Costs

http://extension.oregonstate.edu/catalog/html/sb/sb681/#Seed%20Production

HEMP PRODUCTION BUDGET:

Net return to growers of industrial hemp will depend on several factors including cost of production, yield, and the market value of the harvested crop. Many of the production costs for industrial hemp will be quite similar to other crops grown in the region. Table 5 is a possible industrial hemp production budget that was developed using typical costs associated with irrigated field corn in the Pacific Northwest (Cross and Smith, 1991). These include not only the variable production costs such as tillage, seed, and fertilizer; but also the fixed costs including insurance and amortization of equipment costs.

HempCropCosts

As with any cost analysis, many assumptions have been made to produce this budget, and a different set of assumptions will produce different results. In this example, production practices were chosen to maximize stem dry weight yield for production of composite wood products or paper. While these are relatively low value end uses, they may also take advantage of existing regional production facilities. Maximizing production of high quality textile fiber would require alteration of some practices such as increasing seeding rate (and plant density) to produce more slender plants with higher fiber content, but may produce lower overall dry matter yield. The assumed dry matter yield of 5 tons/acre is consistent with the higher average yields reported in western Europe using well-adapted hemp cultivars. Currently the price for baled, dry hemp stems proposed by an Oregon hemp composite manufacturer is $50 per ton. This is similar to prices currently paid for whole stalk kenaf in the southeastern U.S. (Noblitt and Bitzer, 1995). Since PNW wood chip prices have been rising over the past decade, and this trend is expected to continue; the assumed price of $75 per dry ton was used for this analysis. The assumed cost of hemp seed is the average of prices reported for commercially available European hemp varieties, however, the cost of shipping from Europe was not included (De Meijer, 1995). The cost of locally produced, open-pollinated seed may ultimately be somewhat less than the assumed cost in this model, however, seed from well-adapted, elite lines or hybrid seed will probably cost more. Fertilizer application requirements can vary widely over the region depending on many factors, and a moderate application rate was chosen. Harvest costs are based on current cost of operating silage corn harvesters (8 to 10 tons of dry matter per acre) as well as local cost of raking and baling hay and grass seed straw. Crop storage costs have not been included in this budget, and should be added if on-farm storage is anticipated. In addition, no costs associated with retting, such as additional irrigation, are included. Trucking costs are based on relatively close proximity to storage and processing facilities. While some of these costs may be covered by the hemp processor rather than directly by the grower, all costs of production will ultimately be reflected in the price buyers can pay for the raw material.

The purpose of this budget is to provide a worksheet that will allow growers and researchers to evaluate the economic potential of hemp under their local conditions. Costs, particularly fixed costs, can vary widely among growers depending on their particular farming operation. Land prices in the PNW are quite high compared to some other regions and are increasing rapidly under the pressure of urban growth. Growers in summer rainfall areas of North America will have lower costs without the requirement for irrigation but may be at greater risk of yield reductions due to moisture stress. From this preliminary budget, however, it is apparent that either hemp yield or hemp prices must be substantially higher than current assumed levels for hemp to be economically viable for PNW growers.

Since both hemp yield and price may be quite variable depending on production conditions and the value of the end product, net return to the grower at various yield and straw price levels is shown in Table 6. Yield levels in this table represent a range from relatively low productivity that might be expected using poorly adapted germplasm under less than optimal conditions to high productivity that can result from growing well-adapted varieties under good conditions. Price levels span the range from current low prices for competing raw materials (wood chips) through very high prices that may be experienced during raw material shortages. Other assumptions in the spreadsheet did not change.

Table 6. Net return per acre from hemp production at various price and yield levels.
Yield (tons/ac) Price ($/ton)
50 75 100 125

3 (431.70) (356.70) (281.70) (206.70)
4 (399.00) (299.00) (199.00) (99.00)
5 (366.30) (241.30) (116.30) 8.70
6 (333.60) (183.60) (33.60) 116.40
7 (300.90) (125.90) 49.10 224.10

Production of high value specialty products from hemp may allow buyers to offer higher farm gate prices for unprocessed hemp. Higher raw material prices will obviously improve the economic outlook for hemp production. Higher quality end products usually require more stringent quality control in all phases of raw material production, storage, handling, and processing compared to bulk commodities, which may increase costs.

Current demand for hemp seed as a source of oil and as a food ingredient is strong, and bulk hemp seed prices are quite high ($0.45/lb). Dual-purpose (oilseed and fiber) hemp production may increase grower returns by providing income from both seed and straw sales. Possible net returns from dual-purpose hemp production at various seed yields and prices are shown in Table 7. Returns were calculated using a spreadsheet similar to the one used in the previous example. The cost of combine seed harvest ($20/acre) was added to the variable costs. Hemp straw yield was assumed to be 2.5 tons/acre with a price of $75 per ton. Other assumptions were identical to those used previously.

Table 7. Net return per acre from dual-purpose hemp production at various seed price and yield levels. Straw yield is assumed as 2.5 tons/acre at $75/ton.
Seed Price($/lb) Seed Yield (lb/acre)
500 750 1000

0.30 (255) (181) (106)
0.35 (231) (143) (56)
0.40 (206) (106) (6)
0.45 (181) (68) 45
0.50 (156) (31) 94
0.55 (131) 7 144

From this analysis it is apparent that both high seed yield and high seed prices are required to provide positive returns to growers from dual-purpose hemp production. Hemp seed prices in the upper range shown in Table 7 may be justified for some high value end products, however, most current hemp seed buyers are actively seeking lower priced sources of bulk seed. Hemp stalks harvested following seed production are generally highly lignified and contain lower quality fiber than stalks from fiber production fields. As a result, stalks from dual-purpose hemp production usually sell for a lower price than stalks from fiber production fields and are unlikely to contribute substantial additional net returns to growers.

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CONCLUSIONS:

Industrial hemp production has recently been the subject of increasing study around the world. In the PNW, regional paper and wood products companies are becoming more interested in agricultural fiber sources to meet their raw material needs. Hemp is one among many possible agricultural products that could supplement or replace fiber currently supplied by foreign and domestic wood species. Although production of many products is technically possible using hemp, acceptance of hemp by industry will depend on the specific properties required for particular end products as well as price and availability of hemp as a raw material. Several factors must be considered when assessing the feasibility of industrial hemp production in the Pacific Northwest.

Hemp is a summer annual crop that is well adapted to warm growing conditions, an extended frost-free season, highly productive agricultural soils, and ample moisture through the growing season. Previous research and experience indicate that hemp is well adapted to growth in the corn belt of the U.S. Midwest. The temperature and soil requirements of hemp can probably be met in the existing agricultural areas of the Columbia and Snake River basins and to a lesser extent in the lowland areas between the Coast Range and the Cascades from the Rogue Valley to Puget Sound.

Because of the predominantly winter rainfall pattern in the PNW, industrial hemp production will almost certainly require supplemental irrigation throughout the region to maximize production. The requirement for irrigation will increase production costs and require that hemp be grown on some of the most productive soils in the region, in direct competition with the highest value crops in the PNW. The use of surface or ground water for irrigation also carries environmental costs that must be considered.

Current industrial hemp production in Western Europe is economically feasible primarily as a result of substantial direct subsidy of production by the EC. Since government subsidy of industrial hemp is extremely unlikely in the U.S., a thorough understanding of hemp production practices and costs is essential to determine the viability of fiber, seed, or dual-purpose hemp production.

Total biomass yields will need to be substantially greater than those previously recorded in other countries for industrial hemp to be economically feasible in the PNW at current prices. Since growing hemp, even for research purposes, remains under severe legal restrictions, direct measurement of crop performance using current agricultural technology has not been undertaken, and hemp yields under PNW growing conditions are unknown. Higher yields may be attained by improvements in genetics and cultural practices, but these will require considerable investment of time and resources. Although some high-value end products such as specialty papers or textiles may allow a higher price for hemp stalks, the costs associated with fiber separation and processing may preclude a substantial increase in the raw material price to the grower. Even when these factors are considered, PNW growers may remain at an economic disadvantage compared to Midwest growers who have lower land costs and can produce hemp using available summer rainfall rather than irrigation.

Innovation in harvesting equipment and materials handling is still required to improve the feasibility of hemp production. One of the greatest limitations of annual fiber crop production on a large scale may be the relatively short harvest interval imposed by the onset of fall rains throughout the PNW. This limitation may prove particularly challenging for production of hemp seed or later maturing fiber hemp varieties in the region. The logistics of handling the volume of material required to replace even a small portion of the wood fiber resources currently being used are far from trivial.

Even if hemp is brought into commercial production in the region, it will occupy only a portion of the limited irrigated acreage available in the PNW. As a result, hemp will only provide enough raw material to meet a small portion of current fiber demand in the region.

Significant quantities of agricultural residues such as cereal and grass seed straw are widely available in the region as by-products of existing agricultural enterprises. Grain and grass seed production levels have been quite stable over many decades, and straw from these crops is available at relatively low cost throughout the PNW. While straw will compete with hemp as a primary raw material for paper or composite wood products, there may be opportunities to improve the properties of straw-based products with the addition of hemp fiber.

There is little doubt that industrial hemp can be successfully cultivated in some areas of the Pacific Northwest. Application of agricultural technology such as intensive plant breeding and improvements in harvesting technology could increase hemp yield and enhance production efficiency. Development of these improvements will take time and resources. Until legislative restrictions are removed from hemp, it is unlikely that investments in improved production technology will be made or that the required industrial infrastructure will be developed.


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