Pulling the Cork Out of the Processing Bottleneck Slowing the Hemp/CBD Boom
If you want a good place to see the CBD supply chain being built, go to Mile High Labs in Loveland, Colo. As little as a year ago, you could find the warehouse with your nose. The reek of newly legal hemp, which no human (and probably no drug-sniffing dog) could distinguish from its intoxicating sister plant containing THC, wafted from bins of the crop that seemed to be everywhere. Trucks loaded with “super sacks” filled with hundreds of pounds of hemp arrived frequently.
Like the aroma of a busy bakery, Mile High Labs’ pungent terpenes would seem to signal the sweet smell of success for a processor riding the CBD wave. But founder and CTO Stephen Mueller didn’t smell it that way. For him, the odor emanating from the warehouse was the by-product of a haphazard supply chain -- one that was being improvised to turn ever-increasing amounts of harvested hemp into enough CBD to meet a seemingly insatiable demand. “The bottleneck is at the front of the operation, where you have really huge quantities of stuff to deal with,” he says.
Mile High Labs produces CBD distillates and isolates derived from hemp, which it sells to manufacturers of health and wellness products. The demand for CBD is huge, and there is a lot of hemp available. The problem is, Mile High and similar labs have no use for heaps of dusty crops. What they need is the crude oil squeezed from the plants in the initial stage of processing. Mueller simply could not move raw hemp through his warehouse and get it through that first extraction step as fast as his lab could perform the process it specializes in -- refining and isolating the crude oil into a marketable product. “The logistics were not a big deal at the beginning, when we were buying 10 or 20 pounds [of hemp],” Mueller says, “but when you’re processing 10 or 20 thousand pounds a day, it is just a huge amount of material to move through the plant.”
He saw a frustrating inefficiency that was costing him money. And he knew he had to fix it. His eventual solution, backed by $35 million in Series A funding, is the new Mile High Monster (not to be confused with the Denver Broncos’ mascot), a modular stand-alone processor designed for transport and assembly on a partnering farm. The beauty of it all is that the Monster moves the whole first extraction phase to the actual farms selling hemp to Mile High Labs -- which, in turn, is no longer in the business of warehousing.
A Cannabis Transplant
Like nearly everyone in the cannabis business, Mueller started elsewhere. He worked in semiconductor research before moving into electrical engineering, first with Agilent Technologies and then with Teledyne Technologies, where he managed the applications engineering group. The steady, uneventful pace of his career is what got him looking for other opportunities. “You come out of college and get a job somewhere, then five years later, you’ve gotten a couple of raises and a promotion, and all of a sudden you realize you’re getting really pigeonholed,” he says.
Late in 2015 Mueller began exploring the cannabis business. By the spring of 2016, he had decided to tackle the challenges of producing the pharmaceutically pure compound the market clamored for. “Taking hemp and turning it into this CBD ingredient was really a technical engineering challenge,” he says, “and I am somebody who likes technical challenges.”
In August 2016, Mueller quit his job and opened Mile High Labs. He worked alone for three months before making his first hire (who didn’t last, but his second hire, a maintenance technician, is still with the company). He quickly discovered that not all the challenges would be technical. To start with, where, exactly, could a person buy hemp, and how much should it cost? The crop had been legal only starting in 2014, and then only under state-supervised pilot programs. (The Farm Bill of 2018, which made hemp a legal crop nationwide, was still two years away.) Eventually, a neighbor introduced Mueller to a farmer who sold hemp for $300 per pound. It seemed like a lot of money, but there was no easy way to determine the prevailing prices. He bought 10 pounds.
As Mueller continued buying hemp, he found that farmers wanted to sell their entire crop when it was harvested; they weren’t confident that strangers promising big prices down the line would actually complete the purchase. But Mueller and other buyers didn’t want to come up with all that money at once. Even if they had the cash, they’d be left with a massive supply of hemp to store and use gradually, until the next harvest. “The challenge was to make those relationships,” Mueller says, “and structure contracts so you can draw on these supplies throughout the year.”
The Monster started to take shape.
An imposing multimillion-dollar machine, today the Monster is a sort of instant hemp industrial park installed on a partner farm. It works like this: Under an agreement, Mile High Labs assembles, owns, and operates the processor; the farm provides a concrete pad, water, and power. On the technical side, it’s a supply-chain game changer.
A single Monster increases Mile High Labs’ production capacity by more than 500 percent. It does this by being able to process the equivalent of 50 acres of harvested hemp per day and reduce it into about six barrels of crude hemp oil. That oil is taken in a single van (versus several trucks hauling tons of biomass) to Mile High Labs, where it is further refined. Mueller estimates that the maximum daily output of each Monster provides about one million “product units” of CBD for sale to the manufacturers of health-and-wellness products. Importantly, the machine is GMP-certified (meaning it meets the standard for “good manufacturing practices,” which ensures that ingredients are not contaminated during processing). “Big companies won’t do business with you if you’re not GMP-certified,” Mueller says.
Mueller also designed the Monster with an eye toward building relationships. The arrangement with Mile High Labs assures farmers that their buyer will come through, relieving the pressure to sell the entire crop up front. In addition, it means they don’t have to transport tons of hemp to a lab facility. And Mile High offers them incentives to secure the
harvests from neighboring hemp farms.
An Answer for Farmers
Around the time Mueller was getting ready to launch Mile High, workers at Shi Farms in Pueblo, Colo., had their hands full planting high-CBD-hemp clones in 40,000 square feet of greenhouses for the 2016 crop. Tending that much hemp requires a lot of work. But finding a reputable lab to process the contents of those super sacks was almost harder. “The biggest challenge was finding a way to extract [the oil] from all this material we had,” says the farm’s operations director, Drew Ferguson. “We’d drop this biomass off at labs and never hear back, or it took a long time, or the end product was not good enough.”
Late in 2016, Ferguson and his partner, Steven Turetsky, met Mueller at Mile High Labs, a three-hour drive away, which proved lucky for the sale of their much larger 2017 crop--15 outside acres. When it was time to harvest, each plant was cut down by hand and hauled to barns and greenhouses to be hung for drying, then shucked -- again by hand -- to remove the leaves and flowers for packing into super sacks. “John Deere doesn’t make a hemp harvester, at least not yet, and certainly not for the higher-CBD hemp,” says Ferguson, “so our whole team was out there cutting each plant one by one.”
Shi Farms (shi doubles as an acronym for “sustainable hemp initiative”) has expanded rapidly since then. This year they plan to harvest some 900 acres of hemp -- 228 acres at the farm in Pueblo, another 450 acres on other Colorado farms, 150 acres on five farms in Oklahoma, and up to 80 acres in Nevada--and will pilot a greenhouse in New York.
Thanks to that meeting in 2016, the entire crop will be processed by the Monster being assembled on Shi Farms. According to Ferguson, the arrangement with Mile High Labs encouraged farmers in the cooperative to plant more because they know their harvest will have a buyer with a GMP-certified facility. “It has let us grow, because we know we have the extractor on the other side,” he says. “I’ve met a ton of people gung-ho to grow hemp, but they want to know what to do with it afterward. As Mile High grows and provides this extraction capability, the farmers will know they will have a customer.”
Riding the Next Wave
Today Mueller is installing another Monster on a different farm in Colorado. He estimates that each processor, running year-round, could handle the harvests of between 10,000 and 15,000 acres of hemp, depending on variables in yield per acre. The roughly 78,000 acres harvested across the entire country in 2018, according to the advocacy group Vote Hemp, wouldn’t support a huge population of Monsters. But the 2018 crop was three times larger than in 2017, and there is every indication (though little hard data) that much more acreage is being planted for the 2019 harvest.
That recent growth, however, raises another issue. The market for CBD is booming, but due to the abundance of hemp, the price of its oil is dropping. Ferguson says they were paying $15,000 for a kilo of CBD two to three years ago when he was at his previous job, an edible company called Dixie Brands; in early 2019, a kilo of high-quality CBD was going for only around $7,000.
That’s still big money, but the trajectory is clear. At the start of CBD’s popularity, very high prices enticed farmers to make the switch to hemp, even if they had to harvest it with 19th-century methods. Those prices also made it possible for processors to get started -- so what if they had to use improvised equipment? But if the trend is reversing, Mueller isn’t worried. “We might pay $30 a pound for hemp,” he says. “A year ago, it might have been $60. The prices will go down as people get more efficient, but as that happens, the market will develop for other hemp products. [The Monster] can be used to extract all sorts of stuff. We are working with people on CBG, a different cannabinoid. There are [many] compounds in the plant for nutraceutical or pharmaceutical uses.”
Ferguson also sees new markets opening up. About 90 percent of the hemp plant is leftover biomass after harvesting the flower for oil, he says. His team currently works the remaining biomass into the farm’s dense clay soil, but he believes it will eventually find ever more profitable secondary uses. “Can we turn it into pellets for stoves? Can we spread it back on the field? There is a lot of opportunity with this leftover biomass,” Ferguson says. “I’m guessing we’ll soon see companies collect this from farms to monetize somehow.” A tantalizing prospect for farmers is a hemp strain that yields flowers high in CBD (or whatever cannabinoid consumers demand) and leftover fiber useful for bioplastics, paper, textiles, or other items. “Those ancillary products may be the future of the hemp industry,” Ferguson says.
Back at Mile High Labs, with two Monsters already built, Mueller sees the potential for placing them far and wide. But he’s in no hurry. “We will see what the response is,” he says. “People are starting to grow hemp all over the world, but we don’t want to put 50 out there before we know the size of the market.” For now, he’s busy taking all that space where they used to warehouse smelly hemp and converting it into clean, new processing facilities.