Massive oversupply means a violent crash is on the way for CBD

A massive oversupply in the CBD markets can only lead to a violent crash by the end of the year, observers in both the USA and Europe say. With estimates that the U.S. is currently growing eight times more CBD hemp than can reasonably be consumed in the domestic market, there are clearly rough waters ahead.

“With many businesses and farms still just expanding into the industry, the boom in growth is leading to a massive price crash in all forms of the product,” said Chase Nobles, Co-CEO at Kush.com, an online cannabis marketplace. “Derivative prices continue to drop while many farms are still holding strong on price, which will likely make the crash swift when it happens.”

Conservatively calculating that the U.S. will produce 180 million lbs. of biomass that would yield 4.7M kg of isolate this year, Kush estimated that supply would be eight times current market demand.

Kush reported an average price per percentage point of $3.94 on 10% raw CBD material in July, and Nobles said it expects a further decline to below $2.30 for early harvests, with potential to get much worse starting in October.

Discounts on volume deals

Biomass prices continued a downward slide in August, with discounts on larger volume deals declining by at least 9.1% from July’s price assessments, according to HempBenchmarks.com, which tracks hemp commodities.

Observing in its August report “significantly larger discounts this month for bigger volume sizes,” HempBenchmarks said lower biomass prices ahead of the 2019 harvest are due to producers looking to get rid of old plant material, much of which is of lower quality, with CBD potency having degraded over the course of the past year.

Europe hit hard

European stakeholders, meanwhile, say the U.S. oversupply situation has hit them hard; the USA had been a major destination for European CBD producers. At mid-August prices reported in Europe were half what they were a year ago.

“We’re having to adjust prices monthly because there is so much isolate out there,” one major European player said. “We have no idea where the pricing will bottom out.”

Boom-bust cycle

Kush.com’s Noble said he’s seen the crash phenomenon play out on a smaller scale when marijuana was legalized in the U.S. states of Oregon and Washington. Sudden legalization leads to an immediate increase of demand but supply is limited so prices skyrocket, Noble noted.

Farms then raise capital and increase production based on inflated prices. Due to the seasonality of farming, however, no one farm knows how much the other farms are producing, and everyone increases production at the same time, Noble said. When the harvest occurs, the prices crash. Unable to return a profit, local farms are often forced out of business, he added.

“Farms that go out of business are typically bought by a naive purchaser, who repeats the same mistakes of overproduction without building downstream demand or growing under contract,” Noble noted.