Pulling the Cork Out of the Processing Bottleneck Slowing the Hemp/CBD Boom
Mile High Labs is dramatically ramping up its CBD business by moving industrial-scale processing to where hemp is harvested.
9 min read
A good place to see the hemp/CBD supply chain being built is Mile High Labs in Loveland, Colorado. Terpenes which no human, and probably no drug-sniffing dog, can distinguish from its intoxicating sister plant containing THC waft from bins of hemp that seem to be everywhere as “super sacks” each containing hundreds of pounds of the newly-legal hemp are trucked in.
Much like the characteristic smells that tell you a winery, brewery or bakery is thriving, the entirely legal reek of hemp is the smell of a processor riding the CBD wave. But for Stephen Mueller, founder and CTO of Mile High Labs, that happy odor is a byproduct of both the lab’s success and hemp’s improvised supply chain. The demand for CBD is huge and there is a lot of hemp available — with much, much more being planted this year — but too little capacity to process the CBD from all the available hemp.
“Processing is the bottleneck of the industry,” he said.
Mueller’s solution, backed by $35 million in Series A funding, is the Mile High Monster (not to be confused with the Denver Broncos mascot). The Monster, as it is affectionately called, is a modular standalone processor designed for transport and assembly on a partnering hemp farm. The farm provides a concrete pad, water and power, Mile High labs owns and operates the unit. The first two units are being assembled at farms in Colorado for the harvest later this year. Each unit can process the equivalent of 50 acres of harvested hemp per day into an estimated six barrels of crude hemp oil. The oil is taken to Mile High Labs where the CBD is isolated. A harvest that would have required a fleet of big rigs to transport in bulky sacks is reduced to far more compact, and valuable, oil. The farmers have an assured buyer with MHL and receive royalties for signing up other farms to send their harvest for processing through the Monster. MHL estimates the two Monsters combined will allow MHL to process ten times more hemp than before.
“The farmers won’t have to worry about transporting it from their farm to our facility, but the main thing is it’s a tighter partnership and they are confident they have a market for the crop,” Mueller said, adding that each Monster can process the harvest of “dozens” of farms.
A three-year development process.
Like nearly everyone in the cannabis business, Mueller started elsewhere. He worked in semiconductor research before moving into electrical engineering, first with Agilent Technologies and then with Teledyne, where he managed the applications engineering group. When he explored the opportunities for CBD extraction he was startled by the haphazard, improvised supply chain for processing hemp into CBD — inefficient batch processing with off-the-shelf equipment. Nothing, from the quality of the raw materials to the quality of the finished product was standardized or held accountable to any accepted third-party quality standards.
Mueller, well known in Colorado for advocating industry quality standards, set about reinventing CBD extraction and isolation. He and his team began by taking apart and reassembling existing equipment, then taking what they learned to develop new machinery. Three years of work resulted in the Mile High Monster, which both creates industrial scale processing capacity and, crucially, creates a process that is end-to-end GMP (Good Manufacturing Practices) certified, the standard required by the global food and wellness brands moving into the CBD market.
“Big companies won’t do business with you if you’re not GMP certified,” Mueller said.
The coming hemp glut.
According to Vote Hemp,78,000 acres of hemp was harvested in 2018, three times more than in 2017. Much more acreage is being planted for the 2019 crop (just to keep a sense of proportion, US farmers are expected to plant 92 million acres of corn in 2019). Shi Farms in Pueblo, Colorado, where one of the Monsters is being assembled, is a good example of that rapid growth and the obstacles farmers have had to overcome to achieve it.
After receiving its license to grow hemp, the team at Shi Farms planted hemp clones high in CBD in 40,000 square feet of greenhouses for the 2016 crop. Tending and harvesting that many plants requires a lot of work, but finding a reputable lab to process the harvest was perhaps the toughest problem of all, said Drew Ferguson, operations director for Shi Farms. “The biggest challenge was finding a way to extract (the oil) from all this material we had,” he said. “We’d drop this biomass off at labs and never hear back, or it took a long time or the end product was not good enough.”
Late in 2016 Ferguson and his partner, Steve Turetski, met Mueller at Mile High Labs, which proved lucky for the 2017 crop. Shi Farms planted 15 acres of hemp for the 2017 crop. When it was time to harvest, each plant was cut down by hand and hauled to a barn to be hung for drying, then shucked by hand to remove the leaves and flowers for packing into some of the super sacks crowding the warehouse at Mile High Labs, a three-hour drive from the farm.
“John Deere doesn’t make a hemp harvester, at least not yet, and certainly not for the higher CBD hemp, so our whole team was out there cutting each plant, one by one,” said Ferguson.
The Shi Farms Cooperative has expanded rapidly since then. In 2018 the cooperative harvested 228 acres of hemp — 100 acres from clones on the farm in Pueblo and most of the rest from cooperating farms in Colorado, plus the harvest from two acres of hemp grown in the Hudson Valley of New York under a pilot program. This year the acreage is expanding to roughly 1,200 acres — 228 acres at the farm in Pueblo, another 450 acres on other Colorado farms, 480 acres on five farms in Oklahoma and up to 100 acres on farms in New York and New Mexico. The harvests will all be processed at the Monster being assembled on the Shi Farm in Pueblo.
Ferguson said the arrangement with Mile High Lab encouraged farmers in the cooperative to plant more because they know their harvest has a buyer with a GMP certified facility. “It’s let us grow because we know we have the extractor on the other side,” he said. “I’ve met a ton of people gung ho to grow hemp but they want to know what to do with it afterwards. As Mile High grows and provides this extraction capability, the farmers will know they will have a customer.”
Mueller sees the potential for placing Monsters far and wide but plans an unhurried expansion. “The only real limiting factor is the global demand for CBD and we have not hit that yet,” he said. “We will put two of these (Monsters) out there and see what the response is. People are starting to grow hemp all over the world but we don’t want to put 50 out there before we know the size of the market.”
A future in hemp beyond CBD.
Though the market for CBD is booming, the price of CBD is dropping, which is hardly surprising considering the amount of hemp being planted. Ferguson, prior to Shi Farms, worked for Dixie Brands, an edible company, which he said was paying between $15,000 and $20,000 for a kilo of CBD when prices were at the peak. A kilo of high quality now sells for around $7,000, Ferguson said.
That’s still big money but the trend is clear, says both he and Mueller. Neither, however, is worried. Very high prices for CBD and the hemp it is derived from made it possible for processors to get started, even if they had to rely on improvised equipment, and gave farmers a sufficient profit margin to make the switch to hemp, even if they had to harvest it with 19th century methods. The hemp oil flowing from the Monster can be processed to distill any of the dozens of cannabinoids it contains.
“The trend is toward lower prices,” Mueller said. “We might pay $30 a pound for hemp. A year ago it might have been $60. The prices will go down as people get more efficient but as that happens the market will develop for other hemp products. It (the Monster) can be used to extract all sorts of stuff. We are working with people on the CBG, a different molecule, but there all sorts of compounds in the plant for nutraceutical or pharmaceutical uses.”
About 90 percent of each hemp plant, by weight, is leftover biomass after it is processed for oil, said Ferguson. The team at Shi Farms (“shi” doubles as an acronym for “sustainable hemp initiative) currently works the remaining biomass into the farm’s dense clay soil but Ferguson believes it will eventually find ever more profitable secondary uses.
“Can we turn into pellets for stoves? Can we spread it back on the field? There is a lot of opportunity with this leftover biomass,” he said. “I’m guessing we’ll soon see companies collect this from farms to monetize somehow.”
A tantalizing prospect for farmers is a hemp strain that yields flowers high in CBD (or whatever cannabinoid future consumers demand) and leftover fiber useful for bioplastics, paper, textiles or other products. “Those ancillary products are the future of the hemp industry,” Ferguson said.