Congress hemp ban raises fears of mass layoffs and black market growth

The hemp industry is bracing for layoffs, production reductions and billions in lost revenue after Congress passed a government funding bill late Wednesday containing a surprise provision that will ban nearly all hemp-derived consumer products.

Hemp, a derivative of the cannabis plant, was legalized in the 2018 Farm Bill for industrial uses like rope, textiles and seed. But the law’s broad definition created a loophole in federal rules on THC — the psychoactive compound responsible for a high — experts said, allowing producers to extract psychoactive cannabinoids from federally legal hemp. Companies used that opening to flood the market with gummies, drinks and vapes capable of delivering a marijuana-like high.

The new ban, tucked into legislation ending the longest shutdown in history, outlaws products containing more than 0.4 milligrams of total THC per container. Industry executives said that threshold will wipe out 95% of the $28 billion hemp retail market when it takes effect in a year.

For reference, a single hemp gummy typically contains 2.5 to 10 milligrams of THC, according to the Journal of Cannabis Research.

“We have lost the battle this time,” said Jonathan Miller, the U.S. Hemp Roundtable’s general counsel. “In effect, this is a total, all out, complete ban on hemp products in the United States.”

The new cap replaces the 2018 Farm Bill’s definition of hemp, which was based on THC concentration and allowed products with less than 0.3% THC by weight instead of total amount.

“We have a year to figure this out but in the meantime you could see losses across the industry if we can’t,” Miller said.

More than 300,000 jobs tied to the hemp economy are at risk, according to Whitney Economics, a hemp and cannabis research firm, from farmers and extractors to manufacturers, logistics firms and retailers.

The ripple effects could hit land use, contracted acreage and equipment financing, as farmers who scaled up hemp cultivation after 2018 could suddenly face canceled or restructured contracts, said Michael Gorenstein, CEO of marijuana producer Cronos Group. States with the biggest hemp infrastructure like Kentucky, Texas and Utah are likely to face the steepest economic fallout, hemp executives said.

“There’s a lot of the small retailers, small businesses and farmers that are relying on hemp sales to survive,” Gorenstein told CNBC. “It’s going to create a lot of pressure when they start losing business, losing jobs and losing crops.”

The crackdown marks a dramatic reversal from 2018 when Sen. Mitch McConnell, R-Ky., championed hemp legalization to create a new national agricultural commodity and economic driver for Kentucky.

But after that bill passed, the absence of federal rules allowed a patchwork market to emerge, with widespread safety issues from mislabeled and untested products to items with potency rivaling recreational marijuana, according to government officials and industry experts.

McConnell and other Republicans argued the new restriction “restores the original intent” of the Farm Bill. Closing the loophole, McConnell has said, is key to protecting his agriculture-policy legacy before his retirement next year.

“This was his [McConnell’s] signature law, the hemp law, and he wanted to correct it,” Boris Jordan, CEO of cannabis company Curaleaf, told CNBC. “Usually the Senate will back a retiring senator, particularly someone as senior as him, as their last action. This was a request by him at the last minute.”

But not all Republicans agree. Kentucky Sen. Rand Paul has sparred with his colleagues for months over hemp and blasted the provision as an overreach that is “killing jobs and crushing farmers,” adding that “every hemp seed in the country will have to be destroyed.”

“This is the most thoughtless, ignorant proposal to an industry that I’ve seen in a long, long time,” Paul said after the ban was passed.

While leaders like Jordan said the legal market will sharply contract from a ban, they caution the consumer demand for hemp-derived THC will not. Studies have shown demand for marijuana and other THC-based products has continued rising in recent years as some consumers move away from alcohol and drink less overall.

Cannabis executives warned that rising popularity could drive billions in black-market sales, where products face no testing, no age restrictions and no tax compliance.

“What this ban is going to do is it’s going to force all those little players right now into the illegal market,” Jordan said. “Companies have got way too much money invested in this and the demand is still there and growing. They [companies] aren’t just going to go away, they’re just going to go into the illicit market and put more people at risk.”

And as products move underground, law enforcement agencies could struggle to trace supply chains, Gorenstein said.

“Bad actors thrive when things disappear from the formal economy,” Gorenstein said.

State and local governments could also lose out on millions in tax revenue tied to hemp sales, Gorenstein and Miller said. Several states use those funds to support addiction services, county budgets and public health programs.

Moving forward, industry leaders argue the only durable solution is federal standards, not prohibition. Many favor a model splitting responsibility between agencies: the Food and Drug Administration for oversight for product safety and the Alcohol and Tobacco Tax and Trade Bureau for taxation and distribution.

Executives have also compared the current environment to the early e-cigarette boom, when products like Juul offered fruity and candy-like cartridges that spread quickly, with uneven oversight, before the FDA intervened.

“Too many people have taken liberties that put the end user at risk,” cannabis company Verano Holdings CEO George Archos told CNBC. “We like the tight regulation. We want the safety of the consumer being set in mind for every product that’s being produced and that’s what we hope is being accomplished.”

In the meantime, the industry is preparing a full-court lobbying push aimed at replacing the ban with federal testing, labeling and age-restriction rules.

“We already have members of Congress introducing regulation bills. We are pledging our support and we are working on the grassroots to get citizens activated around the issue,” Miller said. “We are activating across the sector.”

Simultaneously, the Trump administration is “looking at” reclassifying marijuana from a Schedule I drug — alongside heroin and LSD — to a Schedule III drug. The move would not legalize recreational marijuana, but it would make it easier to sell, advocates said.

“Big changes are expected across the board next year but what they will be could determine the future of investments and the industry,” Gorenstein said.