Kona coffee blends and their economic repercussions
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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Reviews & Comments
As a scientist you have to look at a study or analysis with a trained and sharp academic eye. As a marketer I have to look at less substantiated trends and emotional swings, taking educated guesses and calculated risks. Both mindsets are needed to aid the legislature. I think neither threats, faking ignorance or camouflaging issues helps them to look into our future. Sadly I see those as the tools used on both sides a bit too often.
Of course I have a subjective experience with our farm's specific customers reg. labeling issues. But I can't help seeing it not in context with the 1992 customers marketing study and its results. The perception as a form of deception manifested in the current state labeling law certainly didn't 'go away'. And in our subjective (!) experience it increased to a more pronounced resentment.
There is indeed a lack of interaction btw cherry farmers and the new farmers who came here in the last 25 years. That is certainly a problem I do not see addressed by the current coffee farmers groups. I wrote a tongue-in-cheek piece about the various Kona coffee farmer types on Colin Newels Coffee Crew blog a while back.
http://coffee.bc.ca/cafeculture/498/kona-coffee-farming-escape-or-realit...
I know that you wrote an excellent book about Kona coffee and enjoy the scene, so maybe you'll get a chuckle out of reading it.
Keep up the good work/blog!
J.
Esteemed Joachim,
I understand your desire to discuss the larger issue of this economic report. My post is specifically addressing the flaws in the report, not the greater issue. True, the underlying point of the report is to lend credence to changing the status quo. I think it is an important discussion for the industry to have. However, that discussion should not use flawed logic or poor data, which, in my opinion, is what the report uses.
I don't mind having that discussion, but this post is simply an analysis of the report, not the blending issue. A better place for the discussion on blending would be in my blog post on blending!
There are two little things I want to say about your lovely post, though. First, your reporting that your customers and/or folks you interact with are confused by "10% Kona blend" is interesting and valuable. However, for you or I to assume that your experience represents the entire spectrum of consumers is a mistake. Statistically, we'd have a very low "n" and no random sampling.
I'm not saying that you don't represent the true mean (that which represents the actual population) but that we have no idea if it is true. Thus, I'm skeptical that all people, or even a sizable amount are in fact outraged and/or confused by the blends (either in packaging or in practice). After all, lots of people still buy the blends.
The other comment I want to make is that I realized, from your post, that strong proponents of 100% product (or labeling of the product), are always expressing sentiments against the blenders. Why is the vehemency not also against the farmers selling to the blenders?
Admittedly, I'm not as immersed in the Kona scene as you are as I live on Oahu. So, I'm not certain that there isn't dialogue between these two groups. However, I've never witnessed nor heard of any discussion between the cherry farmers and others.
As always, thanks for the discussion.
Shawn
Sorry Shawn, you and Lauren Gautz are so missing the point. This study is not about if the current 10% Kona Blend coffees taste good or bad. Or the usage of Kona in blending coffees.
I read the study a few times and it clearly states that the authors don't want to block anybody of blending Kona coffee with whatever other coffees they fancy. For price margin or taste. Just be honest of how it is presented to customers.
It's about solely using the Kona name on a product, which fundamentally is NOT from Kona, Hawaii.
Think about it this way: You are being asked to cup a 10% Panamanian Coffee. Would you give a judgement about Panamanian coffee as a whole based on this particular coffee? Now you are being told that 90% of it contains organic Ethiopian Sidamo. What did you judge? The Sidamo of course. Nowhere on the package you can find it mentioned. You were deceived.
All this study does is putting a dollar number against the deceptive use of the word KONA. That the number itself maybe off a bit is clear, because the processors can't or won't reveal their numbers.
You write: "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."
Sorry, not true! That's where my professional knowledge as a marketer comes in handy: Increasingly single origin, single estate coffees are marketed at high prices. The consumers brand awareness, even brand dependency, driving purchase decisions, is expanding from regular goods to agricultural products. Food safety issues, buying local, establishing self-identification markers, buying American, organic and environmental concerns make a much smarter, judgmental consumer. From my own experience as a Kona coffee farmer and retailer I can say that all of our customers are aware of the 10 % Blend issues and they are angry that Hawaii's government is sleeping at the wheel. This is a discussion I preferably avoid to bring up, but they always insist of telling us.
10% Kona Blends are clearly FAKES of a brand. Look at some numbers beyond this particular coffee what it means in the bigger picture.
$600 Billion: Estimated annual sales in counterfeit products worldwide
$512 Billion: Global sales lost to counterfeit goods
$250 Billion: Annual loss to American companies from intellectual property theft
$20 Billion: Estimated loss to American companies from counterfeit products
$1 Billion : Estimated annual loss in New York City tax revenues due to counterfeiting
750,000: Number of jobs lost due to intellectual property theft in the United States
http://www.fakesareneverinfashion.com
One could argue that the processors do not want to put their 90% foreign sourced coffee on the label, because they would come from highly questionable sources. Maybe not questionable in taste per se, but maybe connected with child labor, slave labor, illegal pesticides, inferior beans. The processors do not want to disclose their sources and origins on the bag so the customers are easily to sway against them. This is most effective against knockoff handbags, so why wouldn't a campaign work here against 10% Kona Blends/90% questionable coffee? As easy it is to underestimate consumers as a seller, as easy it is to sway them against product these days. Consumers love to drop something off their radar, because it reduces the overbearing information flow and lightens purchase decision loads. Can we as a state risk a food scandal, possibly ruining all Hawaiian coffees?
Bigger than just coffee:
The appellation or geographic origin protection is needed not only for Kona coffee, but for all coffees. Actually for all farm products around the world. An African farming region should not compete only by price point with every tropical region around the world, when they carved out their marketing niche over generations of a specialty product. NO FARM can exist without legal protection ANYWHERE for long! We are only wrecking the local infrastructure when we bring in commodity brokers, who have no concerns for quality and long term vision.
What's the political situation here in Hawaii:
Now the processors are a tad stuck, because not only are a few of them close to bankruptcy and didn't pay the farmers, they had bought from last season. Illegal, because payment to coffee cherry farmers is due within 30 days by Hawaiian State law, and the situation is now being checked by various authorities. The local farmers group has gotten themselves also a nice war chest and seems to be willing to spend it, while the processors coffers and their arguments run dry. So what moral high ground to they claim when the farmers go unpaid? And did their work? Wouldn't the farmers rather prefer having had the 'Kona coffee glut' rot on their trees instead of having put in countless hours?
Yes, the 'Kona coffee glut' you foresee is already here, but only as a huge debt from the processors to the farmers. And this is not the first time in Kona coffee history! It happened often and many large processors and farms went bust, yet the small farmers are more resilient when it comes to go without pay. We'll see how this round in the legislation will play out. The "new Kona coffee world we can compare to the situation of specialty food in other protected regions: There will be rot, there will be more demand than Kona coffee available, there will be price fluctuations. There will be farms making it well and some who don't at all. But the business model for the brand 'Kona coffee' will be based on scarcity, and not on growth! Which is the core difference:
SCARCITY versus GROWTH: These are two opposite business models, which do not work together. Hence there is no coherent 'coffee industry' in Hawaii, compared to Jamaica.
Now to the farmers themselves: Much learning to be done by many to have a quality product, I totally agree! And their advancing age doesn't help much either, coming and staying in the coffee farming for 5 - . Few know why the moisture content of green beans is important, besides that the Dept of Ag in HAwaii requires it to be at a certain percentage. Few of the vocal ones have enough acreage to justify to work with a spread sheet, barely anybody knows how to cup, or how to be savvy in SEO for being able to sell their product online. Way too much debate about organic Kona, while there's no significant demand for it to justify the expenses folks put into it. And so on.
But I indeed have hope that the processors and the growers can sit together and hash out a smooth transition. Maybe not with the current players, but there are more waiting in the wings on both sides. A few years phase-out plan for 10% Kona Blends or at least a significant increase to get the fabulous Kona taste being detectable would be helping all of Hawaii and set a precedent for other ag-products as well.
In the meantime, I concentrate on experimenting more with various methods to process, improve cupping quality and study the vast abundance of coffee literature available over the web. Make contacts to origin coffee farms around the world, talk at length to our customers, and enjoy the sights, sounds and fragrances of Kona. 100% actually ;-)
This blog seems right on and balanced.
There seems to be a very big assumption by the anti blend group that the market is capable and desires to absorb an increase in pure Kona coffee. This assumption runs counter to historical experience.
Another assumption is that blends detract from pure Kona consumption because the blends are inferior. This again is not supported by anecdotal or scientific evidence. Many people are turned off by the high price and "rich" character of Kona coffee. Many blends have superior market appeal over some of the pure Kona roasts.
As long as labeling is clear and factual the market can easily decide what will sell. Barring blends would be restrictive and likely counterproductive to increasing demand for Kona beans.