With President Donald Trump and President Xi Jinping of China not willing to back down, the US-China trade war is intensifying. So far, the United States has imposed tariffs on Chinese products worth $550 billion. In retaliation, China has imposed tariffs on US goods worth $185 billion. In this story, we’ll look at the impact of tariffs and the trade war on tobacco farming and how hemp legalization has come to its rescue.
Effect of the trade war on tobacco farming
In retaliation to Trump’s tariffs, China imposed its first round of tariffs on imports in April 2018. The tariffs on US imports by the Chinese government severely hit the US tobacco industry.
On May 16, the Washington Post reported that the US exported $129 million worth of tobacco from October 2017 to March 2018. However, its exports fell to just $69,000 from October 2018 to March 2019. Apart from these tariffs, the strengthening of the US dollar is increasing the cost of US tobacco. In an effort to mitigate this situation, US tobacco farmers are moving toward hemp farming.
Hemp is also a type of cannabis, which contains less psychoactive THC (tetrahydrocannabinol) and more CBD (cannabidiol). Cannabis has a greater quantity of THC than hemp. Hemp is utilized as a raw material for a variety of products, particularly fabric and food. The CBD extracted from hemp is used for medical applications.
The Agricultural Act of 2014 had allowed growing industrial hemp for research. Later, with the passage of the 2018 Farm Bill in December 2018, hemp was legalized across the United States. The legalization of hemp at the federal level has allowed farmers to take crop insurance on it, as well as having the ability to transport hemp across state lines.
Growth in the US hemp industry
Currently, only 11 states in the US have legalized cannabis for use by adults, while 33 states have legalized cannabis for medicinal purposes. However, the US cannabis market is already the largest in the world, and multiple companies are seeking to enter this burgeoning market. BDS Analytics and Arcview Market Research have projected the US CBD market to exceed $20 billion by 2024.
To expand its hemp business in the US, Tilray (TLRY) acquired Manitoba Harvest, a hemp food manufacturer, in February. Also, the company introduced a portfolio of hemp-extracted products in the second quarter.
Cannabis legalization and the 2020 presidential election
With the 2020 presidential election heating up in the US, the legalization of cannabis is a hot topic. The current Democratic candidates are united on the legalization of cannabis.
The prominent nominees who support legalization include Kamala Harris, Bernie Sanders, Pete Buttigieg, and Andrew Yang. For President Trump’s views on cannabis legalization, please read President Trump: Is Marijuana Legalization a Key Weapon?
Cannabis sector performance
This year, the cannabis sector has underperformed the broader equity market. The Horizons Marijuana Life Sciences Index ETF has returned 1.2% year-to-date, and the S&P 500 Index has increased 13.6%.
Looking at individual stocks, Tilray and Canopy Growth have lost 59.9% and 9.5%, respectively, of their stock value year-to-date.
In the first and second quarters of 2019, Tilray reported an increase in its net losses. Also, the company reported higher-than-expected losses in the second quarter, leading to a fall in its stock price. However, Tilray is focusing on capturing the US hemp vape market. For more information on this market, please read Tilray on Vape, FDA, and the US Market.
On August 15, Canopy Growth reported a dismal first quarter of fiscal 2020. The company missed its top-line and bottom-line expectations, leading to a fall in the company’s stock price. However, Bruce Linton, the company’s former CEO, is optimistic about the company’s initiatives and is buying more shares. For more on that story, please read Canopy Growth: Bruce Linton Is Buying, Should You?
This year, Aurora Cannabis has outperformed its peers by returning 10.9%. Its management’s better-than-expected guidance for the fourth quarter and the recent acquisition of Hempco Food and Fiber has led to an increase in Aurora’s stock price.