Editor's note: The Drug Enforcement Agency is rejecting the argument that it has no authority over hemp regulation. The DEA's full response is included in the updated story below. This story was originally published Oct. 20.

There is a rising consensus from federal small business advocates, state regulators, and industry groups that, for the industry to thrive, the U.S. Department of Agriculture (USDA) must do three things:

• Reduce uncertainty in its regulatory standards, including handling of crops that exceed THC thresholds
• Provide greater flexibility with issues such as testing certification, and
• Reduce the Drug Enforcement Agency’s (DEA) influence on hemp regulatory policy

Stakeholders’ views are coming into focus as public comments have been submitted for the USDA’s Domestic Hemp Production Program Interim Final Rule and submitted regarding the DEA’s amendments to the Controlled Substances Act regulating hemp and cannabidiol. The DEA’s public comment period ends today, and the USDA’s public comment deadline was on October 8.

SBA Weighs In

One of these commenters, the U.S. Small Business Administration’s Office of Advocacy (Advocacy), plays an essential role in federal rulemaking. This independent office within the agency may not necessarily reflect the SBA or the Trump Administration's views, but other agencies must pay heed to its views. The Small Business Jobs Act of 2010 dictates that agencies must give every possible consideration to Advocacy’s comments regarding regulations’ impacts on small businesses.

Advocacy argues in its October 8 comments that the uncertainty in current USDA standards “stifles small business’ participation in the industry.” That is especially true, the office says, given the “significant startup costs” these businesses face, including land, seeds, equipment, and labor.

“Many farmers have chosen not to grow hemp this year until they are certain about what the requirements are, and whether they can produce compliant crops without the risk of a total loss of their investment due to mandatory destruction of hot crops,” Advocacy says. “In some instances, the rules are so stringent that they feel as though they are being set up to fail.”

According to Advocacy, these stringent rules include the requirement to destroy all their crops that exceed the 0.3% THC threshold, also known as “hot” hemp. The current rule requires the destruction of these crops. However, the 2018 Farm Bill only mentioned “disposal” of non-compliant crops and called for plans to include a date by which a farmer could correct a violation. This discrepancy is harming the industry, Advocacy says.

What Advocacy and other stakeholders want is the flexibility to remediate the crop and retest to see if it is below the THC threshold. If the yield is still “hot” or above the 0.3% threshold, then Advocacy says growers should have the option to dispose of the crops. This option would allow some use for the non-compliant hemp, such as fertilizer or bedding.

Not allowing this flexibility can be economically devastating to growers, effectively bankrupting many of them. And, according to its figures below, “for a small farmer, the risk of having to destroy their crop if it is non-compliant may be too high to justify growing hemp at all.”

State Agriculture Departments and Hemp Growers Association Comment

The National Association of State Departments of Agriculture (NASDA) agrees with the need for certainty while also emphasizing in its October 8 comments support for regulations that provide “flexibility to state authorities to implement regulatory plans that work best for them.”

NASDA also calls for flexibility regarding where farmers can test their crops’ THC levels. The USDA rule requires that testing at a DEA-registered laboratory. However, NASDA and other commenters argue that this is not feasible as there are too few DEA labs throughout the nation. This lack of flexibility undermines growers’ ability to run their businesses, NASDA says.

The U.S. Hemp Growers Association agrees with NASDA, with its Executive Director and Chief Operating Officer Caren Wilcox noting that there are only 66 such labs in 27 states. There are not enough approved labs to meet growers’ needs, she adds. As a result, getting crops tested is more expensive and time consuming for growers than it needs to be. The Hemp Growers Association submitted their interim final rule comments on September 7.

Commenters Target DEA, Agency Responds

Many commenters point to the DEA’s influence in this rulemaking as a source of many problems, arguing that it still considers hemp as an illegal substance. However, the 2018 Farm Bill “removed hemp from the Controlled Substances Act,” making DEA’s involvement unnecessary, NASDA says.

Concerns with the DEA’s continued role in regulating hemp is a theme throughout public comments. While the USDA “wants to do the right thing by farmers,” the DEA interferes in that effort, Jonathan Miller, General Counsel for the U.S. Hemp Roundtable, says.

The Roundtable, which represents a group of hemp companies and organizations, is actively telling its members “to tell the USDA to get the DEA out of [regulating hemp], that Congress intended to get them out of this, and to focus on what’s good for farmers.” The group submitted its interim final rule comments to USDA on September 15.

There are signs that the USDA is moving away from the DEA. For example, this year, the agency said that growers could get their crops tested at non-DEA certified labs. And Wilcox believes that the USDA will be able to negotiate those same terms again. That outcome should be a big step towards more independence from DEA, she adds. 

Miller is hopeful that the USDA will use criticisms of the DEA’s role with hemp regulation to justify removing DEA from the process. Public comments should give the USDA the ability to tell DEA officials, “Listen, this is what the public wants, we need to do it,” he says.

While the USDA declined to reply to the public comments, the DEA did respond, rejecting the notion that it has no legal role in hemp regulation.

"The Farm Bill requires USDA to consult with the Attorney General on the promulgation of regulations and guidelines. The Attorney General has delegated his functions under the CSA [Controlled Substances Act] to the administrator of the Drug Enforcement Administration (28 CFR 0.100).  Therefore DEA and USDA are following the law," DEA spokesman Michael D. Miller tells Hemp Grower. 

"The DEA works closely with its interagency partners on any regulations affecting the Controlled Substance Act and remains committed to working with our partners at USDA in areas that impact the CSA.  The Farm Bill exempted any product derived from a Cannabis sativa L. plant with a delta-9 THC content of less than 0.3% by dry weight basis. Therefore, products that do not meet that definition as stated in the Farm Bill remain controlled by the CSA. The Farm Bill did not relieve the DEA of its obligation to enforce the CSA and products still controlled. Our engagement with the USDA is necessary as it relates to those circumstances," Miller adds.  

The USDA is expected to publish its final rule in early 2021.

Thomas Hobbes famously stated that life can be “solitary, poor, nasty, brutish and short.” Hobbes could have well been predicting the state of the 21^st century cannabis industry, with all its brutishness and nastiness. But we hope this article puts us in solidarity with you and other cannabis business owners, mitigating the solitude, and we hope our advice results in your experience in cannabis being neither poor nor short.

RELATED: 6 Cannabis Business Lessons We Learned Too Late

1. BUDGET FOR THE UNKNOWN

Do not forget to budget for the “Oops, we forgot about...” In our prior article we emphasized understanding the revenue and expense cycles of the particular verticals you operate within (grow, processing, retail, etc.) and to pull them together into a pro forma. Almost every significant expense line will have unanticipated situations come up.

Let’s say you are designing an indoor grow and you are ready to install all your lighting and air management equipment. Your electrician says you need to upgrade the electrical capacity to handle all the equipment you identified. This could easily be a $50,000 additional expense.

Or, as another common example, labor expenses are often underestimated and can drain your cashflow before you start monetizing your crop. If, for example, you are delayed in planting your crop or processing by only a few months, your payroll budget still needs to cover the people you already hired. When doing your pro forma, and before you give any rosy scenarios to investors, it is best to add an additional six months of payroll expense as a “contingent payroll cost” (aka cover your assets (CYA)).

Another consideration for extraction operations: You will be working with highly tuned pieces of equipment that do wear out. A failed compressor, pump or chiller can easily take your machine down for a day or two—which is precious processing time. Budget cash to purchase extra key components to keep on hand—items that may otherwise have to be ordered or reconditioned before you can again get up and running.

2. VERIFY ALL INPUTS INTO YOUR DECISION MAKING

In our prior article we warned against trusting experts; you can apply that idea to your actual decision making.

Everybody is eventually wrong at some point in their cannabis journey. We’d even go so far as to say everybody will be wrong in a very big way at least once. “Everybody” not only includes you, but less intuitively, this lesson includes everybody else internal and external to your core management team. Be very careful of internal and external sources of expertise that advise by assertions. Assertions are dangerous, because if they are delivered with a sense of certainty you may just believe them if you trust the person providing the assertion. People who operate by assertion usually know less than they assert (a term for this, coined by authors Peter Boghossian and James Lindsay in their book “How to Have Impossible conversations,” is the “Unread Library Effect).

All information going into your management team’s decision making needs to be verified and re-verified. One of your best management skills is that of a highly skilled journalist. Such journalists try to have more than one source for their information—they corroborate the information they receive.

3. DON’T AVOID BORING ADMINISTRIVE TASKS

Engineered Extracts

Paperwork and administrative activities can become boring. It takes a special individual to be wired for the constant battle of fighting back against burial by paperwork. It is all boring until the moment there is a problem—then suddenly an existential crisis makes paperwork the opposite of boring. Crisis can include compliance issues around licensing, track-and-trace systems, accounting, payroll, insurance of all kinds, property taxes, payroll taxes, income taxes, warranties, standard operating procedures (SOPs), contracts of all kinds, on and on and on. 

When companies start out, they necessarily put paperwork related to some of those areas on the back burner. They say: “Why do we need SOPs? It is just me and my buddies. We’ll get to that later.” Or, “Insurance in cannabis is so expensive, we’ll probably never need it.” Well the fallacy of that position has again been cast in the spotlight given all the recent fires in the Western states. How many times have you heard someone say they are operating on a handshake deal? How many times do you think these deals work out? Answer: practically never.

One of the most valuable individual(s) you will add to your team is someone with administrative skills. These will be dedicated individuals or key management members who take on the admin duties. Consider them the frontline workers of your company. The company will not exist in the future if all the administrative stuff is not complete. Don’t let the avalanche of paperwork bury your business.

4. STOP ADVOCATING FOR FEDERAL LEGALIZATION RIGHT NOW

There is incessant talk about federal legalization needing to happen immediately.  But we believe that when federal legalization does come, the floodgates of competition will open. Especially if you are a small or mid-size cannabis company, you need as long a runway as possible to get on solid footing and to make yourself a survivor, either as a contender to buy other firms or as a target of a purchase. Each state has struggled with getting legalization correct. While you are dealing with these challenges, you don’t need an overlay of federal challenges to your survival. 

So, what do you advocate for? Advocate for decriminalization, not federal legalization. Advocate for the repeal of IRS Tax Code Section 280E.

Finally, we should all be advocating for the expungement of past criminal records related to cannabis on principle alone.  

5. WHAT KIND OF BUSINESS STRUCTURE SHOULD YOU BUILD?

This is the kind of question that can be hard to ask yourself, especially if you have your heart set on only being in retail or being “the best grower” ever or geeking out permanently with your buddies extracting oil and distillate and hoping to scale to stay in business.  Our admittedly biased opinion is that you have to build some kind of vertically integrated intrastate business.

We don’t have the perfect template, but we define a vertically integrated cannabis business as one in which you are in at least three verticals. For example, you have a grow, a processing division and a retail outlet. Or maybe you have a grow, a distribution business and an intellectual property licensing business. The idea is that each business has its own revenue cycle (see our previous article) and the whole is greater than the sum of its parts. With multiple opportunities to capture margin, why risk everything on one market segment?

Say you own a grow operation and you can wholesale your flower at $1,500 per pound. Let’s assume you don’t have any commission charges for distribution. Now, if you owned a retail shop, you can sell that same pound of flower, broken down into 1/8ths for double or triple the $1,500. You also could create and sell your own oil and distillate without the tolls charged by contracting such services.

We can go on and on with examples, but the important idea is to think through what the long term game plan is. As we noted above, we believe federal legalization will be an extinction event for most cannabis companies. By being vertically integrated and managed well you will become a target for purchase by a much larger firm; or you become a target for investment allowing you to scale your dream. Long-term, there will be standalone firms in each vertical, we grant that outcome. But the standalones will be so large they will basically be part of oligopolies in each vertical. They will serve their purpose, but they won’t create much diversified value. We believe more value will be created per dollar invested in a vertically integrated company than a vertical one only and vertical integration will increase your survival odds.

6. BE AWARE OF WHIZ BANG TECHNOLOGY

Automation, smart devices, artificial intelligence, sensors, remote controls, etc., are all great ideas, and in a perfect world you would have an unlimited budget to try out all these productivity- touting applications.  However, balancing the appeal and benefits of technology with your financial bandwidth is essential. As is exploring any technology’s long-term viability. Choose your initial equipment wisely.  Do your due diligence and talk to actual people who are running the equipment you are looking at to learn about benefits and any specific issues with the equipment.  

IN CONCLUSION

We offer these lessons as the result of our own learning curve. Cannabis is susceptible to the “shiny object syndrome” in that it is easy to get distracted by activities and business deals that are not core to your long-term success. This industry is a slog. The more the slog you endure, the stronger and deeper you build the foundation of your business and elevate your chances for success. As we noted in our prior article, we touched upon the concept that a chain of objective successes is the result of a multiplication of probabilities. And learning from others is the cheapest way to increase any and all of your objectives’ probability weightings.

Loren Picard is CEO at High Desert Flower Inc. in Oregon.

Andrew Olsson is vice president at High Desert Flower Inc. and is the co-founder of Engineered Extracts LLC, also in Oregon.