Business

Cash-flow, legal issues giving Kentucky hemp ‘growing pains’

Kentucky’s burgeoning hemp industry is experiencing what one farmer calls “growing pains.” This year several major hemp companies have hit financial and legal snags, even as cannabidiol or CBD turns up everywhere from food to pharmacies.

Ben Furnish and his sister, Kendall Henson, said the industry is growing too fast.

“I think a lot of promises have been made, not just from GenCanna but from lots of other hemp companies that will never be lived up to,” said Furnish, who is part of a group of Kentucky farmers that filed a lawsuit against GenCanna on Oct. 11. “These companies are taking advantage of our sweat equity and our working capital to survive.”

The group of hemp farmers sued the Winchester company over a proposed joint venture in Cynthiana. According to the suit, Furnwood Farm, which is run by Furnish and Henson, and GenCanna planned to partner in buying a building from the Burley Tobacco Growers Cooperative for $1.2 million and turning it into a drying facility.

According to the suit, GenCanna never provided a promised hemp dryer. The farmers also allege that GenCanna didn’t provide them with hemp to plant until it was too late in the growing season to make other arrangements, forcing them to accept “horrific” contracts and plants that have produce a lower yield crop.

“Our action is primarily a fraud case based on the sham scheme perpetrated on our clients in regard to the 2019 Crop Year and the planned Cynthiana drying facility,” Scott White, attorney for the farmers, wrote in a letter to GenCanna’s attorneys and released to the Herald-Leader. In the letter, the farmers demanded $5 million and the rights to their 2019 hemp crop.

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Kendall Henson, left, and Doug Dunaway stand in Dunaway’s hemp field near Berry. They are part of a group that has sued GenCanna. Ryan C. Hermens rhermens@herald-leader.com

GenCanna disputes the Furnwood Farm account and the company plans to file a counterclaim.

“GenCanna has paid the Furnishes more than $2.5 million for hemp since 2016 including a payment of $245,550 on Sept. 30, days before their crop was due to be delivered. GenCanna has followed our contract to the letter. This lawsuit is baseless, and their claims are damaging to our company and to the Kentucky hemp industry,” the company said in a statement. “There are dozens and dozens of farmers in Kentucky who have benefited greatly from their relationship with GenCanna. In fact, over the past five years, we have paid tens of millions of dollars to Kentucky farmers. We intend to respond vigorously to these baseless allegations and will have much more to say in the next few days.”

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Workers harvest hemp on the Furnwood Farm near Cynthiana. Although CBD oil is everywhere, Kentucky hemp companies are still finding it tough to make ends meet. One group of farmers, Furnwood Farm, have sued GenCanna, while Atalo and Elemental Processing have hit big snags. Ryan C. Hermens rhermens@herald-leader.com

Meanwhile, GenCanna also has fallen behind on construction of a hemp processing facility in Mayfield and now faces a reported $13 million in liens over unpaid bills. On Sept. 23, GenCanna filed suit in federal court in Lexington on Sept. 23 alleging it paid more than $2.29 million for processing equipment for its Winchester operation that it either never received or that never worked.

Other hemp misfortunes

But GenCanna is hardly alone in having a troubled season:

Atalo Holdings, a separate company also based in Winchester, notified growers in a letter last month that it had lost backing from a potential investor, putting payments for contracted hemp in jeopardy.

“I regret to tell you the funding source we were pursuing has decided against investment in Atalo. The investor saw great value in our company and was extremely complimentary of the business we have built, but being very conservative, they have chosen not to invest in the cannabis/hemp industry at this time,” CEO Bill Hilliard said in the Sept. 18 letter. “If you’re concerned about payment and would like to discuss it, we will consider a release to allow you to either pursue alternative crop sale opportunities or is you should choose, to forego harvest for cost savings.”

Hilliard said they are still looking for more funding and sales are increasing. “However, we cannot give you a specific or dependable payment date,” he said.

Elemental Processing, a Lexington hemp processing company, has sued Oregon-based HP Farms for $44 million, alleging that the 2019 crop its growers produced is nearly worthless because the seeds that HP Farms sold were not CBD-rich “feminized” seeds as promised.

“Farmers that raise flowering hemp for cannabinoid production such as cannabidiol or ‘CBD’ rely heavily on the genetics they are provided to sustain their crops. Planting counterfeit feminized seeds is a tremendous problem for farmers because not only their crops for other farmers’ crops nearby could be detrimentally affected with no control over the pollination of their fields,” Elemental Processing said in a release on the suit. “Farmers are vulnerable prety to unscrupulous seeds brokers because it is almost impossible to tell the sex of a hemp seed until it is planted and grows.”

According to the lawsuit, farmers planted 1,100 acres that had to be plowed under after the plants turned out to be male, costing the company millions.

Lilu’s Garden, a Denver-based company that has a processing plant in Owenton, informed growers recently that instead of “tolling” — paying a portion of profits after the sale of the finished hemp products — the company will only buy at a flat rate up front. Chuck Ciancanelli said they made the change because “the price is going to change.” That’s because CBD prices have dropped in recent weeks.

Bigger than one farm

In Cynthiana, the farmers who have sued GenCanna said they are standing up not just for themselves but for all Kentucky hemp growers.

“It’s a bad situation hemp farmers are in, but what drove us to sue is … this is a lot bigger than Furnwood Farm,” Kendall Henson said. “One day we hope our children will be second-generation hemp farmers. But if this keeps happening I don’t know if Kentucky’s hemp crop can keep going.”

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Doug Dunaway examines hemp growing in his field Thursday near Berry. Ryan C. Hermens rhermens@herald-leader.com

She said Furnwood had a successful partnership with GenCanna in previous years but things just fell apart this year.

“I think it’s growing pains. I think they grew too big too fast, and they tried to take advantage of farmers, thinking we’d just fall in line,” Henson said.

GenCanna is one of biggest hemp processors in the state with about 60 farmers growing about 7,000 acres of hemp this year. They’ve invested more than $100 million in building a network of small growers to produce food-grade quality products. They also announced a major expansion — plans to build a $150 million processing plant in Western Kentucky — but have struggled to pull all the pieces together.

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Adam Yazell, left, and Lewis Furnish, examine hemp growing in a field near Berry. They are part of the group that has sued GenCanna. Ryan C. Hermens rhermens@herald-leader.com

In February, GenCanna sold a third of the company to MariMed, a cannabis company, and last month GenCanna engaged Goldman Sachs to serve as a financial advisor for a potential initial public offering and other financing alternatives.

“We are attempting to be stewards in the industry but ... it isn’t always a bed of roses,” said Steve Bevan, GenCanna COO, in an interview. He said they are on the verge of announcing some good things but “things get tough in this industry. There are problems with a lack of regulation. We’re eagerly awaiting USDA rules.”

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Furnwood Farm grew hemp for GenCanna for several years. The processor disputes claims that it has hurt the farmers. Ryan C. Hermens rhermens@herald-leader.com

CEO Matty Mangone-Miranda said they expect to see a bifurcation of the industry as companies that can reach major food producers need to rise above “garage” scale brands.

Mangone-Miranda said the challenge his company has faced is “building the rocket ship as it’s launching. ... “It’s challenge when you have lenders new to the industry ... and it’s all just still new. We’re working through some of the early challenges to the industry, as we always do.”

GenCanna may follow the path of Ananda, which launched an IPO of its Ecofibre earlier this year in Australia that has generated enormous returns, with the company valued at almost $665 million in U.S. dollars. Ananda also has a plant in Cynthiana.

CBD is flowing but cash isn’t

Although mainstream stores like Kroger and Walmart are selling CBD products of all kinds, the revenue stream to farmers has stagnated. Many Kentucky farmers sign contracts with processors that are supposed to pay a percentage when the crop is planted, another when it is harvested and the balance when it is sold.

But often farmers are left waiting for the money, said Brian Furnish, a Cynthiana farmer who left his position with Ananda this spring.

Now he’s working to establish a hemp receiving station for farmers in the former Burley Co-op facility in Cynthiana, which he has leased from his cousins at Furnwood Farm.

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Hemp dries in a barn at Furnwood Farm near Cynthiana. Furnwood and GenCanna had planned to partner on a drying facility but the deal fell through. Now Furnwood is suing. Ryan C. Hermens rhermens@herald-leader.com

“Kentucky has a lot of positive things ... but lack of money is the biggest negative,” Furnish said. The receiving station will give farmers a place to bring their crop if the contract falls through, he said.

In December, he hopes to begin accepting bales of hemp, which will be tested for moisture levels, THC levels, cannabinoid profile, and other standards before it is offered to potential buyers.

“A lot of people are having problems, and don’t have the cash to pay the farmer on time,” Furnish said. “The farmer is the one left holding the bag and that’s the sad thing.”

Many of the problems Kentucky’s hemp industry appear to be tied to cash flow problems.

Access to capital continues to be a major issue, especially in the start-up phase, said Andy Graves, who is chairman of Atalo. Banks are still extremely reluctant to lend to hemp-based businesses, he said.

“All the funds that we are able to use are coming from private individuals or existing companies, and it’s very difficult to find,” he said. “It’s a risky business in their minds. So we keep looking. People are using (CBD) everywhere. It is a breakout year.”

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Hemp was harvested on the Furnwood Farm Thursday near Cynthiana. Furnwood and a group of local farmers have sued GenCanna, a hemp processor. They are asking for $5 million and the right to the crop. Ryan C. Hermens rhermens@herald-leader.com

Graves said he’s heard of at least one potential investor who backed off because of the vaping crisis that has been linked in part to THC products, which are byproducts of cannabis but not hemp.

Jonathan Miller, who is the general counsel for the Hemp Roundtable, said the financial situation should be improving for hemp companies, in part because next year the crop will be eligible for crop insurance thanks to the 2018 farm bill, largely at Senate Majority Leader Mitch McConnell’s behest.

Potential passage of the SAFE Banking Act, which is getting renewed attention in Congress, also could help ease hemp banking problems, he said.

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Janet Patton covers restaurants, bars, food and bourbon for the Herald-Leader. She is an award-winning business reporter who also has covered agriculture, gambling, horses and hemp.
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