Avoiding the trap of chasing low-hanging fruit in hemp processing

(Editor’s note: This story is part of a recurring series of commentaries from professionals connected to the hemp industry. Robert Ziner is founder and CEO of the Canadian Industrial Hemp Corp., which uses artificial intelligence to process hemp stalks and fiber to make hemp-based bio-composite pellets.)

In many business opportunities, especially those focused on basic primary processing and distribution, the easiest market entry opportunity is often the pursuit of low-hanging fruit. The markets are usually already large, often commodity-oriented and are relatively easy to sell and fulfill.

However, every coin has two sides. And the reality is that low-hanging fruit markets exist on a very slippery slope.

The basic problem with these markets is that everybody can see them, everybody can reach them and nobody can pick them. These markets usually have low barriers of entry, and price is most often the easiest and fastest way in.

Low pricing makes sense for a new company with relatively low overhead. It can get you in the door, but it also leaves you very vulnerable – especially if you have payables to look after and cashflow is tight.

The problem exists because low-price suppliers are always vulnerable to the next low-hanging fruit picker – offering a lower price, or any major industry player who wants or needs to capture more market share by lowering prices even further.

Robert Ziner

While this dance always benefits the customer, the suppliers always lose.

Low-hanging “FIBER” fruit

In the hemp fiber market, the low-hanging fruit markets are:

• Bast fibers for textiles, animal bedding and bio-composites.
• Hurd fibers for animal bedding, hempcrete and kitty litter.

These are all large commodity markets. However, if everybody targets them, the way that most suppliers compete is to lower their price. The buyer always expects top-notch service and quality and will usually punish you financially if you aren’t consistently there. This tag-team formula of rugged competition & smart buyers almost always ensures that prices erode.

In the end, only the lowest-cost supplier wins – but not too much!

But is there a way to enter the hemp fiber industry successfully without chasing after low hanging fruits? Where is the opportunity?

Fighting for stable margins

The fight for opportunity in the commodity hemp-fiber supply industry is actually a fight for stable margins. It demonstrates the fundamental problem with serving commodity markets as well as the need for market transparency.

Every business needs more than an optimum price – whether you are the buyer or the seller. Success usually comes from market stability, which delivers less guessing and fewer headaches. It comes from having a meaningful sustainable, competitive advantage to offer the market.

It is essential for any supplier to have a clear understanding of how value actually gets created in their industry and to appreciate the breakdown of the value added created throughout the value chain. Success lies in the diverse elements associated with marketing any product. It needs to ensure that the benefits which the end users need are catered to – and that almost always goes beyond low prices. Apple has proven this point over and over.

Find hemp product opportunities in which you can be a leader.

One of the most common things we hear about hemp fiber is that there are over 50,000 different product applications for which it could be used. Although this sounds very appealing, that does not explain how one would pursue this mountain of opportunity in a pragmatic and effective way.

The fundamental need for smaller hemp-fiber producers is to focus their opportunities based on the two main financial principles of business: profitability and cashflow. One, without the other, is a prescription for failure – and economic disaster. There is a basic need to:

• Pursue more than selling only conventional commodity outputs – bast and hurd – because there simply is not enough margin earned in their wholesale distribution, and inevitably too much competition.
• Create strategic partnerships between the primary processor and distributors of specific secondary products. Their combined margins will be higher than is possible in a dog-eat-dog fight for better pricing. By working together, more effort can be focused on finding operational, marketing and logistics savings and improvements.

In a sense, I see these less as partnerships than as cooperative ventures.

Co-ops as an operational model involve all parties working toward a common goal. In this case, generating consistent supply and quality outputs to gain broad market acceptance and long-term financial success. These have long been the hallmarks of agricultural co-ops, and they make a lot of sense for the hemp industry in general and for hemp fiber in particular.

It would make perfect economic sense for primary producers and secondary producers to work together to identify a few specific products which they could produce and distribute efficiently and cost effectively. Their cooperation would demand that they together determine ways to ensure that margins are fairly distributed, taking into account the invested capital expenditure as well as the costs associated with each partner achieving success in their end of the business relationship.

Yes, the discussions needed to achieve friendly cooperation will take time as well as a focus towards mutual fairness. But this will be considerably easier and less painful than gambling on how low to drive prices to the processors, or a distributor running into painful competition in a highly fractured marketplace.

I like to remind people what I learned in the commodity softwood lumber marketplace – a sector I worked in for over 30 years. Regardless of how capable, efficient or productive your company may be, when your competitor has financial difficulties, their problems usually become yours.

Why? Because when they are in financial difficulty, necessity will force them to call your customers offering low prices just to try to ensure their cashflow.

Then you will get the call: “Even though we really like you, you have to match the competition’s low price – or lose the order. There are just too much savings for us to ignore their offer.”

The profitable opportunities in hemp fiber exist but only in the higher branches – not the low-hanging fruit.

Robert Ziner can be reached at [email protected]