The CARES Act: Impact on Hemp Businesses

By Andrea A. Golan

May 7, 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed into law by Congress on March 27, 2020, includes several emergency appropriations provisions to provide relief to the agricultural sector.1 These relief programs are directed towards agricultural and rural businesses, and they are in addition to loans, tax relief provisions, and other benefits available to eligible businesses under the historic CARES Act legislation, including the Paycheck Protection Program and U.S. Small Business Administration (SBA) Emergency Economic Injury Disaster Loans. (More information on these programs can be found in our VS Insights series, "Coronavirus and Cannabis: Monitoring the Impact.") While marijuana businesses may not be eligible for certain programs under the CARES Act, hemp farmers and businesses are eligible to seek loans and direct aid to offset the immediate economic impacts of the virus.

The CARES Act includes:

Agricultural and Manufacturing Assistance2

  • $9.5 Billion to the Department of Agriculture for Agricultural Producers. The CARES Act provides an additional $9.5 billion to the Department of Agriculture to provide financial support to farmers and ranchers impacted by coronavirus. The funding is allocated specifically for specialty crops, producers who supply local food systems and farmers’ markets, restaurants and schools, livestock producers, i.e., cattlemen and women, and dairy farmers.

  • $14 Billion to Commodity Credit Corporation (CCC). The CARES Act includes $14 billion for the fiscal year 2020 to replenish the CCC (a funding mechanism for agricultural programs) which is used to stabilize, support and protect farm income and prices through initiatives like the Market Facilitation Program (MFP). This replenishment will allow U.S. Department of Agriculture (USDA) to develop new support programs to assist agricultural producers and potentially help agribusinesses such as ethanol plants.

  • $20.5 Million of lending for USDA’s Rural Development Business and Industry Loan Guarantee Program. The CARES Act includes $20.5 million to support $1 billion in lending for USDA’s Rural Development Business and Industry Loan Guarantee Program. This program targets rural businesses and provides loans ranging from $200,000 to $5 million, with an average size of approximately $3 million. Eligible businesses include businesses with facilities located in rural areas that save or create jobs. Most types of businesses are eligible, including those engaged in manufacturing, wholesale, retail, and service industries. Eligible entities include partnerships, individuals, cooperatives, for-profit and nonprofit corporations, including publicly-traded companies, tribal groups, or public bodies. Any size business may be eligible but certain industries may be restricted. Loan funds may be used for any essential business purpose, including:

    • Business acquisitions, construction, conversion, expansion, repair, modernization, and development;

    • Purchase of equipment, machinery, and supplies

    • Startup costs and working capital;

    • Projects supported by New Markets Tax Credits;

    • Debt refinancing under certain conditions. Funds can be used to refinance loans, provided the refinancing improves cash flow while creating or saving jobs. If a lender wishes to refinance a loan already in its portfolio, the loan being refinanced must be closed and current for at least the past 12 months and may not exceed 50 percent of the overall loan unless the loan is federally guaranteed.

    • More information on the USDA’s Rural Development Guaranteed Loan Program can be found here and here.

  • A temporary three-month extension on repayment of commodity marketing assistance loans, from nine months up to a year. Until September 30, 2020, the Secretary may extend the term of a marketing assistance loan authorized by section 1201 of the Agricultural Act of 2014 (7 U.S.C. 9033) for any loan commodity to 12 months.

  • $100 Million in grants to improve rural broadband. Which provides grants for the costs of construction, improvement or acquisition of facilities and equipment needed to provide broadband service in eligible rural areas.

  • The availability of Economic Injury Disaster Loans to businesses with fewer than 500 employees. An EIDL can provide low-interest financial assistance to a business that suffers substantial economic harm as a result of a federally-declared disaster. The SBA has indicated these loans are available to businesses that produce or sell hemp and hemp-derived products. Information on the EIDL program can be found here.

  • The availability of the Paycheck Protection Program for businesses with fewer than 500 employees. The program gives SBA the authority to provide 100% federally-backed loans through December 31, 2020, to help eligible businesses pay operational costs such as payroll, rent, and utilities. If a business satisfies certain conditions, portions of the loans are forgivable. Learn more about PPP loans.

  • $50 Million is provided for the Hollings Manufacturing Extension Partnership to help small- and medium-sized manufacturers recover from disruptions caused by COVID-19 by finding value within the supply chain and expanding markets. The Manufacturing Extension Partnership (MEP) is a public-private partnership with centers in all 50 states and Puerto Rico. These centers provide services to manufacturers to meet critical needs, ranging from process improvement and workforce development to specialized business practices, including supply chain integration, innovation, and technology transfer. The centers also connect manufacturers with government agencies, trade associations, universities and research laboratories, state and federal initiatives, and many other resources. Additional information about the MEP can be found here.

USDA Coronavirus Food Assistance Program

On April 17, 2020, the U.S. Secretary of Agriculture announced the Coronavirus Food Assistance Program (CFAP), a $19 billion relief package to provide support to farmers and ranchers, maintain the integrity of the food supply chain, and ensure every American continues to receive and have access to the food they need. According to a statement released by U.S. Senator John Hoevan of North Dakota, chairman of the Senate Agriculture Appropriations Committee, $16 billion in direct payments will include: $9.6 billion for the livestock industry, $3.9 to row crop producers, $2.1 billion to specialty crop producers, and $500 million for other crops.

On an April 17, 2020 media call, U.S. Secretary of Agriculture Sonny Perdue said the $500 million for “other crops” includes hemp. Perdue stated, “Hemp growers, if they demonstrate a loss, they will be considered like other crops.” Listen to the audio from Secretary Perdue’s media call.

The program consists of two major components: (1) $16 billion in direct support to farmers and ranchers and (2) $3 billion in purchases of agriculture products.

Direct Support to Farmers and Ranchers

The $16 billion in direct payments to farmers and ranchers will be based on actual losses for agricultural producers where prices and market supply chains have been impacted and will assist producers with additional adjustments and marketing costs resulting from lost demand and short-term oversupply for the 2020 marketing year caused by COVID-19.

The $16 billion in direct payments for farmers and ranchers will be funded using the $9.5 billion secured in the CARES Act for the Department of Agriculture and $6.5 billion in Commodity Credit Corporation (CCC) funding.

According to Senator Hoevan’s news release, producers will receive a single payment determined using two calculations:

  • Price losses that occurred January 1-April 15, 2020. Producers will be compensated for 85% of price loss during that period.

  • The second part of the payment will be expected losses from April 15 through the next two quarters and will cover 30% of expected losses.

The payment limit is $125,000 per commodity with an overall limit of $250,000 per individual or entity. Qualified commodities must have experienced a 5% price decrease between January and April.

USDA is expediting the rulemaking process for the direct payment program and expects to begin sign-up for the new program in early May and to get payments out to producers by the end of May or early June.

USDA Purchase and Distribution

USDA will partner with regional and local distributors to purchase $3 billion in agricultural products, including produce, dairy and meat that will be provided to food banks and other non-profits serving people in need.

USDA also released a comprehensive COVID-19 Federal Rural Resource Guide that provides details on all federal resources that can help rural residents, businesses, and communities.

New Guidelines for FSA Direct and Guaranteed Loans to Hemp Producers

On April 16, 2020, the U.S. Department of Agriculture (USDA) released new Guidance on Servicing Direct and Guaranteed Loans with Hemp Producers outlining the eligibility and application requirements industrial hemp producers must satisfy to access USDA’s lending services.

Producers growing hemp under state pilot programs authorized by the 2014 Farm Bill Pilot Program are eligible for Farm Service Agency (FSA) loans until October 30, 2020, when the 2014 Farm Bill will sunset. Starting with the 2020 growing season, producers growing hemp under the 2018 Farm Bill are eligible to receive FSA loans. FSA will require applicants growing under the 2018 Farm Bill to be licensed under a State or Tribal plan approved by the USDA or if a producer resides in a State or Tribe that does not have a USDA-approved plan, the producer must be licensed directly by USDA.  An operation that receives financing and is later determined not to be licensed under either the 2014 Farm Bill or the 2018 Farm Bill will be considered to be in “non-monetary default,” meaning that losses related to hemp will not be covered under the FSA guarantee.

FSA eligibility and application requirements include:

  • License to grow hemp: A copy of the producer’s current license to grow hemp authorized by the 2014 or 2018 Farm Bill.

  • Proof of Contract: For income from hemp production to be included in projected cash flow or to be used for income projections, a contract for the purchase of hemp is required.  The contract to grow/purchase should meet the following requirements: (i) provide for termination based on objective “for cause” criteria only; (ii) require the grower be notified of specific causes for cancellation; (iii) provide assurance of the producer’s opportunity to generate enough income to develop a cash flow budget and repay the loan; and (iv) be issued by a purchaser that has a reasonable and realistic prospect of fulfilling the contract (purchasers should have a demonstrated history of satisfying similar contracts). Producers should also ensure that purchasers are properly licensed and have a history of fulfilling similar contracts. FSA and/or the Guaranteed Lender may consider servicing a loan without a hemp contract if the hemp grower is properly licensed and shows they can cash flow without any hemp income.

  • Acreage: The FSA and Guaranteed lenders will require that the planned hemp acreage matches the acreage reported to the FSA (as required by the 2018 Farm Bill) and the information provided with the license number.

  • Dependable Source of Income: FSA requires that income sources be dependable and likely to continue. FSA will review the previous production year contract and compare it with the borrower’s actual performance. All lenders must use as much of the operation’s historical information as possible for a general guide. Producers will be required to assign their sale proceeds to FSA in an amount not to exceed their annual payment.

  • A Farm Business Plan (FPB): For direct loans, FPBs must be based on standard production budgets. Enterprise budgets are considered acceptable starting points, but business plans must reflect realistic performance assumptions that take into account (i) increased input costs by region; (ii) intended use of hemp being produced; (iii) increased income for organic production; (iv) changes in unit numbers and weights; (v) quality levels if production is for CBD; and (vi) other relevant facts that affect net income.

    • Note: The Kentucky State Department of Agriculture website provides several useful enterprise budgets that were prepared in conjunction with the University of Kentucky for all types of hemp being grown, which can be found at http://hemp.ca.uky.edu/.

  • Banking: Applicants should make sure they have access to a bank authorized to accept financial transactions from hemp operations.

  • Restructuring: When lenders are reviewing servicing options and creating future plans for hemp businesses they must (i) use as much of the operation’s historical information as possible for a general guide; (ii) review the previous production year’s contract; (iii) compare the contract with the operation’s actual performance, and (iv) review the new contract (if applicable) to ensure production is attainable and the borrower has the means of meeting any contract requirements.

  • Liquidation: A hemp operation’s license cannot be transferred to another producer or a creditor. Therefore, if the borrower defaults, dies, or abandons the operation, another individual, lender, or FSA Agency cannot obtain rights to the commodity and liquidate it as a full or partial income recovery attempt.

  • Hemp Disposal: FSA will not pay for crop disposal nor will it cover a lender’s advance to the borrower to cover the cost as part of any guaranteed loss claim.  If a producer’s hemp crop is destroyed for testing above the 0.3% THC threshold, the FSA may consider this similar to a crop damaged by disease or insects provided the destruction of the hemp was beyond the borrower’s control and the borrower did not commit a negligent violation as determined by the licensing authority.

Farmers can get more information about potential federal loans from the USDA’s Farm Service Agency (FSA)

The FSA is the primary lending arm of the USDA, and its county offices are open by phone appointment. FSA is relaxing the loan-making process and adding flexibility for servicing Direct and Guaranteed loans to provide credit to producers in need. Some services are also available online to customers via the farmers.gov portal where you can view USDA farm loan information and payments, and view and track certain USDA program applications and payments. Hemp remains highly regulated for federal loan participation- ensuring compliance is critical before you submit a loan application.

The FSA offers a variety of farm loans that may be beneficial to hemp businesses including Direct Operating Loans, Microloans, Direct Farm Ownership Loans and Guaranteed Loans. Loans are also available for specific audiences such as Youth Loans, and loans for minority and women farmers and ranchers and beginning farmers. Loans are also available for specific situations. There are also several specialty loans available including emergency loans and Native American Tribal Loans. More information about the types of FSA loans is available here.


Other Resources for Hemp Businesses

There are many non-emergency-related federal and state loans, grants, and other benefits available to agricultural and related businesses. These programs may now have additional available funds from the CARES Act, and the benefits of the additional funding will be realized for years to come. Note that many state grant programs have upcoming deadlines, and we recommend consulting with counsel regarding timely opportunities in your states of operation. Available federal programs include but are not limited to:

  • USDA Organic Certification Cost Share Programs (OCCSP) provide producers and handlers with financial assistance to reduce the cost of organic certification. OCCSP programs are overseen by the USDA but administered by state departments of agriculture. Producers and handlers that have already been certified as organic can apply to the program in their state for reimbursement of certain costs associated with organic certification. Additional information about OCCSP programs can be found here.

  • Rural Microentrepreneur Assistance Program (RMAP) loans may be available to businesses in eligible rural areas with fewer than 10 full-time employees. This program provides loans and grants to Microenterprise Development Organizations (MDOs) that then use the funds to help microenterprises start-up and grow through a Rural Microloan Revolving Fund and provide training and technical assistance to microloan borrowers and micro-entrepreneurs. Eligible businesses can apply to MDOs for loans up to $50,000, limited to 75% of the project cost, with fixed interest rates. Additional information here.

  • Value-Added Producer Grants are awarded to agricultural producers that enter into value-added activities related to processing and/or marketing bio-based value-added products. Grants are awarded each year through a national competition. The program is currently closed for 2020 but will likely be available again in 2021. Additional information here.

  • Beginning Farmer and Ranchers Loan Program loans may be available to new farmers. USDA, through the FSA, provides direct and guaranteed loans to beginning farmers and ranchers who are unable to obtain financing from commercial credit sources. Each fiscal year, the FSA targets a portion of its direct and guaranteed farm ownership and operating loan funds to beginning farmers and ranchers. Additional information here.

  • Farm Storage Facility Loans (FSFL) programs can provide financing to build or upgrade facilities. The Farm Storage Facility Loan program provides low-interest financing so producers can build or upgrade facilities to store commodities. Eligible commodities include, among others, grains, renewable biomass commodities, and floriculture. Eligible facility types include grain bins, hay barns, bulk tanks, and facilities for cold storage. Drying and handling and storage equipment are also eligible, including storage and handling trucks. Eligible facilities and equipment may be new or used, permanently affixed or portable. Additional information here.

  • Whole-Farm Revenue Protection (WFRP) insurance policies can help protect farm operations. The Whole-Farm Revenue Protection is available for hemp grown for fiber, flower, or seeds. WFRP allows coverage of all revenue for commodities produced on a farm up to a total insured revenue of $8.5 million. Producers can purchase WFRP coverage if they have a contract for the purchase of the insured industrial hemp and meet all applicable state, tribal, and federal regulations. Additional information here.


The Food and Drug Administration: Modifications to the OTC Drug Review Process

The Food and Drug Administration (FDA) will receive an additional $80 million in funding under the CARES Act to develop necessary medical countermeasures and vaccines, advance manufacturing for medical products, and monitor medical product supply chains in response to COVID-19. The CARES Act also includes several provisions that modify the over-the-counter (OTC) drug monograph review process, previously passed in the Senate as the “The Over-the-Counter Monograph Safety, Innovation, and Reform Act of 2019.” These provisions aim to streamline the regulatory process for approving new OTC monograph drugs, make it easier for FDA to update monographs, and provide flexibility for the agency to respond to safety issues and innovations. The key OTC drug review provisions are:

  • Currently Marketed OTC Drugs. Deems currently marketed OTC drugs as generally recognized as safe (GRAS), and not new drugs, not misbranded, and not subject to the prescription requirements of Section 503(b)(1) of the Federal Food, Drug and Cosmetic Act (FDCA) or requiring a new drug application under section 505.

  • Misbranding. Clarifies that an OTC drug that does not comply with the monograph requirements is misbranded.

  • Provides a more expeditious administrative order process. Removes the requirement for notice-and-comment rulemaking for OTC drug monographs and replaces it with a more expeditious administrative order process, including an abbreviated public comment process, formal dispute resolution, and judicial review of final agency actions.

  • Update to the Sunscreen Innovation Act (Section 586 of the FDCA). Replaces the current sunscreen monograph with a sunset provision. Clarifies that sponsors of sunscreen ingredients with pending orders have the option to seek review per the Sunscreen Innovation Act or to seek review under the new monograph review process.

  • 18-Month Exclusivity Period. The CARES Act incentivizes pharmaceutical companies to research and manufacture innovative drug products by providing an 18-month exclusivity period for:

    1. OTC drugs that contain an active ingredient not previously incorporated in a drug, or

    2. Administrative orders that provide for a change in the conditions of use of a drug for which new human data studies conducted or sponsored by the requestor were essential to issuance of the administrative order. The bill also imposes user fees to support FDA’s OTC drug review activities.

  • Updates to Congress for cough and cold monograph drugs for children under six. Requires an annual update to Congress on the appropriate pediatric indication for certain OTC cough and cold monograph drugs for children under age six.

To learn more about the eligibility of your business for loans, tax credits, or other relief under COVID-19 related federal or state laws, or for support in applying for a loan, please contact your Vicente Sederberg attorney.

Vicente Sederberg is actively monitoring federal, state, and local action and will continue to provide updates through our COVID-19 Resource Center.  


Endnotes

1 These provisions are found in Division B of the CARES Act, entitled “Emergency Appropriations for Coronavirus Health Response and Agency Operations”

2 These agricultural provisions represent 98% of the food and agriculture-related provision of the CARES Act. The remaining 2% of funding, approximately $916 million, is allocated for salary costs for enhancing services for a number of agricultural support programs.

This article is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. This material may be considered attorney advertising under certain rules of professional conduct.