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Kona coffee blends and their economic repercussions

February 15, 2010

In Hawai‘i, the blending of Kona coffee with imported coffee is a regular controversy.  I’ve written about it before and I expect I’ll write about it again.  Today’s blog addresses a new development in the discussion.





This is the current blending situation in Hawai‘i.  A few large, Hawai‘i-based roasting companies import coffees from Central and South America and blend them with Kona coffee.  They market and sell these blends as “10% Kona coffee blends”.  Hawai‘i state law stipulates that these Kona coffee blends must contain at least 10% Kona coffee (by weight).  These coffees are mostly sold via retail outlets in Hawai‘i and are marketed to both local residents and tourists.  State law also requires certain packaging rules that include a statement of the percentage amount of Kona coffee in the bag and a minimum font size for this statement.  (This state law applies to all roasted coffee products that contain and advertise Hawaiian coffee.  However, blenders tend only to use Kona coffee as it carries more cachet than any other coffee producing region in Hawai‘i.)





Today, the Kona Coffee Farmers Association and Resource Decisions released a preliminary report on the economic effects of blending Kona coffee.  I greatly admire their use of objective calculations into the discussion.  I also admire the report’s admission that the conclusions are based on a minimal amount of data and that the author is a small-scale Kona coffee farmer.





Unfortunately, the report makes an assumption that is incorrect.  Consequently, the subsequent analysis is incorrect and the conclusions of the report are invalid.





Table 3 of the report shows that in 2008/2009, there were 711 farms in Kona.  Given the current available statistics, I agree this is a good estimate.  This report assumes that 10% of the coffee from each of those farms is not only graded as Kona prime but is sold to the big roasters to be used in their kona coffee blends while the other 90% of their coffee to be sold as 100% Kona coffee as a private label/estate farm.  If this assumption were true, then the conclusions from the report may be valid.





In reality, this assumption is completely incorrect.  What actually happens is that several hundred farms sell their coffee cherry to a processor that is owned by or contracted with the large roasters (I spoke to the president of Hawaii Coffee Company today to verify that several hundred farms is accurate; he’s asked that I not disclose the number of farms he works with directly).  There is no estimate of the number of private label/estate farms in Kona.  I personally estimate at least 150-200, though 300 wouldn’t surprise me.  Essentially, this means that, roughly, at least ½ the farms in Kona sell their crop solely to the blenders for use in 10% kona coffee blends and 100% product lines while the other half, private label/estate farms, market and sell 100% Kona coffee.  





The implications for this on the report’s calculations are enormous.  First, it suggests the cost of Kona coffee (prime or otherwise) for the big roasters may be underestimated by several dollars as the cost of the coffee is not simply a mark-up of the price of coffee cherry.  Rather, processing costs, roasting costs, and partnership costs must be included.  (Partnership costs are the costs associated with the relationship the processor has with a farm.  It can include things like incentives and free fertilizer.)  Thus, the upper-bound estimate of $14.4 million/year economic rent is likely a huge over-estimate.





A second and vastly more important implication is that a law enforcing Kona coffee to only be sold as 100% Kona product would not increase the Kona supply by just 10% a year.  Rather, the amount of coffee that would enter the 100% market would be approximately 50% of today’s total production.  I conclude this because if only ½ the farms in Kona sell all their cherry to the big roasters (that’s 355 farms), then nearly all that coffee would be shifted from kona coffee blends to 100% Kona coffee product.  





In my opinion, these two implications invalidate a major conclusion of the report; many growers (approximately 50%) do, in fact, experience a benefit from the blending as is now practiced.





Whether the Kona appellation is being eroded in the mind of the modern consumer is debatable; the coffee consumer and the Kona coffee industry are very different than they were when Drs. Hodgson and Bruhn reported on this issue in 1992.  Even if it is being eroded, is this occurring only in the consumer who buys the Kona coffee blends or also in the consumer who buys 100% Kona product (I suspect they are different groups)?  I don’t know.





If Kona coffee blends were made illegal, the market would not only be flooded with Kona coffee but this coffee would all be sold at typical Kona prices.  With such an increase in supply, could the market bear so much coffee at the higher-than-blended prices?  I don’t know.





The report author recognizes he can’t make that kind of calculation, either.  All the stakeholders in this discussion recognize that an understanding of consumer behavior is essential to understanding what would happen if the law and status quo were changed.  As the lowest estimate of a study to address this unknown is about $100,000, it is not going to be researched any time soon.





It is clear that nobody really knows what would happen if the minimum percentage were changed, though plenty of folk have their guesses.  I admire that this report took a stab at the issue.  I fear, though, that it adds little to the conversation.  





There are additional relevant issues that pertain to the blending discussion.  As this post is already fairly lengthy, I’ll not include them here.  If anyone disagrees with my assessment, I gladly welcome discussion either here, in this public forum, or via email.  As I have no stake in the outcome of this controversy, I will gladly change my mind as new facts present themselves.






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