Projected 2019 hemp boom comes up short, litigation ensues

One of the Blaine Klett’s many Blue Dog Hemp fields in the Valley from a past season closes in on harvest time.

2019 was the year that was supposed to usher in the next big farm boom in Montrose County — industrial hemp would make us all rich.

But something happened during the parade — rain, lots of rain. Those $40,000 to $60,000 per acre yields never happened. The gold rush turned into a trail of depleted bank accounts, fallow farmland and litigation.

Western Slope farmers have seen more than one boom/bust cycle over the past half century. Potatoes, sugar beets, and barley were all highly valued cash crops. But things changed overnight, and the whims of the market killed the potatoes, Holly Sugar shuttered its processing plant, and Coors decided the barley here was not to its liking anymore. This time the crop was hemp, which it has been learned contains a magic elixir that many people tout as having positive effects on everything from arthritis to regularity.

Hemp always had and still does have great value, albeit not nearly as much value as people like the owners and operators of companies like Blue Dog Hemp would have had everyone believe over the past three years. To be fair, Blue Dog wasn’t the only entity that bought into or made claims of a gross income of a million dollars for cultivating 20 acres of cannabis. Nonetheless, Blue Dog, a Texas company, chose the Western Slope as its hemp farming location. Over a period of two years prior to planting time in 2019, the company and its sister, Blue Dog Real Estate, led by Jona (Jonathan) Williams of Austin, Texas, acquired control of about 1,000 acres. That was done through various land contracts, purchases, quit claims and operational agreements with local landowners.

In talking to landowners who either sold or contracted land to Blue Dog for hemp production, the alleged sales pitch did seem off the scale. One landowner, who asked to remain unidentified, told the Montrose Daily Press that the returns the company was pushing were extreme. He said he ended up doing a deal based on his own calculations that indicated that even if a portion of their claims were true, it was still a good prospect.

However, as the harvest for the 2019 crop wound down, it became obvious that a lot of folks would never see the intended return from their land. People started talking out loud.

“They raped this valley,” said Bob Beyers, the man who heads the Producers Co-op. “They created the biggest mess that you have ever seen.”

Producers have a huge stake in the valley ag scene with 1,600 members/owners. The co-op was born more than 90 years ago to create a supply chain entity that would give the local producers better purchasing power and better end user pricing. Producers have weathered all the previous busts. Nonetheless the hemp experiment took a toll.

Beyers says that the Blue Dog operation left a number of co-op members with land that they couldn’t use or even have access to.

“In all, I would say that with failures with hemp, the co-op members lost nearly a half million dollars,” Beyers said.

Did anybody have positive cash flows after the 2019 season?

“There are a few who showed a little positive cash,” said Beyers. But in general, according to the co-op boss, hemp so far has not lived up to the hype.

The big push for hemp land last year came on the heels of the 2018 Farm Bill, which made hemp a legal crop. It also opened the crop to USDA insurance and crop loans. That made it even more attractive.

What the Farm Bill didn’t do was establish a viable, problem free marketing chain. Moving harvested hemp biomass around the country ran into hassles with states where the plant was not legal. Meanwhile, the Federal Drug Administration (FDA) still hasn’t come up with a solid set of guidelines that allows for easy marketing of CBD oil, the primary driver of the big money hemp promoters were looking for. Hemp, for all practical purposes, is still marijuana, a Schedule 1 drug, unless it is certified to have less than 0.3% THC.

The US Department of Agriculture, the federal agency in charge of regulating the hemp industry, is presently mired in conflict with states and producers over its handling of the rules for hemp growing. Almost 5,000 respondents to the agency’s request for comments pushed back over the 0.3% requirement and the USDA demand for all testing to be done by DEA labs.

Another problem came to the fore. The economics of hemp had changed and are still changing. In 2018, six years down the road, promoters were still using the 2012 price for CBD oil to push hemp production. The price for a milligram of CBD oil back then was about 90 cents. But by the time the Farm Bill passed and everyone started climbing onto the hemp bandwagon in 2019, that number had fallen to about 11 cents. That’s a cash crash of 88%. So those $50,000-acres had come back to earth at about $6,000, less the cost of growing and processing the product.

Further, the demand has not kept up with the production explosion.

Of course, hemp has other uses in textiles, wallboard, livestock feed, paper, and other products. There is a market, outside the CBD oil, but it won’t produce cash any better than normal row crops. Hemp was a legal crop before the “War On Drugs” turned it into a totally illegal plant in 1970. The Controlled Substances Act put thousands of successful hemp farmers out of business with a simple congressional vote.

But once it was discovered that hemp had an even more profitable component in its DNA, the move to make it a legal crop eventually produced the enabling legislation in the 2018 Farm Bill, which made it legal to grow on a controlled basis, by keeping the marijuana aspect of it under certain tolerances.

The Farm Bill, however, left as many questions as it did opportunities. Even though the state of Colorado has done a credible job of sorting out the legalities and licensing that have allowed people who wanted to grow hemp in the state to do so rather unimpeded. What happened next, especially in Montrose County, has been referred to as a gold rush, with all the financial shenanigans, grifters, and get-rich-quick talk.

And so Blue Dog came to the Slope looking for land on which to grow hemp. They were all in. Blaine Klett, who is no longer part of the company, and Williams came to town and presented local landowners with visions of gold dripping off plants growing in the sun. In all they identified and gained control over 18 locations — about 1,000 acres. That represents about 13 percent of the acreage registered in Montrose County.

Together, the scattered parcels made up what they called, on the company website, the Montrose Hemp Farm. They set up shop in a greenhouse structure just off Shavano Valley Road in the far south end of the valley.

The 2019 Blue Dog hemp crops came in pretty well and there appeared to be a good crop to be harvested. But some the harvest was delayed, for whatever reasons, in some fields. Then a hard freeze in October basically killed off the remaining crop, rendering it virtually useless.

One indicator that something was awry was the black plastic still covering the fields, months after the crop had been removed. The use and removal of the plastic is one of the complaints listed by the Colorado Department of Agriculture. One land owner, who asked not to be identified, told us he finally spent $15,000 for a machine to remove the plastic from his land. He also made the tool available to others in the same boat. He said that even getting the material out of the fields still left him with a problem — what to do with it. It is not biodegradable or recyclable. And landfills won’t take it.

Blue Dog was asked about the plastic and their plans for this year on Feb. 26. The company’s emailed response reads: “We are in the process of removing our plastic from the fields. Once the weather cooperates, we will have it removed. We are exploring options for recycling the plastic.

“The team is still in discussions as to our plans for the 2020 season and we haven’t made any final decisions about the number of acres that will be planted.”

At this writing, it appears, by visiting some of the fields that some of the plastic has been removed, but in others, it is still on the ground. That which had been taken out of the planting areas is still located in rolls at the fields’ edges.

As the New Year dawned, unrest became more palpable. The Daily Press office has received many phone calls with complaints. This reporter has been getting tips and information from various sources for months. Some landowners who had done deals with Blue Dog referred the Daily Press team to legal counsel when asked about the matter. Although not all of the criticism was aimed at Blue Dog, it was nonetheless registering dissatisfaction with the result of the 2019 hemp season.

In gathering the facts for this story, few people have wanted to go “on record” with the complaints. Some, we found out, had signed “nondisclosure” orders that left them powerless to say anything under threat of legal action.

One state level document that has come to light was a 2019 Hemp Summary prepared by the Colorado Department of Agriculture (CDA). Under a section of the presentation called The Good, The Bad and The Ugly, the CDA outlines a hefty number of matters of compliance that include growing unlicensed hemp, failing to make reports, hot crops exceeding THC limits, failure to pay for inspection and sampling, and stealing water.

Most of these violations could produce a civil penalty up to $2,500 per charge and revocation or suspension of registration (licensing). The water theft matter could be a criminal situation.

A request for a list of violators was submitted to the CDA on behalf of the Daily Press. Hemp Program Manager Brian Koontz declined to provide the list, saying that it was confidential. The list is still the subject of further requests under the Freedom of Information Act (FOIA).

Finally, we submitted an email to Jona Williams and Michael Sanchez at Blue Dog, outlining the alleged problems that had been brought to our attention. Their response was:

“Thank you for the email and the information. We do not doubt that many people are disappointed with the way last season turned out as the hemp market has struggled over the last few months. What everyone expected to be a very lucrative industry has slowed down substantially.

“While we appreciate that you have a job to do, we do not intend to get into a ‘he said, she said’ battle in the media. People are entitled to their opinions but that doesn’t necessarily make them true.”

The response further said:

“The Colorado and national hemp/CBD industry has changed dramatically over the past 12 months. We, as every other hemp/CBD operation, are doing our best to navigate and adapt to the changing realities of the market. The nature of the hemp/CBD market is not a secret nor do we have any control over it, we can only do our best to respond to it.”

These responses were provided by Blue Dog Marketing chief Michael Sanchez.

Of course, Blue Dog wasn’t the only player in the game. Another major player has been Paradox Ventures LLC. Its consulting and bedding services were widely used over some of the more than 6,000 acres under cultivation in Montrose County. Paradox also had a good bit of the plant under cultivation themselves.

State Sen. Don Coram, a principal in the firm, was quite candid when asked for the Paradox plans for this year.

“At this time we do not intend to plant this year. We are in the process of moving our inventory of oil and biomass from 2019. We will evaluate for the 2021 season after this shakes out,” he said this week. This is consistent with the Paradox position shortly after harvest when it had become apparent that the price structure and glut had drastically affected the profitability of the product.

On the other end of the product chain is the processing to distill CBD oil. There is one plant in the area doing that, General Processing, located just north of Olathe in Delta County. The plant is owned and run by Matt Miles of Montrose.

Miles told us that the plant brought in, dried, and stored about 500,000 pounds of hemp plants. The materials came from 27 different local growers. As crews finish processing and distilling the stored materials, they are just starting to do some processing for two out of state companies.

Miles said that General Processing has sold about 25 percent of the product it has processed with sales for Only Pure, the house brand oil, staying strong because of a relationship they have with Natural Growers Vitamin Cottage brand.

Miles says he sees a big cutback in the local hemp planting this year.

“A lot of people are waiting for direction from government jurisdictions,” he said. “That said, I still think the future for the CBD industry is very bright.” Miles also said he thinks we all got our heads a bit past the tips of our skis early on.

Meanwhile, the General Processing chemists have been hard at it. “We have developed a proprietary system to degrade the psychoactive THC cannabinoid into CBN, a beneficial non-psychoactive cannabinoid,” said Miles.

He added that this is a very big deal for his company and for the industry. “It totally eliminates the THC without having to alter the finished product in a negative way. By being innovative and staying ahead of the competition, we expect to remain successful for the foreseeable future,” Miles said.

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