As hemp farmers lead, banks not ready to follow

Although Pennsylvania farmers are blazing a new path into the hemp industry, local banks and credit unions remain cautious in providing the businesses with financing.

The 2018 farm bill legalized hemp production at the federal level and established provisions for its cultivation, transport and sale. It also removed hemp-derived products from Schedule 1 status under the Controlled Substances Act, a designation that made federally regulated lenders understandably nervous.

Even after the recent changes, some still are, noting that hemp’s regulatory status is still somewhat in flux.

Silver Spring Township-based AgChoice Farm Credit serves 52 counties in Pennsylvania and four counties in West Virginia. It has been fielding a growing number of inquiries from farmers who want to break into the hemp business, but the ag-focused lender is not yet ready to make deals, according to Michael Schrey, the company’s chief lending officer.

“We need final regulatory clarity and guidance around how we can support these farmers. For now, regulation is playing catch-up with the new law,” he said.

Like AgChoice, Chambersburg-based F&M Trust is also waiting for further clarification of federal and state regulations.

Lorie Heckman, F&M Trust’s chief risk officer said there is still confusion over the difference between marijuana and hemp. Both are derived from cannabis, but they are biologically different, she said.

The 2018 farm bill requires that hemp contain less than 0.3 percent of tetrahydrocannabinol, or THC, the active psychoactive ingredient in marijuana.  Any farmer whose crop is tested and found to have higher THC levels is subject to federal penalties, according to the bill.

The production and sale of recreational marijuana remains illegal in Pennsylvania and at the federal level, but hemp is not. Still, hemp is considered high risk by most banks.

When banks lend to a high-risk business, they must send personnel to inspect the business on a regular basis to ensure there is no illegal activity. This creates a stumbling block for many banks, Heckman said.

“It would be time-consuming and not all banks have the resources,” she said.

However, Heckman said F&M Trust is keeping a close eye on regulations as they develop at the state and federal level. Heckman believes most banks want to play a part in the hemp industry; they just want a bigger safety net.

“The hemp industry has the potential to be very lucrative,” she said.

Lower Paxton Township-based Centric Bank and Shippensburg-based Orrstown Bank confirmed that they do not lend or provide services to marijuana-related businesses. Calls to five other midstate banks were not returned.

The reluctance of local banks to associate with hemp businesses is no surprise to Judith Cassel, an attorney with Harrisburg-based law firm Hawke McKeon & Sniscack LLP. She specializes in medical marijuana law.

Cassel said the federal government hasn’t clarified regulations related to the 2018 farm bill. But states such as Pennsylvania are waiting on them before they establish their own regulations, which could be stricter than the federal government’s, Cassel explained.

“Each state has to develop a plan,” she said.

Many banks also are waiting to see if the SAFE Banking Act becomes law.  Recently approved by a U.S. House panel, the act would create a safe path for financial institutions that want to work with legal cannabis businesses.

But until there is further regulatory clarification, hemp farmers are resorting to alternative means of financing, Cassel said. In worst-case scenarios, hemp businesses and marijuana businesses in states where the substance is legal are operating on a cash-only basis, which makes them vulnerable to robbery, Cassel said.

It’s also logistically difficult to run a business without access to credit and payroll services, she said.

But farmers are finding ways to make it work.

Shase Hollenshead, owner of Mercersburg-based Destiny’s Agro Farms, decided to start out small when he obtained a permit from the state Department of Agriculture in 2017 to grow and analyze four varieties of hemp plants for fiber content and seed yields. He began with five acres and now has close to 100, he said.

Hollenshead knew at the time he didn’t want to take a loan out, so he never contacted a local bank to obtain one.

“If I can’t make it, I’ll just exit,” he said.

Smaller banks that have existing relationships with farmers may allow hemp businesses to be run through their accounts, Cassel said, citing a few of her clients who are doing precisely that. But she declined to name the banks.

“These banks are only doing it because of the working relationship they have in place. If word gets out that a bank is making these transactions, they’d likely shut down the client’s account,” she said.

“In some cases, it’s a ‘don’t tell’ situation where the bank just says ‘if we don’t know, then we don’t have to police it,’” she said.

Although many hemp farmers in Central Pennsylvania are starting out small and may have the financial resources to support their new businesses, the lack of access to traditional banking is going to be an increasing problem as more farmers grow hemp and seek to expand, Cassel said.

Cassel hopes federal regulations will be clarified within the next six months. Until then, she is happy with the progress she already has seen.

“I think the farm bill is exciting. I think it’s really exciting that we’re getting back to our roots,” she said.