CropLogic supply agreement implies top dollar hemp price

Outstanding news emerged from agtech and farm management group CropLogic Ltd (ASX:CLI) today in the form of an agreement to supply part of its 2019 hemp biomass production from its 500 acre farm in Central Oregon.

The US$10.5 million (A$15.4M) supply agreement with Deschutes Labs, a new industrial hemp processing facility located in Central Oregon implies a price per pound at least at the top end of management’s previous expectations of between US$35 and US$45 per pound.

The agreement is for the supply of less than 30% of total production estimates.

As a guide, previous estimates provided by management pointed to production of 800,000 pounds of hemp biomass.

If the deal was done for 30% of the total estimated production this would reflect a price of approximately US$45 per pound.

While management hasn’t put an exact amount on the production that is locked in, it would appear that it has achieved a price slightly in excess of US$45 per pound.

The timing of the supply agreement is significant as sale prices often strengthen as demand increases closer to harvest.

Crunching the numbers further, management previously estimated that a mid-range cost of production would be in the order of US$6.00 per pound, and based on a mid-range hemp biomass price of US$40 per pound and an AUD:USD exchange rate of US$0.70, CropLogic could generate a pre-tax profit in the order of $40 million.

The decline in the Australian dollar to approximately 67.5 cents works in CropLogic’s favour, and with the foundation seemingly laid for a better than US$40 per pound price it would appear that the underlying earnings estimate could be conservative.

Based on an exchange rate of 67.5 cents, the supply agreement is valued at approximately $15.5 million.

Agreement provides earnings visibility and industry credibility

In discussing this development, CropLogic chief executive James Cooper-Jones said, “This initial sale confirms that CropLogic’s agronomy, farm management and agtech expertise can be successfully applied to industrial hemp, and has been recognised by industry participants.”

“This Supply Agreement establishes CropLogic as a viable producer and assists in developing credibility amongst other hemp farmers that we are pitching to.”

Pointing to the possible implications for the future, Cooper-Jones said, “CropLogic has received many enquiries and is seen as a corporate primary producer and farm manager.

‘’We will seek to understand larger scale local production and I am sure our experienced team will be able to present a strong business case for further development of our hemp expertise.”

This underlines the positive impact CropLogic is having on the broader agricultural industry in the US where it is a prominent supplier of farm management technology across a broad range of crops.

Consequently, the company is positioned to generate revenues from multiple sources, reducing its reliance on one particular industry and assisting it in funding further expansion.

Aside from focusing on harvesting its existing hemp crop, CropLogic is conducting a Hemp Trial Farm Review which will include assessment of seed selection and performance and scope for larger scale growing operations and application of agtech considerations in scale up.

Near-term catalysts for the group include the release of production numbers in September/October, along with further sales information.

Aligning with prominent processing partner

The sales agreement struck by CropLogic is with Deschutes Labs, a new industrial hemp processing facility located in Central Oregon.

Deschutes Labs has a phase 1 processing capacity of over 10,000 pounds per day.

The lab will commence operations in September 2019 and will be licensed to produce food grade extracts and designed and operated according to GMP and ISO 9000 standards.

Deschutes Labs is supported by sophisticated investors and family offices out of New York who have been attracted to this industry following the passing of the US Farm Bill in 2018.

The Deschutes Labs management team has worked in the CBD and extract industry and has a track record of success in the cosmetics industry including the successful marketing of retail products.

Commenting on the group’s experience and the importance of its relationship with CropLogic, Anthony Vivolo, manager of Deschutes Labs, said, “Our mission is to produce the highest quality hemp extracts and isolates from premium American grown industrial hemp.

‘’Deschutes Labs is proud to be operated by the industry's best, boasting an extraction team with over a decade of professional experience.

“Through our relationship with CropLogic, a growing partner offering vast knowledge in hemp genetics, we can offer our customers consistent and abundant CBD products.”