While hemp seed is one of the three official contracts that Swaps Execution Facility (SEF) Seed CX will launch with, the name “seed” represents a much broader concept. One that hopes to grow; well, like a seed.
“We don’t define ourselves as a hemp exchange; we define ourselves as a commodities exchange that is leading the way in industrial hemp and other markets,” says Edward Woodford co-founder of Seed CX. “Other markets where our expertise in [launching] new markets and creating new products is something we can repeat [and build on].”
While Seed CX is a market — set to launch in Q4 2016 — for legal hemp products, and not related to either medicinal or recreational cannabis, it had its own legal hurdles to pass.
It did so with the 2014 Farm Bill Act, which allowed for the growth of industrial hemp in all 50 states provided that the states had the regulatory infrastructure in place.
“Hemp comes from a cannabis plant but the plants are very different,” Woodford says. “Basically marijuana is anything with more than 2% THC (Tetrahydrocannabinol, the element that creates a high) and industrial hemp is anything with less than 2% THC.”
It is that connection to marijuana that had always been a barrier for the widespread production of hemp in the United States, but the uses for the plant are numerous, widespread and are growing all of the time.
Hemp is used as a fiber, food and feed source as an oilseed and in numerous medical applications.
Cannabidiol (CBD) is a compound found in both hemp and cannabis that holds multiple medical benefits. The plant is also friendly to grow and U.S. agriculture is eager to participate according to Woodford. “Hemp is now being grown in more than 10 states and 33 states have allow [farmers] to grow industrial hemp,” Woodford says. “There are businesses throughout the United States that use industrial hemp.”
However, markets involve risk and growers and processors of hemp need a mechanism to offset that risk. That is where Seed CX comes in, an electronic trading facility regulated by the Commodity Futures Trading Commission and backed by a consortium of farming groups and exchange liquidity providers.
Like all emerging markets the challenge is getting the initial liquidity. “You need to create a critical mass. People go to eBay because you know that you can buy and sell there,” Woodford says. “You have to create incentives to be there, you have to bring people to the market and build a competence and belief that there will be somebody on the other side of the market.”
Seed CX is adding users to its platform and will launch as a SEF in an uncleared environment. Liquidity providers will need to establish credit agreements similar to an ISDA (International Swaps and Derivatives Association) agreement with hedgers and anyone trading.
“As a SEF we simply allow the transaction to occur. We have to ensure that everyone trading on our platform meets the requirements and has a credit agreement in place,” says Woodford.
However, Seed CX is looking to become a full Derivatives Contract Market by early 2017. “We are very close to establishing a relationship with a clearing house which would allow us to become a fully fledged exchange that could trade futures,” Woodford says.
Woodford says that Seed CX’s focus is to serve the entire hemp supply chain, giving processors confidence they will have a place to hedge. “Supply chains [are] like dominoes, you need every domino to be there. To get it from farmer to customer is a domino effect, if a domino is not there than it doesn’t go all the way through to the customer,” he says. “Our product benefits everyone from customer to farmer but the person that is mostly taking the risk in the market is the processor.”
The focus will be in building the initial liquidity. “For us it is all about volume, it is about creating a platform where we quickly innovate and launch new products and the products gain traction,” Woodford says. “In five years we want to have hundreds of thousands of contracts traded on a daily basis. We want to be known as people who innovate, create trading opportunities for speculators and help market participants hedge their risk in markets which to date have not been served.”
It is a tall order, but one that every successful exchange has gone through. With the demand for hemp growing, those that meet that challenge will need a tool to hedge their risk and Seed CX plans on being there for hemp, as well as building a platform to serve other emerging agricultural commodities.