The Agricultural Improvement Act of 2018 (commonly referred to as “the Farm Bill”) legalized and regulated industrial hemp across the nation. This has created excitement among farmers and processors who seek to cash in on this new industry. The Farm Bill removed industrial hemp from the Controlled Substances Act. 18 U.S.C. 812(c). It also permitted those who are licensed by a state program to grow industrial hemp. In addition, it provided for protections for those transferring licensed hemp through interstate commerce. 7 U.S.C. § 1639o(b).
Even with this new “legalization” there remains a patchwork of state and federal law which apply to both growing and processing this new crop. The Farm Bill requires states to submit regulatory plans for approval and specifically does not preempt any state law. 7 U.S.C. § 1639p. The primary source of enforcement are state regulatory agencies, along with local, state, and federal law enforcement.
Kentucky is ahead of the curve. The Kentucky Department of Agriculture (KDA) implemented the Commonwealth’s Industrial Hemp Pilot Project in 2014 and it has since grown exponentially. In 2015, the KDA approved 1,742 acres planted. That number is set to skyrocket to 42,000 approved acres for 2019. On the very day the Farm Bill was signed into law, the KDA filed its application for approval. There is little doubt that it will be granted. The KDA issues licenses to hemp growers and processors pursuant to KRS 260.850 et seq. and its regulations specifically outline how its licensees must act.
The current regulations require all persons who grow, handle, or process industrial hemp to be licensed by the KDA and to comply with strict rules related to Tetrahydrocannabinol (THC) testing, handling, and transferring hemp. These regulations and their interplay with federal regulations can be complicated. As a result, many compliance questions abound, but the importance of compliance cannot be understated. For example, if one processes, grows, transfers, or markets hemp without a license, they are subject to prosecution for possession or trafficking a controlled substance. KRS 260.858(3); KRS Chapter 218A. Violating the regulations can result in a five year ban from the program. 302 KAR 50:030. Thus, Kentucky growers, processors, and brokers need to ensure compliance with these regulations to maintain their licenses and to stay on the right side of law enforcement. Below are just a few of the requirements they need to know about Kentucky’s laws and regulations.
Know if Your Product is in the KDA’s Industrial Hemp Program.
Growers, processors, and brokers must know if they are handling a product the KDA considers in-program or out-of-program. Out-of-program materials include stripped hemp stalks, dried roots, cannabinoid extracts such as CBD oil, and crushed grain. Any person may transfer or sell these products outside of KDA’s program. But federal law may apply, such as the Food, Drug and Cosmetic Act. Other state laws may also apply.
In-program transfers include whole stalks that include the leaf and seed, unprocessed floral material, viable seeds, and rooted hemp plants. Transfers of these materials are required to comply with both state and federal law. This includes ensuring that the material is transferred to and from an entity that is licensed by the KDA or another state’s industrial hemp program.
Grower Specific Requirements.
The KDA requires applicants for grower’s licenses to comply with specific requirements found in 302 KAR 50:020. Growers must specify the anticipated amount of acreage, the source of the seed, and the exact GPS coordinates of the growing site. A background check is required along with an application fee. Growers are required to maintain a crop that is under 0.3% THC and comply with strict testing requirements. When transferring in-program material, the harvested hemp must be accompanied by a copy of the grower’s license and may only be transferred to another entity that is licensed by the KDA or by another state.
Processor and Handler Specific Requirements.
Processors and handlers must comply with some of the same requirements as growers, along with some tailored specifically to their activities. These requirements are found in 302 KAR 50:030. The KDA requires applicants for processor’s and handler’s licenses to identify the location of their operations, outline their marketing plan, and identify what products they intends to produce, in addition to a host of additional requirements. Processors and handlers may only purchase hemp from a licensed grower and, as with growers, they may only transfer in-program material to or from other licensed entities.
Additional laws and regulations apply depending on the products being produced. For example, if a processor intends to produce food products, it must comply with the Kentucky Food, Drug, and Cosmetic Act (KRS 217.002 et seq.) and corresponding regulations. It must also comply with the Food and Drug Administration (“FDA”) laws and regulations. This includes obtaining the appropriate permits, operating in a compliant facility, and appropriately labeling the products. In addition, the FDA has a current prohibition on certain hemp derived products, such as CBD, from being placed into food products, pet food products, or cosmetics. While the FDA has recently indicated that it will review these guidelines in light of the Farm Bill, its timeframe is uncertain..
Marketers and Brokers
It is illegal to market or broker the sale of industrial hemp in Kentucky without a license. KRS 260.858(3); 302 KAR 50:030(2)(1). Marketing includes efforts to advertise and gather information about the needs or preferences of potential consumers or suppliers. KRS 260.850(8). KRS 260.858(3) permits licensed entities to use “agents.” This term is not defined in the statute, but the KDA has indicated that it will not permit a person to be an agent of multiple licensees. Therefore, an employee or independent contractor of a licensed entity who is not marketing or brokering for any other licensee would likely be considered an agent of the licensee. However, a person or entity cannot broker or market hemp for multiple licensees without their own license.
Testing for THC
All persons handling hemp must ensure the THC level is below 0.3% or they risk losing their crop or worse—prosecution by federal, state, or local law enforcement. The KDA has specific testing requirements throughout the growing, harvesting and production process. 302 KAR 50:050. This includes testing seeds, pre-harvest testing, and post-harvest testing. If the crop tests above the prohibited level, additional tests are required. The growers or processors usually pay for these tests. Crops not coming into compliance may be burned and potentially referred to law enforcement.
Due to the variance in some of the tests, current KDA guidance permits growers to market material falling under a range of 0.4% THC. However, if transferring outside of Kentucky, one must ensure compliance with the destination state’s regulations and THC marketing thresholds.
There are additional compliance considerations too numerous to list. These regulations are subject to rapid and dramatic changes to keep up with this growing industry. Of course, all of this is in addition to the risk inherent in any new agriculture business. To ensure compliance with federal and state law and limit your risk, it is important to get advice from knowledgeable attorneys. This could be the difference between running a profitable industrial hemp business and facing Draconian sanctions such as removal from the program or criminal charges.
