by Chelsea Jensen
West Hawaii Today
cjensen@westhawaiitoday.com
Wednesday, February 17, 2010 8:33 AM HST
Kona coffee farmers are losing out on up to $14.4 million in revenue annually to corporate marketers of 10 percent Kona coffee blends, according to a study released last Wednesday.
"Growers experience no benefit from blending as is now practiced. In fact they experience a loss that is possibly on the order or greater than the gain to the blenders," according to the study Economic Effects of Blending Kona Coffee by Marvin Feldman, an economist with San Francisco-based Resource Decisions. "With regard to the distribution of the impacts, the report concludes that the marketing of 10 percent Kona blends authorized by current Hawaii law results in a partial transfer of profit from growers to blenders and from in-state to out-of-state interests."
The study, funded by the Kona Coffee Farmers Association, assessed the economic impact blended coffee has on local growers who produce 100 percent Kona coffee. The study compared the current 10 percent blend law to the association's proposal to limit the use of the Kona name to 100 percent Kona coffee.
"This study validates what we were convinced was the case all along. The exorbitant profits made by the blenders from using the Kona name on a package of 90 percent foreign-grown coffee comes out of the pockets of the growers," said the association's president, Bruce Corker, noting that blends also flood the market reducing prices for 100 percent Kona coffee. "When you only have 3 million pounds of green coffee a year in Kona and can only use the name on the genuine article then the price is going to skyrocket. ... More money is going to come to the producers which will bring economic resources into West Hawaii instead of, as the study indicated, having these huge profits go to the blender and may ultimately end up out-of-state."
Under state law, use of the name "Kona" is authorized on packages containing a minimum 10 percent Kona-grown coffee.
In 2007, the state Legislature requested the Department of Agriculture study the labeling practice and address issues related to increasing the minimum content requirement from 10 percent to 50 percent. While the study found a change would have significant impact on producers, processors and consumers, it did not define whether that change would be positive or negative.
The department ultimately recommended an additional study be conducted to measure solely the economic impact, but funding for the study never materialized, leading the Kona Coffee Farmers Association to fund the preliminary study by Feldman, who also owns a small coffee farm in Captain Cook.
"It's a gross distortion of reality," said Jim Wayman, president of the Hawaii Coffee Co., which distributes Lion and Royal Kona blended coffee brands. Wayman, who said he had not finished analyzing the study, refused further comment.
Corker said with the study complete, farmers and blenders could begin making headway on a compromise to change Hawaii's 10 percent law. While the association would prefer a 100 percent law, compromises such as requiring that the product be 75 percent or at least 51 percent Kona coffee have been offered, he said.
"The problem we faced in the Legislature year after year is that the blenders come in and say nothing should be done unless there is consensus in the industry. But we're never going to get consensus in the industry as they define it," Corker said. "Because no one could finance the study it has been a very effective delay (tactic) for them and what this does is start the debate process with an economist's view of what indeed would happen."
Dexter Washburn, owner of the 5-acre Aerie Farm in Holualoa, said the study might even have been conservative based on the fact that data concerning Kona coffee production is limited and many blenders refuse to release data citing proprietary reasons.
"My own gut tells me that the financial implications of the 'counterfeiting' business is much larger than $14.4 million," he said. "From the amount of 10 percent sold, I think it would have a bigger impact on the market, but don't get me wrong, $14.4 million is a lot of money and if it's distributed amongst the 600 or so farmers it would be helpful."
According to the study, a majority of blended Kona coffee is produced by Honolulu-based Hawaiian Coffee Co. and Hawaiian Isles Kona Coffee Co. Messages left with Hawaiian Isle Kona Coffee Co. seeking comment were not returned as of press time on Tuesday.
Kona coffee farmers have produced 2.7 million pounds during the past 10 years of which about 10 percent -- or 270,000 pounds of prime -- is available to blenders. That 270,000 pounds, according to the study, produced about 2.2 million pounds of blended Kona coffee.
From the blenders' perspective, the value added by blending Kona and commodity coffee is based on the cost of the component green beans, plus the added cost of roasting and bagging.
After delivery costs are incurred, the commodity coffee trades at about $1.50 per pound in Hawaii and the average price of green Kona coffee during the 2008-09 season stood at $6.63, according to the study which ultimately found roasted Kona blend coffee costs $3.81 per pound to produce.
"Hawaiian Coffee Co.'s Web site lists their Lion brand at $16 per 20 ounces, resulting in $12.80 per pound. Hawaiian Isles coffee offers their blend at $16 per 2 pound package, resulting in a price of $8.00 per pound. Averaging these two prices results in $10.49 per pound," the study reads noting that sales result in a net profit of about $6.68 per pound.
Local growers have received an estimated $1.4 million from the sale of green prime Kona to the blenders, according to the study. Should farmers roast and sell 100 percent "prime" Kona farmers could make about $6.63 per pound.
**********************************************************
Blenders refute coffee study
Opponents say changing labeling rules would harm business
by Chelsea Jensen
West Hawaii Today
cjensen@westhawaiitoday.com
Wednesday, March 10, 2010 6:50 AM HST
Reacting to a study saying Kona coffee farmers lose $14.4 million to blenders each year, some processors and sellers claim changing state law to ban the practice of blending Kona coffee or require more Kona coffee in blends would negatively impact farmers, jobs and profits.
Tom Greenwell, Hawaii Coffee Association president, claims Marvin Feldman's February 2010 study, "Economics of the Hawaii Coffee Industry," that assessed the economic effect 10 percent blended Kona coffee has on the 100 percent Kona coffee market used unsubstantiated and incomplete data to draw its conclusion.
"What they have called facts in this study are not facts, and we need to set the record straight," Greenwell said, noting Feldman's assumption that eliminating blenders in the state would increase farmers'
revenues by more than $14 million is wrong because of errors in the amount of Kona coffee cherry bought by blenders, the cost of the cherry and blenders' profit.
While unwilling to disclose his Hawaii Coffee Co.'s profit data for proprietary reasons, president Jim Wayman said profit margins for his Oahu-based blending company, and likely for blenders statewide,
are much less than Feldman's study found.
Refuting Feldman's study finding that blenders earn profits topping $6.50 per pound, Wayman explained his company sells 93 percent of its blended product to wholesalers at less than half the price listed on his company's online store. Further, the company purchases green coffee, which includes all grades, for about $9 per pound -- nearly double the cost listed in the study.
"We're only making about half as much as he says we're making off our products, and we're paying twice as much as he says we are for our product," Wayman said. "The assumption that I sell all my coffee at an average of $10.49 a pound is almost double what I sell it at to retailers and restaurants."
Wayman also noted that blenders purchase at least 50 percent of Kona's crop, not just 10 percent of the crop labeled as prime as the study claimed. Greenwell also said an informal survey he conducted of "some" of the association's 65 members showed at least 50 percent of the Kona crop is purchased by processors and blenders.
Shawn Steiman, who holds a doctorate in Tropical Plant and Soil Sciences from the University of Hawaii,
said no more than 300 of the state Department of Agriculture's 700 registered Kona coffee farms grow, process and sell their coffee, leaving at least 400 farmers who sell most or all of their crop to processors and blenders.
"If you eliminate blending, as much as half of the Kona coffee crop would come back onto the market as green coffee," Wayman said. "The price paid to farmers for coffee would plummet. ... Who would buy all of that coffee? Of course, if you're sitting there with your coffee rotting there is some price at which a farmer will sell it."
The excess coffee not purchased by blenders would have to find a market or prices would fall as supply would top demand. The impact, Greenwell claimed, could be similar to 1998 when lawsuits and overproduction caused cherry prices to fall from $1.70 per pound to about 50 cents a pound.
"If we stopped blending then a lot of cherry farmers would have to find other means of income," Steiman said. "You have to think, now, how many of these people depend on this for living? Could they survive happily?"
Wayman added that without earning a profit, his company would likely not be able to keep its 125 employees."How many of them will I have to lay off if it changes?" he said, in response to what might happen if the state's minimum requirement was increased from 10 percent to 51 percent.
Wayman is not against a change in the minimum requirement, but said before any changes are made an independent economic study needs to determine the correct blending percentage that would ensure the survival of farmers and blenders.
"Would any major industry in this country double the price of their product without first doing a thorough market study? The answer is, of course, no," he said. "Before we blindly just say 'let's double the price of the best-selling Kona coffee products,' we as an industry should do an adequate, independent and professional market study to determine what that change should be rather than just jump in.
*********************************************************
Feldman Replies- Letter to the Editor of West Hawaii Today
Coffee study
Thursday, March 18, 2010 8:28 AM HST
Restating the case
I would like to set the record straight regarding WHT articles on Feb. 17 and March 10 based on my economic study.
The study was entitled "Economic Effects of Blending Kona Coffee A Preliminary Analysis" not "Economics of the Hawaii Coffee Industry," as reported. This distinction is important as it identifies the preliminary nature of the study, as well as its focus on the impacts of blending. Both articles mistakenly indicate that farmers lose $14.4 million due to blending of Kona coffee. My study states this figure is the extra profit that blenders gain from the use of the Kona name on 10 percent blends. The negative economic impacts on farmers might well exceed this extra profit, but I am not able to estimate that negative impact with available data.
The March article's continuation heading "Blenders purchase at least 50 percent of Kona's crop" is based on a statement by Jim Wayman of Hawaii Coffee Co. While this may be accurate, it is misleading in regard to blending.
Blenders such as Hawaii Coffee Co. purchase a large amount of Kona coffee that is sold as pure Kona. There is no basis for assuming that this part of the crop would be glutting the market if there were no 10 percent blends. It is the 10-15 percent of the crop, namely the prime grade (the lowest grade of Kona coffee), that is typically used in the blends. Indeed, if the only coffee identified as Kona were pure Kona, it is quite possible that consumer demand for Kona coffee would rise.
At present some consumers who are disappointed in the inferior taste of Kona blends dismiss all Kona coffee. It should be noted that in independent tastings, expert cuppers were unable to distinguish 10 percent Kona blends from non-Kona coffee.
My analysis was preliminary, based on best publicly available data. All of the data sources and assumptions were carefully documented. Unfortunately, the publicly available data do not report exactly how much of the Kona coffee crop is used in 10 percent blends. Published HDOA sources indicate that prime Kona constitutes
10-15 percent of the crop. Blends combine this grade with non-Kona commodity coffees. The blend labeling does not identify the grade of the Kona coffee used or the origin of the remaining 90 percent of contents. Only this 10 to 15 percent of the crop would come back on the market if blending were ended.
Regarding Wayman's critique of my blending profit estimate, I would note that in the absence of accurate information I made carefully stated assumptions regarding blenders' costs. The $9 per pound that he suggests he pays for green Kona does not apply to the lower grade coffee used in blends. The blenders are in a position to reveal both these costs and the exact quantity of Kona coffee used in blends.
I would welcome better data and would be happy to revise my analysis accordingly. Simply stating that the assumptions are incorrect does not shed any light on the subject. Wayman suggests that a thorough marketing study is needed before changing the status quo. Such studies were already conducted by the state in 1990 and 2006. If the blenders were more forthcoming with the actual blending quantity and cost data, the merits of the
public's interest in this important issue could be decided at a modest cost.
In the interest of full disclosure, I am a small Kona coffee farmer as well as a consulting economist with a doctorate in Natural Resource Economics, an MS in Agricultural Economics and 30 years of professional experience. The full text of my study can be found at:
konacoffeefarmers.org/Economic%20Efforts%20of%20Blending%20 Kona.pdf
Marvin Feldman
