The cannabis plant’s unsteady transformation from outlaw weed to mainstream commodity is poised for another step forward as entrepreneurs lay plans to launch hemp derivatives.
Seed CX of Chicago has applied to a US regulator to become a trading venue for financial contracts on industrial hemp, the marijuana cousin found in such products as fabric, shampoo, plastics, building materials and food.
Brian Liston, Seed CX president, hopes to offer three contracts tracking markets for hemp seed, whole hemp plant and hemp plant extract and wipe away what he called a “stigma” for the commodity.
“We will be successful when it is normal and when it is boring,” Mr Liston said.
Hemp, like marijuana, is a type of cannabis. Cultivation in the US has long been hamstrung by federal laws classifying both varieties as controlled substances.
But the hemp market got an official imprimatur in 2014, when US farm legislation legalised a new category of “industrial hemp” in states that allow it to be grown.
Industrial hemp is defined as a cannabis plant with less than 0.3 per cent level of THC, the ingredient in marijuana that makes people high. Hemp does contain cannabidiol or CBD, which is thought to have potential therapeutic benefits.
At least 27 states have passed laws related to industrial hemp, according to the National Conference of State Legislatures. Mr Liston said Kentucky, Tennessee and Colorado accounted for most of last year’s crop. Recorded US hemp production previously peaked at more than 150m lb during the second world war.
Seed CX has filed a draft application with the US Commodity Futures Trading Commission to become a “swap execution facility”, an exchange-like trading platform established under the 2010 Dodd-Frank financial reform, people familiar with the matter said. The regulator did not respond to a request for comment.
Mr Liston and his co-founder, Edward Woodford, hit upon their idea while studying for master’s degrees in finance at the Massachusetts Institute of Technology. “The cannabis industry is fascinating, from every perspective,” Mr Liston said. “It’s sort of this untapped, hard-to-access industry that literally needs every sort of service, and a lot of large businesses don’t want to be seen entering the space.”
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Even if it wins over regulators, Seed CX would also need to attract traders. Futures and similar derivatives contracts tend to struggle if they are not based on an active underlying cash market, something Mr Liston said he also seeks to cultivate.
Michael Gorham, finance professor at the Illinois Institute of Technology, was sceptical. “The overwhelming majority of futures contracts die within the first five years of being listed,” he said.
Marijuana has also been gaining legal status in the US in recent years. Some 86 per cent of Americans now live in states that allow some level of medical or recreational use of the drug, according to ArcView Group, an investor network. Legal sales rose 17.4 per cent to $5.4bn in 2015 and are projected to reach $6.7bn this year, ArcView estimates.
- Copyright The Financial Times Limited 2016
