power your advice

Industrial Hemp: Discussing a Risky, But Potentially Lucrative Niche With Clients

As more states wade into the waters of legalized marijuana, be it on the medicinal or recreational fronts, chances are your clients are consuming an increasing amount of information about cannabis-related investments.

Usually, those investment options consist of penny stocks, some small- to mid-cap fare trading on major U.S. exchanges or exchange traded funds (ETFs), an asset class still sparsely populated, but growing in cannabis investment circles. More often than not, investors are hearing about the cannabis industry's exponential growth prospects and the potential to rapidly grow account balances with some stocks in this space.

Other investors may have moral equivocations about cannabis but remain interested in the related investment opportunities. In this case, becoming somewhat about knowledgeable about industrial hemp could serve advisors well when discussing cannabis with more discerning clients. Hemp is a cannabis byproduct that does not offer a “high.”

Rather, hemp has myriad industrial applications, including being used in some food and beverage products, the manufacturing of furniture, paper, clothing and building materials . Rest assured that hemp is now legal at the federal level thanks to a provision contained in the 2018 Farm Bill.

Industrial Hemp Opportunity

Data confirm that industrial hemp market is booming.

“The global industrial hemp market size was estimated at $3.9 billion in 2017, expanding at a CAGR of 14.0% over the forecast period (since 2014),” according to GrandView Research . “Growing demand for hemp-based food products including cooking oil, dairy alternatives, flour, and salad dressings is expected to drive market growth. In addition, rising demand for bakery products such as bread and cookies is expected to drive the market.”

In the U.S., industrial hemp was a $1.1 billion business last year, but that figure is expected to surge to $2.6 billion by 2022. More aggressive forecasts claim the global industrial hemp market could swell to $26.6 billion by 2025, indicating there are other players besides the U.S. in this game.

Clearly, industrial hemp is a growth market, but knowing that is only half the battle when it comes to having substantial conversations on this topic with clients.

Industrial Hemp Investment Angles

For some risk-tolerant investors, the hemp market is home to ideas that would typically be considered alternative investments. Those include joining investor groups that back hemp factories or farmers or investing in hemp-related real estate. Think along the lines of hard assets that while potentially rewarding, generally are not liquid assets and therefore not suitable for each and every client.

Getting to stocks, many of the dedicated industrial hemp names out there are not listed in New York. Some trade in developed markets, such as Australia and Canada, and are accessible to American investors. Of course, it is crucial advisors warn clients about the transaction costs and tax implications of buying stocks listed outside the U,S.

This gets us back to more traditional cannabis equities. Several of the Canada-based companies that trade in New York are looking to use industrial hemp as their entry into the U.S. market, using hemp to position themselves for profits if and when the federal government relaxes its stance on cannabis.

Chances are some of your clients are already familiar with a few of these names. In most cases, NASDAQ or NYSE listed cannabis stocks are small caps or, at best, small mid-cap names. When discussing risks associated with investing in small companies, advisors need to be mindful in discussing the growth vs profit orientation in small companies from the investment risk perspective.

Related: Geothermal: The Under-Appreciated Investment Opportunity in Alternative Energy