Seed CX has constructed the first industrial hemp derivative contracts, which will be traded on its platform, subject to regulatory approval by the CFTC.
Edward Woodford, CEO at Seed, says: “We are focused on risk mitigation tools for the industry including crop insurance and derivatives hedging capabilities. One of the key steps to this process is helping to create an active cash market and generate economic research.”
The contracts have been developed in conjunction with research conducted at Harvard Law School, assisted by faculty at MIT’s Sloan School of Management.
Woodford says: “We are excited to have developed the world’s first industrial hemp derivative. We have worked closely with hemp farmers and processors throughout the US, who want access to important hedging tools to protect this growing agricultural commodity.”
Active on a number of national and state hemp business associations, the Seed CX founders have played an important role in the development of the national hemp industry. after it was made legal to cultivate in the USA with the enactment of the 2014 Farm Bill Act.
Woodford says: “These are products that not only viscerally excite people, but serve a strong economic purpose for end users. This is a market with a total addressable production value, in its first year of legal cultivation, of over USD1.5 billion annually.”
According to the Congressional Research Services 2015 report on hemp, “the global market for hemp consists of more than 25,000 products.”
Woodford says: “Farmers are increasingly looking for security as they diversify into different and more profitable crops, and in particular former tobacco growers are transitioning towards hemp cultivation. It is salient to note that farm incomes fell over 30% from 2014 to 2015 – the largest drop since 1983.”
The goal is to furnish industries with risk mitigation tools and to furnish liquidity providers with alternative tradable commodity derivative contracts. Subject to regulatory approval, Seed plans to launch with three initial industrial hemp contracts: hemp seed, whole hemp plant and whole hemp plant extract. Hemp seeds can be eaten whole, but are often hulled to expose the inner seed kernel. Hemp seeds can also be crushed to produce hempseed oil, which is mostly used in health and beauty products. The hemp meal resulting from crushing provides a high protein food or feed. Whole plant hemp extract is a mixture of fatty acids, plant sterols, Vitamin E and phyto-cannabinoids including CBD. Whole plant hemp oil is a consumable product, and it is also used as a nutraceutical in lotions, for example to ease swelling.
Woodford notes that he is often initially asked “why does this opportunity exist? This is a unique opportunity where there is a multi-billion market with thousands of sophisticated market participants, but where there exists a misperception and an unwillingness to understand or engage in the nuances of this commodity.”
Woodford says: “There are two key determinants of traded volumes. Firstly, the larger the underlying market, the higher the traded volume. Secondly, there is a derivatives multiplier which is the ratio of volume from the end-users or hedgers to the volume from liquidity providers. In most Agricultural commodities, this ratio or multiplier is 75x. In oil and gold, this multiplier is as high as 200x. In hemp, you have a rapidly growing underlying market and at the same time, liquidity providers are excited to trade an entirely new commodity, to capture spreads and take positions on unique idiosyncratic risks.”
The founding team of Seed CX analysed during their graduate research why certain derivative contracts were successful. Woodford says: “During my grad studies, I analysed why certain contracts worked and others did not. In a sense, I wrote the epitaphs for many failed contracts. However, the hemp market has the right pillars for a successful hedging market: volatility, a lack of viable alternatives to hedge such as through a cross hedge, storability and an enthusiastic and deep network of hedgers.”
Jamie Comer, who served as the Agriculture Commissioner of Kentucky from 2012 to 2016 and is one of the largest hemp growing states in the US, says: "Having being involved in farming my entire life, I know the benefit that Seed CX will bring in creating the infrastructure for a growing viable and secure hemp market. This is exciting given that the US hemp industry has to date created over 500 jobs in Kentucky and countless more throughout the country."
