Industrial hemp is one of the world’s most versatile crops, with potential uses ranging from food and beauty products to biofuel and clothing. But the plant’s close association with marijuana has landed it on the banned substances list alongside its THC-rich cousin, preventing farmers in the United States from cultivating it.
However, the 2014 introduction of a new federal farm bill, which allows agriculture departments and universities to cultivate hemp for research purposes in states that allow it, may mark the beginning of a shift away from that policy. To the founders of Seed CX, a digital commodity exchange centered specifically around seeds, that makes for a tremendous market opportunity.
“We believe industrial hemp is growing massively due to rapidly changing market dynamics, such as the push for sustainable protein other than soya, the fact that tobacco farmers are looking for diversity in crops with the decline of tobacco in the U.S., and the regulatory changes as well,” said Co-founder Edward Woodford.
The idea for Seed CX came out of research he and Co-founder Brian Liston conducted on hemp markets while studying finance at Massachusetts Institute of Technology.
Commodity exchanges are marketplaces where investors and businesses buy and sell contracts for real world goods — like energy, precious metals or agricultural products — typically to be delivered at a set point in the future.
For a farmer or manufacturer, these contracts are a way to protect themselves from price swings, allowing them to make business plans beyond their next shipment. Investors, on their end, lean on commodities to diversify their portfolios.
Formerly the purview of suit-clad operatives crammed tightly into trading pits like that of the Chicago Board of Trade, modern commodity trading has become almost entirely digital. But location still matters, which is why Seed CX has been laying the groundwork for its own digital exchange in Chicago for the past year and a half.
“We have investors from across the world and from across the United States, but Chicago really is the hub of commodities, and understands the economics of agriculture,” said Woodford.
Seed CX got regulatory approval from the Commodity Futures Trading Commission (CFTC) on Tuesday, and plans to launch this fall with hemp as its first product. Woodford said his team is also researching other emerging commodities to be launched at a later date.
Although the commodities vertical is largely dominated by established players like Chicago’s CME Group and the Intercontinental Exchange, Woodford said there is still room for nimbler startup exchanges like his.
“The larger exchanges come to our events, they know what we’re doing, and they’re pretty excited. They know that we can do things that they can’t. We can move quicker, we can take different kinds of risks in launching new products,” he said. “Of course they could try and create a hemp contract, but it’s not just creating a ticker on a screen. There’s a huge amount of economic research.”
Being the first exchange to establish contracts for a particular commodity offers a huge leg up against competitors because traders want to operate in exchanges with existing activity. Citing established partnerships with agricultural traders and companies that use hemp in their products, Woodford expects that his exchange will reach that critical mass.
“Exchanges live and die by liquidity,” said Woodford. “The reason you use eBay or the reason you use Facebook is that, if you want to sell something on eBay, you will find a buyer, and you’re on Facebook because your friends are on Facebook. That’s the same sort of challenge that we face as a business. We are a network effect business.”
Although a number of institutional investors shy away from businesses that have even the faintest smell of illegal substances, Seed CX secured a $3.5 million round of funding in early 2016 from investors including Brooklyn Bridge Ventures’ Charlie O’Donnel, 500 Startups and Tom Sosnoff, the Chicago-based serial entrepreneur and former options trader behind thinkorswim, tastytrade and dough.
Since raising that round, the team has grown from three to 11, with no plans to stop growing anytime soon.
“We are always looking for good people,” said Woodford.
Images via Seed CX and Shutterstock.
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