifying and addressing these risks, all players can work together to create a transparent and sustainable supply chain for cannabis and hemp products.

To address these challenges, it may be necessary to develop new regulatory frameworks and standards that provide greater clarity and transparency around the production and distribution of medical cannabis and industrial hemp. This could help to mitigate concerns around legal and regulatory risks, and provide a more stable environment for banks and other financial institutions to operate in.

Another area where the medical cannabis and industrial hemp markets may be missing is in the development of supply chain infrastructure. While these markets are growing rapidly, there is a need for more efficient and integrated supply chain networks that can support the production, processing, and distribution of these products. This could include investments in technology and logistics, as well as the development of new financing mechanisms that can support the growth of small and medium-sized enterprises in the industry.

Lessons learned from the agricultural commodities markets can be applied to the emerging medical cannabis and industrial hemp markets to help support their growth and development. By leveraging the expertise and resources of banks and other financial institutions, these markets can develop more efficient and sustainable supply chain networks, while also managing risk and ensuring liquidity for buyers and sellers.

LET’S LOOK AT KEY POINTS IN HISTORY THAT HAVE CREATED SIGNIFICANT CHANGE IN THE WORLD OF GLOBAL AGRICULTURAL COMMERCE:

The Green Revolution (mid-20th century): The Green Revolution was a period of rapid agricultural development that began in the mid-20th century and led to significant increases in crop yields and food production. This was achieved through the use of high-yield crop varieties, irrigation, and fertilizers, among other innovations. To support these advances, advanced supply chains were developed to distribute agricultural inputs such as seeds, fertilizers, and pesticides, as well as to transport and market the increased output of crops.

The cannabis and hemp industry can look at the Green Revolution as a model for establishing supply chains by focusing on the following key areas:

1. Research and development: During the Green Revolution, significant investments were made in research and development to improve crop yields, disease resistance, and other factors that impacted agricultural productivity. The cannabis and hemp industry can benefit from similar investments in research to develop new strains that are better suited to different growing conditions and have desirable qualities such as high CBD content or low THC levels.

2. Infrastructure and logistics: The Green Revolution also saw investments in infrastructure and logistics to support the movement of agricultural products from farm to market. The cannabis and hemp industry can benefit from similar investments in logistics, such as specialized transportation and storage facilities that can ensure the quality and potency of products during transport.

3. Standardization and regulation: The Green Revolution led to the establishment of standardized agricultural practices and regulations to ensure the safety and quality of food and other agricultural products. The cannabis and hemp industry can benefit from similar standardization and regulation, such as the development of uniform testing and labeling requirements to ensure the safety and consistency of products for consumers.

4. Financing and risk management: Finally, the Green Revolution was supported by significant investments in financing and risk management tools to support agricultural production and marketing. The cannabis and hemp industry can benefit from similar investments in financing and risk management, such as the development of specialized financial products and insurance policies that can help manage risk and support growth in the industry.

The rise of agribusiness (mid-20th century): The growth of agribusiness in the mid-20th century marked a significant shift in the way agricultural supply chains were organized. Large corporations began to dominate the production, processing, and distribution of agricultural products, leading to the development of complex supply chains that spanned the globe. These supply chains involved the integration of raw materials, manufacturing processes, and transportation systems, and were supported by advanced financing networks that facilitated the flow of capital and managed risks associated with agricultural production and trade.

The cannabis and hemp industries can learn from the rise of agribusiness in the mid-20th century in several ways to better stabilize their down turns and avoid market failure:

1. Integration and collaboration: The rise of agribusiness was characterized by the integration of different stages of the supply chain, from production to processing to distribution. The cannabis and hemp industries can benefit from similar integration and collaboration between different players in the supply chain, such as growers, processors, and distributors. This can help to improve efficiency, reduce costs, and improve overall product quality.

2. Advanced financing networks: Agribusinesses in the mid-20th century were supported by advanced financing networks that facilitated the flow of capital and managed risks associated with agricultural production and trade. The cannabis and hemp industries can benefit from similar financing networks, such as specialized financial products and insurance policies that can help manage risk and support growth in the industry.

3. Technology and automation: The rise of agribusiness was also characterized by the adoption of new technologies and automation, such as the use of tractors, combines, and other machinery to increase efficiency and productivity. The cannabis and hemp industries can benefit from similar technological advances, such as automated growing systems and advanced testing and tracking technologies, that can improve efficiency and reduce costs.

4. Standardization and regulation: The growth of agribusiness in the mid-20th century was also supported by the establishment of standardized practices and regulations to ensure the safety and quality of agricultural products. The cannabis and hemp industries can benefit from similar standardization and regulation, such as the development of uniform testing and labeling requirements to ensure the safety and consistency of products for consumers.

The development of futures markets (late-19th century): Futures markets are financial exchanges where buyers and sellers can trade contracts for the delivery of agricultural commodities at a future date. These markets provide a mechanism for hedging against price fluctuations and managing risk and have been critical in the development of global agricultural supply chains. The first futures market for agricultural commodities was established in Chicago in the late-19th century, and similar markets have since been

established around the world.

The cannabis and hemp industries can learn from the development of futures markets by establishing similar mechanisms for hedging against price fluctuations and managing risk. This can be done through the creation of futures contracts, which would allow producers and buyers to lock in prices for future delivery of their products. By doing so, they can protect themselves from sudden price drops and market failures.

When farmers enter into futures contracts, they gain some assurance that they will receive a certain price for their crops at a future date. This can help them to manage price risk and plan their production accordingly.

So what should a Broker be defined as in the cannabis space?

1. Agricultural brokers who work with futures contracts are required to be registered with the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). The NFA is a self-regulatory organization that oversees the activities of agricultural brokers and other commodity futures professionals, while the CFTC is a federal agency that regulates the futures and options markets.

2. To become registered with the NFA, agricultural brokers must meet certain requirements, including passing a proficiency exam and completing a background check. They must also maintain minimum financial requirements and adhere to ethical standards set by the NFA and CFTC.

3. Additionally, agricultural brokers may need to obtain a bond or insurance coverage to protect their clients in the event of financial losses or other issues. This helps to provide reassurance to farmers and other agricultural producers that their transactions are being handled by a reputable and financially stable broker.

To ensure that they are not taken advantage of in futures contracts, farmers need to carefully consider the terms of the contract and work with reputable brokers and exchange operators. They should also make sure that they fully understand the risks and benefits of the contract, as well as the procedures for settling disputes or addressing breaches of contract.

Farmers can also use other risk management tools such as insurance, diversification of crops, and maintaining good relationships with buyers and suppliers to reduce their exposure to risk.

In addition, the establishment of futures markets can help to increase transparency and reduce price volatility in the industry. By providing a public platform for price discovery, futures markets can help to establish more accurate and stable prices for cannabis and hemp products, which can in turn help to attract more investment and stabilize the market.

It is important to note that the establishment of futures markets requires significant regulatory oversight and infrastructure, which may be challenging to establish in the cannabis and hemp industries due to legal and regulatory barriers. Nonetheless, there are already examples of cannabis futures markets being established in some jurisdictions, and it may be possible to expand these efforts as the industry continues to mature.

The development of microfinance (late-20th century): Microfinance is a type of financial service that provides small loans and other financial products to low-income individuals and communities. In the context of agriculture, microfinance has been used to support small-scale farmers and rural entrepreneurs, who may have limited access to traditional banking services. Microfinance has helped to support the development of local agricultural supply chains and has provided a pathway for small-scale farmers to participate in global markets.

The cannabis and hemp industries can learn from the development of microfinance by exploring ways to provide financial services to small-scale farmers and rural entrepreneurs who may not have access to traditional banking services. This can include providing small loans, insurance, and other financial products that can support the development of local agricultural supply chains.

• One potential approach could be to establish microfinance institutions that specialize in providing financial services to the cannabis and hemp industries. These institutions could work closely with local farmers and entrepreneurs to understand their needs and develop tailored financial products that can help to stabilize their businesses during times of market downturn.

• Another approach could be to establish partnerships between the cannabis and hemp industries and existing microfinance institutions. These partnerships could provide access to capital and financial products that can support the development of local supply chains and help to mitigate the risks associated with global markets.

Yes, the development of microfinance in the agricultural sector has provided access to financial services to support small-scale farmers and rural entrepreneurs and promote the development of local supply chains in the past. However, these services required commitments from the farmers, which were recognized by global brands and retailers as the farms' transition from micro or small regional sustenance farmers into commercial agricultural businesses certified to do business on the global marketplace. The cannabis and hemp industries should be looking towards the voluntary certification model as a way to better stabilize their businesses and support the long-term sustainability of their operations through the availability of micro-financing options upon being validated and certified by a trusted 3rd party certifying body.

Overall, the involvement of banks in global agricultural commodities supply chains has helped to create a more efficient, transparent, and liquid market for agricultural products. This has enabled farmers and agricultural producers to access global markets and receive fair prices for their products, while also providing consumers with a diverse and affordable supply of food.

At FS Origins, we are committed to helping businesses in the cannabis and hemp industries navigate the complexities of global supply chains and build sustainable and profitable operations.

Our team of experts brings a wealth of knowledge and experience in agriculture, finance, and supply chain management, and we are dedicated to helping our clients succeed.

Contact us today to learn more about how we can help you build a thriving business in the rapidly evolving world of cannabis and hemp agriculture.