Hemp legal limbo challenges Sonoma County's Delta Separations, other equipment makers

Usually spinning and freezing delicate things does not cause them to produce valuable oil, but that is the case with some hemp plants.

And it's even harder than it sounds.

That is according to the executives at Delta Separations in Cotati who manufacture equipment that can extract, evaporate, and distill oil and other desired materials from plant mass, including from cannabis plants like hemp.

Hemp is a type of cannabis that, unlike marijuana, is legal at both the federal and state levels and does not contain significant levels of THC, the compound in marijuana known for its psychoactive effects.

Hemp is prized for its oils, particularly nonpsychoactive cannabidiol (CBD), which some claim has medicinal properties.

Started in 2015, executives at Delta Separations say their business is growing rapidly, doubling sales year over year. There are still constraints, however, with being associated with hemp, which is legal cannabis, according to Chief Operating Officer Roger Cockroft.

'This industry is a very undercapitalized industry. And that's partly because of the segmentation of the market through various regulations,' Cockroft said, noting the company does not touch cannabis plants and instead sells equipment to manufacturers and distributors.

Cockroft said because marijuana, or cannabis with high THC levels, is still illegal at the federal level, it is still associated with hemp cannabis. The Federal Deposit Insurance Corporation has also not handed down regulations on how to handle banking of hemp-derived cash. As a result, many financial institutions are wary of handling it and the regulatory hurdles they face if they do.

Credit unions have been somewhat more open to the idea. The National Credit Union Association published guidance in August stating that legal hemp businesses provides new opportunities for rural communities and allowing federally-insured credit unions to provide certain financial services to the industry.

Continued stigma and association with federally illegal marijuana has somewhat limited what Delta can do, according to Cockroft.

'It has proved to be really difficult for us to test our equipment,' he said. The company now has a research and development facility in Santa Rosa to go along with two manufacturing facilities and its offices that are in Cotati.

Because Delta is not a cannabis company, one model has been to test its equipment through licensed cannabis clients who handle hemp and marijuana.

'We usually have beta test models that are in the field for about six months to 12 months that are being operated by a licensed facility,' said Ben Stephens, founder and chief technical officer at the company.

'We get their feedback data of how things are working,' Stephens said, underscoring that the processing of hemp into things like CBD is still something that is being perfected. 'That keeps the client happy because they're getting a free piece of equipment. It keeps us happy because we're getting the data off of it.'

Hemp processing may be a newer industry, but it could expand rapidly if and when the Food and Drug Administration regulates CBD and allows it to be placed in things like food products according to Erica Stark, the executive director of the National Hemp Association.

'Right now there's still legal impediments at the state and federal level with the [U.S. Food and Drug Administration] that prevent businesses from realizing the full potential of what they can be,' said Ryan Lowther, a partner at Farella Braun + Martel LLP and founder of the firm's cannabis industry practice group. 'That is causing investment constraints and capital crunches until investors are more comfortable.'

Last month the U.S. Department of Agriculture released interim final rules for how hemp cultivation should be regulated. The U.S. Food and Drug Administration, however, considers CBD an unregulated substance and has yet to release guidance on its use in products like food, making those products illegal for the time being.

Despite that agency remaining silent on CBD for now, the legalization of hemp has resulted in a quadrupling of acreage planted since this time last year, Stark said. That has coincided with an increase in extraction operations across the county as well as existing facilities expanding their capacity and production for hemp oils.

'It's very important to keep supply and demand in check,' Stark said, noting that prices for hemp plant matter or 'biomass' have dropped because of an increase in supply. 'The markets are in a state of fluctuation right now.'

In a statement, Delta estimated that there isn't enough processing equipment installed to handle 90% of this year's hemp harvest and that over $7 billion worth of the plant could go to waste for lack of processing equipment.

In its new release Delta estimated that each acre of hemp can produce 165 pounds of CBD oil with a market value of roughly $66,000.

'That same acre of hemp used for fiber products only garners $850, a staggering value difference. Unfortunately there is less than 10% of equipment installed in the U.S. that is required to process hemp into CBD oil before it spoils.'

Stark noted, however, that much domestic hemp is still grown for the fiber and grains it produces and that oils like CBD still remain in the minority. 'CBD production is not all there is to hemp production,' she said.

She added also that the processing bottleneck is not just an issue when it comes to CBD distillation but is a problem for farmers growing the plant for its other products.

Under the 2018 farm bill hemp must have less than .03% naturally occurring THC which is another hurdle for farmers and processors who are still sorting out what variants of the plants have the right genetic traits.

Stephens, the Delta Separations founder, said a client in Arkansas had to burn half a field of hemp because its THC content was too high, resulting in a massive loss. He added: 'There's no real strains that are grown or that are genetically put in place where you have high CBD content and really low THC, it just doesn't exist right now.'

Staff Writer Chase DiFeliciantonio covers technology, banking, law, accounting, and the cannabis industry. Reach him at chase.d@busjrnl.com or 707-521-4257.