With the launch of Seed SEF right around the corner, we held an informational event at Hubbard Inn this week to discuss our plans for a CFTC regulated swap execution facility, the industrial hemp market and our related product contracts. We had a group of 50 participants in the derivatives and agricultural spaces as well as a handful of journalists and hemp experts join us for the presentation, a networking reception and a virtual tour of a hemp field, Dionisio Farms in Pueblo, Colorado.
The presentations started with a discussion led by Bill Hilliard, CEO of Atalo Holdings. With approval from the Kentucky Department of Agriculture to become a registered hemp processor, Atalo Holdings has become the largest contractor of local hemp growers in the state. Atalo growers participate in the Agricultural Department’s mission to research seed varieties, agronomics, processing and commercialization for hemp-based products (namely hemp seed and extract).
Atalo has a rich history in the hemp industry. In 1996, Atalo’s chairman Andy Graves spoke to the American Farm Bureau Federation and won support for industrial hemp farming across the United States. Approaching hemp as an agricultural product, Kentucky set up a production regime to prepare for the foreseen regulatory shift. When the 2014 Farm Bill passed, making it legal to grow hemp for the first time in 60 years, Kentucky was the first state in the Union prepared to produce the plant. It has since gained a decisive foothold in the domestic cultivation market.
Atalo uses every piece of the plant in its process; the stalk, the seed and the flower material. According to Hilliard, the stalk is broken into fiber and hurd, the seed or grain is high in protein and used in food products and finally, the flower can be used forcannabidoil (CBD) and a number of other cannabinoid extracts. Atalo currently has about 400 acres dedicated to CBD and 1000 for grain crops. It certainly seems to be working. Bill explained that they had 6 hemp growers in 2014, about 30 in 2015 and are currently up to 58 this year.
Hilliard concluded his portion of the presentation by comparing the product to where corn was 60 years ago and believes this is a very auspicious time for the hemp market.
Next Seed’s co-founder Edward Woodford spoke about the motivation behind Seed, the hemp market and the contract specifications.
After speaking with many growers, producers and legislative advocates, we discovered there is a need for transparency and data in the hemp industry. Seed was spawned out of this driver as well as the desire to centralize liquidity and manage risk. Edward continued to describe how we will also bring an efficient delivery process to the emerging economy and enforce arbitration of contracts, if needed.
Woodford highlighted that the produced and delivered value of hemp to the United States is a $2 billion market (and growing). Even though the US only started growing the crop in 2014, it has become the center delivery point all over the globe.
Seed plans to launch three forward and option contracts; a 500-gram CBD extract contract, a 500-gram CBD isolate contract and a 5,000-pound contract on hemp seed. The CBD contracts will have deliverable grades that take into account standards used across the industry such as heavy metals, residual solvents and terpenes.
Woodford admitted that it was a challenge, but after surveying participants and reviewing documents from public companies, Seed has an idea of the size of the CBD market. The US produced about 40,000 kg of CBD in 2015 and will produce about 144,000 kg in 2016. Imported CBD was at 17,000 KG in 2015 and 24,000 in 2016 totaling a 168,000 kg for this year. That equates to roughly 336,000 contracts of hedgeable product.
The hemp seed contract grading standards will take into consideration quality assurance such as maximum THC levels and the use of herbicides and pesticides. Other factors include Oleic acidity levels, microbial standards and physical features.
The US produced about 7 million pounds of hemp seed in 2016 and imported about 40 million pounds (of which only 14 million pounds is not forward contracted), totaling 21 million pounds of deliverable hemp seed supply.
Finally, Woodford touched upon volatility and the drivers of risk, which are a mix of systematic and idiosyncratic factors. Like most crops the weather will play a role in the production of hemp plants. Risk is also associated with regulatory and legislative shifts as well as new demand sources.
I gave the final presentation of the night talking about how our attendees could actually trade hemp and make a foray in this exciting new market.
As a swap execution facility, the CFTC requires market participants to be eligible contract participants (ECPs), to verify you can trade swaps and to comply with our Seed SEF rules.
Once you meet these requirements, Seed asks that you authorize traders, set up bilateral credit agreements with other Seed SEF Participants and then certify your connection. Currently, traders can connect through SeedTrade, our web-based frontend, through a VPN or cross-connect to utilize a custom frontend. Traders can cross-connect from Equinox, the CBOT building and CME DC3.
We’ve made certification easy by setting up a sandbox procedure or Internet based environment to test functionality. Order Flow and Market Data are currently written in FIX.
To trade on Seed, buyers and sellers must have a previously agreed upon credit agreement. Seed is working on standardizing this procedure but currently the participants set up the agreements themselves. Participants will be familiar with the rder types as they are standard market and limit orders including GTC, GTD and IOC. It’s important to note that block trades are permitted via our proprietary submission tool, SeedBlock.
We are looking for market making firms to sign up and are offering incentives to cover the costs associated with connection and trading. Please reach out to[email protected] to learn more about the programs that will be offered.
I also talked about some of our future plans. Seed looks to offer a storage facility in Colorado for participants that don’t want to take delivery on. The warehouse will act as a valuable intermediary for testing, which is a pretty significant pain point in the industry right now. We are also working on 3 new contracts that will launch in six months and clearing services in about a year.
I closed out the presentation with a quote from America’s first president. George Washington once said, “Make the most of Indian hemp seed and sow it everywhere.” Neither Edward nor I, as co-founders of Seed, are U.S. nationals, but we certainly appreciate the extent to which hemp is ingrained in the history of the country.
We are passionate about the hemp market and believe this is a rare opportunity formarket makers and traders to explore a new and unique market. We’ve met with many experts in the hemp field and toured many hemp farms (please get in touch if you would like a virtual tour of one.) We aim to bring transparency, managed risk and standardization to this new market.
If you would like to learn more about Seed SEF, please email c[email protected] or reach out to me directly.