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California legalizes CBD, but it’s not all roses for hemp producers

Marijuana Extract Rule Stifles Hemp Industry
The hemp CBD opportunity expands but some guard rails will cause more problems than they solve—for farmers, extractors, and anyone looking to sell into the Cali market.

After more than three years of stops and starts and difficult negotiations, the era of hemp CBD prohibition in California will soon be over, now that the California state legislature overwhelmingly approved AB45, a bill to legalize it this past week. Governor Newsom is expected to sign the bill by or before Oct. 10.

While the passage of the bill is a major victory for hemp advocates, the devil’s in the details—and there is certainly much to kvetch about.

“There is no doubt that legalizing CBD in the world’s fifth-largest economy is a major win for hemp,” said Jody McGuinness, executive director of the Hemp Industries Association. “But some of the onerous and impractical restrictions in this bill are going to create significant problems for manufacturers and farmers alike. As an industry, we should celebrate this as the major victory it represents, but already be contemplating how it can be improved in the next session.”

First, the good news.

This was the third attempt to get a CBD bill in California, and at the start of this summer it still did not include allowing hemp CBD in foods and beverages. Now it does.

Count that as a major victory—especially since some trade groups, the U.S. Hemp Roundtable chief among them, are advocating that the FDA legalize hemp on the federal level but for supplements first, with food and beverages to come at some later, uncertain date. The California legislation demonstrates that cannabinoids can be legalized for whatever product format innovators can dream up.

“The final product has come a very long way,” said McGuinness.

The original legislation, written by Assembly member Cecilia Aguiar-Curry, also included a ban on craft hemp flower. At the beginning of September, a compromise was reached to adopt a phased-in approach that will ultimately permit the sale of smokable hemp products to adults while immediately allowing the manufacture of smokable products to be sold in other states. That ban on smokable hemp is now done—but contingent on the regulatory authorities coming up with a tax regime. It’s anybody’s guess how long that might take.

Also on the bright side will be the relief for CBD brands that have long been hassled in retail outlets for selling hemp CBD.

“Countless times, we have had our Winged CBD gummies and other ingestible Winged products pulled off shelf temporarily because the local health department would come in, cause a ruckus, and incite fear,” said Jess Mulligan, co-founder of Winged Women’s Wellness, a CBD-forward supplement line. “Our retailer partners are going to be over the moon for finally getting some clear legislation, and it will instill the confidence to get behind hemp-derived products in a big way.”

Since the passage of the Farm Bill and legalization of hemp in December 2018, many retailers began selling hemp nationwide confidently. California has been tricky, though, as conflicting and murky legislation from the state level made it hard for retailers. There’s no question the message of the law’s passage will be a boon for retailers and the brands they sell.

“Retailers and product manufacturers will no longer have to fear embargoes and product seizures,” said Jonathan Miller, general counsel of the U.S. Hemp Roundtable. “Consumers will have access to products that promote their health and wellness. And most importantly, California hemp farmers will see a wide opening of opportunity for their crops, as the nation’s largest wellness market is now open for sale.”

A bullet dodged is that AB45 does not validate the DEA's controversial Interim Final Rule, which tries to make the case that THC content above 0.3% at any point for any length of time during the extraction process makes the extract a Schedule I controlled substance. There was some concern that the bill would validate the DEA's position, but the final bill language does not. "It doesn’t codify DEA on above 0.3%," said Will Kleidon, founder and CEO of hemp brand Ojai Energetics and chairman of the California Hemp Council. "It states that the final extract, not in process extract, cannot exceed 0.3%."

Contention arises

It is on this last point where this is quite some disagreement. Some say yes, others say not so fast.

On the one hand, these critical changes to California law will drive economic opportunity and boost job growth by providing certainty to everyone along the value chain—farmers included—through a clear roadmap for expansion by providing consumers with a regulated CBD marketplace.

“California plays a pivotal role in cultivation, production and distribution,” said David Culver, vice president of global government relations at Canopy Growth. “The passage of AB45 allows Canopy and our peers to operate within the state. This was a key consideration in why we heavily invested in the state by locating our west coast facility in Modesto.”

On the flip side, there are a couple concerns that give hempsters pause.

  • The pause in smokable hemp, effective upon the bill’s signing (and maybe longer if the state regulatory apparatus takes a while to get itself situated), is a cause for uncertainty. “Most of the smaller growers are growing exclusively for a premium raw / smokable market,” said Josh Schneider, CEO and founder of Cultivaris Hemp. “A decent majority of those depend on local and regional sales to distribute their products. This bill will leave that business in limbo.”
  • Processors and extractors will have to be inspected by agents from California Department of Public Health's Food and Safety in order to sell in California. This applies to anyone in the U.S. that manufactures hemp CBD that wants to sell into the California marketplace. “Inspectors will come visit their facility and be GMP compliant,” said Chris Boucher, at the Hemp Farmer’s Guild, which represents the interests of California hemp farmers and cultivators. “Basically, California is going to act like the FDA.” Kleidon, for his part, says this is no different from what other dietary supplement brands face. Indeed, even companies manufacturing products as far afield as water bottlers, out-of-state home medical device retail facilities, and processed pet-food manufacturers. "It also is the raw extract producer, not the product company unless they also produce raw material," said Kleidon. 
  • In addition to registering with CDPH, hemp manufacturers must obtain an “industrial hemp enrollment and oversight authorization” from the CDPH. Manufacturers have a three-month grace period from the law’s effective date to obtain the enrollment and oversight authorization. 
  • Industrial hemp can only be used in dietary supplements or food products if all of the hemp-derived parts used in such products: 
    • (1) “come from a state or country that has an established and approved industrial hemp program that inspects or regulates hemp under a food safety program or equivalent criteria to ensure safety for human or animal consumption” and 
    • (2) the hemp grower is in good standing and compliance with the laws of the state or country of origin. 
  • Also, industrial hemp cannot be included in any products containing nicotine, tobacco, or alcohol. No blunts allowed! 
  • Finally, California has essentially outlawed delta-8 THC. The definition of “THC” includes THCA and “any tetrahydrocannabinol” including delta-8, delta-9, and delta-10. Because AB-45 states that hemp products (and hemp extract in its final form) must have a “total THC” concentration of not more than 0.3%, these provisions mean that hemp products (and hemp extract in its final form) cannot have more than 0.3% of any and all forms of THC, as measured in the aggregate. 
  • Subject to administrative rulemaking, the CDPH has the discretion to include in the definition of “THC” any cannabinoid (other than CBD) that it determines may cause intoxication. 
  • The CDPH may also determine maximum serving sizes and the number of servings per container.
  • No later than July 1, 2022, the Department of Cannabis Control (DCC) is required to prepare a report outlining the steps necessary to incorporate hemp into the cannabis supply chain, including allowing hemp as an ingredient in manufactured cannabis products and the sale of hemp-only products at cannabis retailers. 

The upshot of this bill is it perpetuates the patchwork, 50-state solution to hemp and CBD, which should not have been like this had the FDA properly regulated hemp after the 2014 and 2018 Farm Bills.

Two years ago this past March, the FDA held a raucous public meeting and declared that it would take at least three years, maybe five, for it to come up with regulations—much to the shock of the industry, which wanted rules set in place, like, yesterday. The agency does seem on track for that three-year timetable—much to the chagrin of the market, especially large multinational CPG companies from food and beverage that could have absorbed much of the oversupply of hemp from 2019 when the world was abuzz with hemp potential after the passage of the 2018 Farm Bill. That led to the opening of delta-8 THC—which is slightly buzzy, too much for at least 15 states that have outlawed it—which nevertheless provided some economic relief for farmers sitting on all that overharvest.

That the FDA still denied New Dietary Ingredient dossiers from market leader Charlotte’s Web as well as legacy supplement company Irwin Naturals does not seem to bode well for the FDA ever allowing cannabinoid medicine to be anything other than a pharmaceutical product.

So after the dust settles on AB45, the hemp industry still has work ahead as it tries to remediate some of these onerous provisions in the law.

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