Attorney to bankers: Be savvy about hemp growing before lending

Jan Shepel
In this Aug. 21, 2019, photo, Jeff Dennings, left, and Dave Crabill, industrial hemp farmers, check plants at their farm in Clayton Township, Mich. The legalization of industrial hemp is spurring U.S. farmers into unfamiliar terrain, tempting them with profits amid turmoil in agriculture while proving to be a tricky endeavor in the early stages.

WISCONSIN DELLS – While most farmers don’t think of growing industrial hemp as a “silver bullet” for farm income, many are interested in it as a way to diversify their farming operations and add another potential income-generating enterprise to their farms.

For Wisconsin’s bankers, dealing with hemp growers poses some new challenges, which were outlined at a Wisconsin Bankers Association seminar Nov. 21 in Wisconsin Dells that attracted 145 state bankers. Scott Birrenkott, an attorney who is assistant director of legal affairs with the association, walked bankers through some of the things they might deal with if they have customers who want to grow hemp.

First, he wanted them to know what hemp is (and what it isn’t). Though admittedly not a botanist, Birrenkott said hemp is a taller, skinnier plant with most of its leaves at the top while marijuana – hemp’s psychoactive cousin – is a bushier plant with broader leaves and budding flowers.

“They come from the same genus and type of plant but they are very different,” he said.

It’s important for bankers to be aware that marijuana and hemp are harvested in very different ways and have different uses. Marijuana is high in THC, the chemical that gives users a “high” while hemp is very low in THC. Hemp, however, has higher amounts of CBD – the oil that is being used by many consumers now for things like anxiety and joint pain. Some varieties of hemp are grown for their fiber content and get made into things like fabric.

“Hemp and marijuana have different growing conditions, different uses and applications and different legal status,” he said.

Wisconsin advocates of “industrial hemp” tried for years to get it legalized as an agricultural crop, but that idea faced headwinds until passage of the 2014 Farm Bill, which gave states the ability to set up pilot and research programs for farmers who want to grow the crop. The measure defined hemp as the cannabis sativa plant with no more than 0.3 percent THC on a dry weight basis, distinguishing it from marijuana.

In Wisconsin, Act 100, passed in 2017, established such an “industrial hemp” pilot program in the state and gave the Department of Agriculture, Trade and Consumer Protection the role of writing administrative rules to implement the program. The agency did so as ATCP 22, a rule that includes licensing and registration requirements, mandatory criminal background checks for growers and the registration of all hemp fields along with GPS coordinates. The rule also has sampling and testing requirements for hemp crops, and any crop testing over 0.3 percent THC must be destroyed.

Birrenkott said bankers need to know what is legal and be comfortable with the information given to them by growers wanting to grow hemp. Banks don’t necessarily need to verify all the information with DATCP – like where their fields are and if the growers are licensed – but they may want to do so as they begin to work with hemp growers. Answers will vary from bank to bank depending on their policies and comfort level.

“You might do more due diligence on these accounts because we are trying to work through and understand something that’s pretty new,” he said. “All of this is about knowing your customer.”

Bankers, he said, must comply with the Bank Secrecy Act (BSA) which hasn’t been updated to include the 2014 Farm Bill policy on hemp. He told Wisconsin State Farmer that when he called the Federal Deposit Insurance Corporation (FDIC) – that’s the federal agency that guarantees bank deposits -- about hemp they didn’t even realize the crop had been de-criminalized.

His best advice to bankers was for them to know the practices hemp growers are engaged in and figure out if their bank has a policy for working with these customers.

The legal issues surrounding hemp are moving almost faster than growers (or bankers) can keep up. While the earlier farm legislation created the ability for states to begin pilot programs, the 2018 Farm Bill de-criminalized hemp growing. It also gave the U.S. Department of Agriculture the task of creating a program under which anyone in the country could legally grow hemp. The USDA published an interim final rule to implement that program on Oct. 31.

Scott Birrenkott

Under that rule, any state without its own program could allow hemp cultivation under the federal rule and states with their own program could submit that to the federal agency for approval. Birrenkott indicated that Wisconsin plans to continue its state program when DATCP officials submit the state program to USDA.

On Nov. 12, the Wisconsin Legislature passed SB 188, a measure to establish a new state hemp program that will harmonize with the most recent farm bill. It was presented to the Governor on Nov. 19 and is just waiting to be signed into law. The Wisconsin measure and the 2018 Farm Bill remove the old requirements for research, allowing hemp to be grown strictly as a commodity crop.

If the new Wisconsin measure gets signed into law, as expected, DATCP will continue to be the agency writing the rules that state farmers will have to comply with.

The state measure will change the state designation from “industrial hemp” to simply “hemp” and prohibit state farmers from growing it without a DATCP-issued license. It also re-defines marijuana for the purposes of the Controlled Substances Act to exclude hemp. Among other things, the new measure ends the state’s pilot program and makes it a permanent state program.

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Birrenkott said he gets lots of questions from Wisconsin bankers asking if it’s okay to bank these growers. “The short answer is yes,” he said.

For now, bankers are only working with hemp growers to open banking accounts. “They’re not lending yet” to growers with a hemp enterprise, he said. “Ag lenders want to understand hemp growing and be savvy about it but it’s difficult to jump right in on it.”

There are so many questions to be answered related to cultivation of this crop, like what seed will yield the top crops, best management and growing conditions. “That’s what’s on lender’s minds,” he said.

The calls Birrenkott has gotten at the WBA office regarding hemp have shifted from “we’re not sure” to “we’re doing this and we’re going to market ourselves on that.” Several bankers at his session told him they looked forward to helping growers open deposit accounts and offering financial advice. “Loans are trickier,” he told Wisconsin State Farmer.

One of the issues for lenders has been that hemp couldn’t be insured with federal crop insurance. Birrenkott said that may be changing in line with the 2018 Farm Bill; he’s been told that the FCIC at USDA will allow for crop insurance on hemp for 2020.

Eric Skrum, WBA’s communication’s manager, noted that some of the legal issues and bank policies are nuanced. “All these things take time and banks don’t move fast,” he said. “But you want your bank to be careful. There’s not a lot of guidance. Bankers are trying their best, especially ag bankers.”

One of the things that Birrenkott has done to help bankers is create a questionnaire they can use when they talk to a hemp grower.

“It’s designed to gather information,” he told them. “We developed it based on calls we’re getting (from bankers.)”

The questionnaire includes blocks to be filled out by potential growers or processors of hemp or retailers of CBD products. Bankers, he said, can decide the degree of “certification” they want from customers – from doing nothing to checking everything including GPS coordinates on hemp fields. “Maybe some banks will want to go even further like wanting to know what seeds they’re using,” he said.

In the case of people selling CBD products, he said, there are no rules and regulations.

He advised bankers to be aware of interstate issues, especially if they are close to state lines. Minnesota, he said, allows hemp crops to go a little higher in THC content – 0.5 percent – before destruction of the crop is required and in Illinois there has been a move to legalize marijuana, so in that state-line area banks might have some growers on either side of the legal divide.

Birrenkott said there are emerging forms of business and commerce where the customers may not be a grower or a processor or a retailer, but a broker, a transporter or a hemp-related equipment maker or seller.

“Regulators aren’t going to tell you how to deal with these new business models. My recommendation is to start thinking about it,” Birrenkott said.

There also might be some issues related to moving hemp across state lines for processing. “There are still plenty of unknowns.”

Banks, he said, will be figuring out if they have a policy for this new state enterprise, and to what extent they will work with these customers.