Friday, October 25, 2013

Hawaiian Coffee

No, alas, I did not actually taste any Hawaiian coffee. It is difficult to find freshly roasted samples where I live. But I did write a research paper about the economics of it.

Just to give proper context: The paper was written for my MBA class at Baruch College called "Global Competitiveness of the US Economy," and the assignment was as follows:

Select a large exporter or product / commodity that is being exported from the United States. Analyze the historic background of this exporting business, its current strengths and weaknesses in its main overseas market, how is it hurt or hindered by government regulations, tariffs, currency and culture in expanding its overseas sales. Include also its main international competitors and the advantage those competitors have from government regulation, currency, etc. The paper must include a relevant “review of the literature.” (1,750 – 2,250 words)

Needless to say, in 2250 words I cannot produce a comprehensive analysis of everything to do with Hawaiian coffee. It ended up being a mere broad overview. Nevertheless, this paper is relevant to The Nice Drinks In Life, and now that it has been submitted, graded, and returned to me, I would like to share it here with my kind readers. The text, notes, and appendices are not changed from what I handed in to the professor other than one redaction (when I interviewed a source, he/she was not told that I might ever publish this). I have not expanded upon it for this website due to the same factor that keeps me from publishing more often in the first place: I simply lack the time.

Should anyone have any further insight into the matter, or any factual corrections, I would love to hear about it in the comments section below.

And for the incurably curious, I received an A- on the paper.

Hawaiian Coffee
Governmental & Market Conditions

A Brief Introduction
Within the world of coffee there are two principle types: “arabica” (Coffea arabica) and “robusta” (Coffea canefora).[1] Arabica, preferred for drinking, has many sub-species, or varietals: Typica, Caturra, etc.[2] Coffee is cultivated in over fifty tropical nations.[3] Brazil grows more coffee than any other country, producing about a third of the world’s coffee.[4] In aggregate, coffee is traded globally more than any other commodity besides oil.[5]

Much as with wine, both a coffee bean’s varietal and its region of origin are of much interest to coffee consumers and professionals.[6] Therefore, coffee as a general category is not strictly fungible. In fact, one given region’s coffee harvest may trade at a different discount or premium than other regions’ coffees.[7]

Hawaii first saw coffee planted in the early 1800s[8] and is the only US state to grow it (although Puerto Rico, a US commonwealth, grows it, too).[9] Many different varietals of arabica are planted there.[10] Most Hawaiian islands grow coffee, although it is Kona, a thin strip of a region in the Big Island of Hawaii,[11] that has the most popular crop.[12] The region has a unique micro-climate that lends a certain quality to its coffee, whereby it has come to be known as the “coffee belt”.[13] That is not to sell the other Hawaiian regions short; some professional coffee roasters are in fact negative on Kona, preferring different Hawaiian coffees such as Ka’u.[14]

[1] International Coffee Organization. “Botanical Aspects”.
[2] Ibid.
[3] National Coffee Association USA. “Coffee from Around the World”.
[4] The Economist Editors. “Brewed Awakening”.
[5] Black Gold Movie. “Economics of Coffee”.
[6] National Coffee Association USA. “Coffee from Around the World”.
[7] IntercontinentalExchange. “Coffee C® Futures”.
[8] Hawaii Coffee Association. “Coffee History in Hawaii”.
[9] Huffington Post Editors. “Hawaii Coffee is the Only American-Grown Coffee”.
[10] Bittenbender & Smith, 2008, p3.
[11] Please see maps in Appendix 1.
[12] Huffington Post Editors. “Hawaii Coffee is the Only American-Grown Coffee”.
[13] Bittenbender & Smith, 2008, pp5-6.
[14] Personal interview.

Governmental Conditions
In the same way that many wine regions’ names are protected by regulations forbidding any wine not produced from certain varietals and within specific borders from using them, the phrase “Kona coffee” is protected.[15] Only the “Kona typica” varietal grown within the Kona region may refer to itself as “100% Kona”.[16] This has generally succeeded at nixing sales of fraudulently labeled Kona coffee.[17] However, there is one key caveat: any blend containing as little as ten percent Kona coffee may refer to itself as a “Kona blend”.[18]

No other Hawaiian zone has a protected denomination; however, many other coffee regions do. The Marcala region in Honduras famously became the first in Central America to be awarded such a status.[19] Starbucks made some waves when it traded on the good name of Costa Rica’s Tarrazú region to sell $7 cups of coffee.[20]

The US federal government provides subsidies to Hawaiian coffee farmers.[21] Some competing coffee-producing nations, such as Brazil[22] and Colombia,[23] also provide such subsidies, and more are considering it.[24] The federal government also provides crop insurance to Hawaii’s coffee farmers,[25] however, this does not necessarily benefit them. Between 1995 and 2012, they in aggregate paid $103,072 more into the program than they took out of it.[26]

The State of Hawaii provides some assistance to the coffee farmers, but it is rather negligible. In June 2013 Governor Neil Abercrombie signed a bill offering a collective total of $550,000 over two years to help combat a pest.[27]

The US federal government does not restrict the amount of coffee that may be imported,[28] nor does it charge import duties on the crop.[29] It does inspect imports for quality,[30] increasing consumer confidence in imported coffee.

According to a recent agreement between Japan and the US, each will officially recognize the other’s organic certification beginning 2014.[31] This is important, because many Hawaiian coffee farms have that certification, and Japan, in addition to being Hawaii’s main coffee export market,[32] is a growing coffee market generally,[33] its traditional tea culture notwithstanding.

[15] Kona Coffee Farmers Association. “About Kona Coffee”.
[16] Ibid. The Kona Coffee Council has a seal of approval to certify that a coffee is 100% Kona (Kona Coffee Council. “The Seal Program”) or the Hawaiian state government, which actually owns that trademark, may certify coffee itself (Mountain Thunder Coffee Plantation. “Kona Coffee History”). Any coffee that is going to carry the 100% Kona mark must be inspected and certified before ever leaving the region (Mountain Thunder Coffee Plantation. “Kona Coffee History”).
[17] “Asian Coffee”.
[18] Kona Coffee Farmers Association. “About Kona Coffee”. Blending different coffees is a standard – in fact, artistically important – practice among roasters and purveyors.
[19] Café Marcala. “Denominación de Origen Café Marcala”.
[20] Mencher, 2012.
[21] Environmental Working Group: Farm Subsidy Database. The database is searchable by ZIP code. I entered a randomly selected ZIP code encompassing Hawaiian coffee farms, and searched through the results. All farms whose information I browsed have received federal subsidies at least once in the last ten years. The subsidies seemed minimal at first, but not after considering the relatively small acreage of typical Hawaiian coffee farms.
[22] Kayden, 2013. What with Brazil’s tremendous coffee production, keeping up with subsidies is no minor factor.
[23] Delgado, 2013.
[24] Garcia, 2013.
[25] Environmental Working Group. “Crop Insurance”. The insurance covers indemnities, reimbursement for lost administrative and other expenses, and so on.
[26] Environmental Working Group. “Crop Insurance Total Costs by Crop in the United States”.
[27] State of Hawaii Department of Agriculture. 2013.
[28] U.S. Customs & Border Protection. 2013.
[29] Duty Calculator. “Import Duty & Taxes for Coffee Beans”.
[30] Lister, Jonathan. “Regulation of Coffee Retail Market in USA (
[31] Bishop, 2013.
[32] Krishnakumar & Chan-Halbrendt, 2010.
[33] International Coffee Organization. “Imports of All Forms of Coffee by Selected Importing Countries from All Sources” (updated June 2013).

Market Conditions
Hawaii produces relatively little coffee. Coffee exporting countries produced roughly 145 million 60-kilogram bags of coffee, or over 19 billion pounds, in 2012.[34] Hawaii grows less than 10 million pounds per year,[35] between one-third and one-half of it coming from Kona.[36]

A small percentage of Hawaii’s coffee gets exported, mostly to East Asia, especially Japan.[37] Japanese-Americans are strongly represented in Hawaiian coffee production, and easily establish rapports with Japanese customers.[38] But exporting elsewhere has proven to be challenging, despite a dearth of import duties and restrictions for coffee in most countries.[39] Price is the major reason for this.

Pricing is principle among Hawaiian coffee’s competitive disadvantages: it is so expensive that many professionals and aficionados do without it altogether.[40] In markets with low disposable incomes, it is a deal breaker.[41] The cause of Hawaiian coffee’s high price is multifaceted. One item is the cost of farming in the US.[42] Another is that every competing coffee-exporting nation has much cheaper currency than the US.[43] Still another is the pattern of small farms with relatively low yields (see below). Finally, there is the need to maintain the image of exclusive, high-quality coffee associated with Hawaiian beans. Selling them cheap might ruin that image.

Hawaiian coffees have more disadvantages than just price. For example, Fair Trade certification is a popular item among consumers,[44] but Hawaiian coffees must compete without them.[45] Another disadvantage is the regulation permitting blends with 10% Kona coffee to be called “Kona blends”. Many consumers, not knowing any better, purchase such products thinking that it is legitimate Kona coffee, ultimately profiting competing regions at Kona’s expense.

Hawaiian coffee has advantages, too. The Kona region’s protected denomination is one of them, the caveat notwithstanding. Another is its high quality, in terms of both integrity and flavor. In June 2013 it was reported that “the Board of the Kona Coffee Farmer's Association unanimously voted to adopt and support Hawaii County Bill 79 to prohibit GMOs[46] on the island;”[47] public support of such ideas does much to inspire confidence in Kona’s, and by extension all Hawaiian coffees’, commitment to quality.

Furthermore, Hawaiian coffee’s taste is outstanding. Indeed, one cause of its high price, often overlooked when searching for institutional causes, is huge demand for a very scarce product. Even Kona naysayers have other Hawaiian coffees that they recommend.[48] There is one downside here, though: the growers get attached to the reputation. If they were open to producing lower-grade, cheaper products, such as coffee for instant preparation, they would likely do better in emerging coffee markets around the globe.[49]

Interesting is the rarity of Hawaiian coffee. It causes higher prices and an air of exclusivity, each of which circles back to the other. Small acreage imposes natural limits on the extent to which Hawaiian coffees can claim market share; however, the percentage of harvested coffee sold is generally high. In deciding whether the small yields are beneficial or detrimental, it helps to consider whether the farmers would like to augment them: As it turns out, at least a few farmers are frustrated at the low yields that poor weather has caused in recent years.[50] Certainly, the low yields mean the region cannot benefit from economies of scale, further raising prices – thereby furthering exclusivity, in an encore of the unending cycle.

Another item of note is the dearth of exports to Europe, especially Italy and France. None of them has import duties,[51] they have strong coffee cultures preferring dark roasts,[52] and Kona is especially well suited to being darkly roasted.[53] This may be a simple matter of marketing.

[34] International Coffee Organization. “Total Production of Exporting Countries” (updated July 2013).
[35] Exact estimates differ across reports, but the Hawaii Coffee Association puts the number between 6-7 million pounds (Hawaii Coffee Association. “Coffee History in Hawaii”).
[36] Krishnakumar & Chan-Halbrendt, 2010.
[37] Ibid.
[38] Ibid.
[39] Duty Calculator. “Import Duty & Taxes for Coffee Beans”. Japan is hardly the only coffee consuming nation without an import duty, and most of the nations that do charge one grow their own coffee anyway.
[40] Personal interview.
[41] Krishnakumar & Chan-Halbrendt, 2010.
[42] Rubinstein, 2008. American farms are quite capital-intensive.
[43] The top ten countries by production are Brazil, Vietnam, Indonesia, Colombia, Ethiopia, India, Honduras, Mexico, Uganda, and Guatemala (International Coffee Organization, “Total Production of Exporting Countries”).
[44] Fair Trade USA, 2013.
[45] Fair Trade certification is not available for American produce (Fair Trade USA. “Global Reach Map”). So, although Hawaiian coffees come from farms equally fair to workers (as per American labor laws) as Fair Trade proponents demand, they lack the certification and must compete against coffees that have it.
[46] “GMOs, or ‘genetically modified organisms,’ are plants or animals that have been genetically engineered with DNA from bacteria, viruses or other plants and animals. These experimental combinations of genes from different species cannot occur in nature or in traditional crossbreeding. … [A] growing body of evidence connects GMOs with health problems, environmental damage and violation of farmers’ and consumers’ rights.” —Non-GMO Project, “GMO Facts”.
[47] Unsigned. “Protect Kona Coffee from GMO: Kona Coffee Farmers Association Supports County Bill 79” (Hawaii Reporter).
[48] Personal interview.
[49] (Unsigned). “Planning to Export” (Business Beyond the Reef, December 13, 2011).
[50] Rubinstein, 2008.
[51] Duty Calculator. “Import Duty & Taxes for Coffee Beans”.
[52] Europeans’ notorious antipathy towards American coffee refers to American preferences vis-à-vis brewing and consuming it; it has nothing to do with bean varietals or origins (Askin, 2013).
[53] Personal interview.

Outlook & Conclusions
Hawaiian coffee deals with a variety of competitive problems, but is hardly set to capitulate. Not all of its disadvantages are unique, and some of them (low yields, pricing) are arguably advantageous in certain market conditions. Hawaiian coffee growers have access to US federal subsidies and insurance, and enjoy the benefits of a capital-intensive agricultural community. They are organized into associations that benefit all members. Also, very few other coffees enjoy the prestige of Hawaiian coffees; the “Kona blend” issue is surmountable by educating consumers, pressuring officials to change the rule, and other basic methods.

Hawaiian coffee, after two centuries of history, is set to enjoy two more.

Appendix 1: Maps

Map 1: Political map of the Hawaiian Islands, with Kona marked on the Big Island of Hawaii

Map 2: The Kona coffee belt & other coffee regions in Hawaii (marked in green)

Works Cited

Textual Sources
Askin, Jennifer. “Starbucks Set to Rock Italy’s Café Culture”. ABC News. April 30, 2013.

Bishop, Hunter. “US-Japan Trade Pact Boosts Organic Ag”. September 26, 2013.

Bittenbender, H.C. & Smith, Virginia Easton. Growing Coffee In Hawaii: Revised Edition. Manoa: College of Tropical Agriculture and Human Resources, University of Hawaii at Manoa, 2008.

Black Gold Movie. “Economics of Coffee”. Accessed October 2, 2013.

Café Marcala. “Denominación de Origen Café Marcala”. Accessed October 2, 2013.

Delgado, Diana. “Colombia Hikes Coffee Subsidies, Calls for Coffee Strike to End”. Reuters. March 2, 2013.

Environmental Working Group. “Crop Insurance”. Accessed October 2, 2013.

Environmental Working Group. “Crop Insurance Total Costs by Crop in the United States”. Accessed October 2, 2013.

Environmental Working Group: Farm Subsidy Database. Accessed October 2, 2013.

Fair Trade USA. “Fair Trade Certified™ Coffee Imports Hit Record High in 2012”. April 10, 2013.

Fair Trade USA. “Global Reach Map”. Accessed October 2, 2013.

Garcia, David Alire. “Mexico to Mull Spending Around $200 mln to Help Coffee Farmers Battle Leaf Rust”. Atlantic Specialty Coffee, Inc. September 26, 2013.

Hawaii Coffee Association. “Coffee History in Hawaii”. Accessed October 2, 2013.

Heiss, Mary Lou. “Review of A Cup of Aloha: The Kona Coffee Epic by Gerald Y. Kinro”. Gastronomica: The Journal of Food and Culture, Vol. 4, No. 4 (Fall 2004), pp124-125. University of California Press.

Huffington Post Editors. “Hawaii Coffee is the Only American-Grown Coffee”. Huffington Post. September 29, 2013.

IntercontinentalExchange. “Coffee C® Futures”. Accessed October 2, 2013.

International Coffee Organization. “Botanical Aspects”. Accessed October 2, 2013.

International Coffee Organization. “Imports of All Forms of Coffee by Selected Importing Countries from All Sources”. Updated June 2013.

International Coffee Organization. “Total Production of Exporting Countries”. Updated July 2013.

Kayden, Marley DelDuchetto. “Coffee Rises as Brazil Subsidies May Curb Supply; Cotton Rallies”. Bloomberg Businessweek. July 11, 2013.

Kona Coffee Council. “The Seal Program”. Accessed October 2, 2013.

Kona Coffee Farmers Association. “About Kona Coffee”. October 19, 2010.

Kona Earth. “About Us”. Accessed October 2, 2013.

Krishnakumar, Jyotsna & Chan-Halbrendt, Catherine. “Consumer Preferences for Imported Kona Coffee in South India: A Latent Class Analysis”. International Food and Agribusiness Management Review, Vol. 13, Issue 4 (2010), pp97-116.

Lister, Jonathan. “Regulation of Coffee Retail Market in USA”. Accessed October 2, 2013. “Asian Coffee”. Accessed October 3, 2013.

Mencher, Daniel. “Costa Rica Tarrazú Asoproaa”. The Nice Drinks In Life. December 20, 2012.

Mountain Thunder Coffee Plantation. “Kona Coffee History”. Accessed October 3, 2013.

National Coffee Association USA. “Coffee from Around the World”. Accessed October 2, 2013.

Non-GMO Project. “GMO Facts”. Accessed October 2, 2013.

Personal interview. September 29, 2013. [Source redacted by author]

Rubinstein, Alexis. “The Hawaiian Gem: A One-of-a-Kind Bean with the Setting to Match”. Tea & Coffee Trade Journal, Vol. 180, Issue 5 (May 2008).

Specialty Coffee Retailer. “Pest Torments Hawaiian Farmers”. M2Media360. March 2013.

State of Hawaii Department of Agriculture. “Governor Signs Measure in Support of Agriculture”. June 26, 2013.

The Economist Editors. “Brewed Awakening”. The Economist. July 13, 2013.

U.S. Customs & Border Protection. “Importing Tea, Coffee and Spices for Commercial Purposes”. Updated August 14, 2013.,-coffee-and-spices-for-commercial-purposes.

(Unsigned). “Planning to Export”. Business Beyond the Reef. December 13, 2011.

(Unsigned). “Protect Kona Coffee from GMO: Kona Coffee Farmers Association Supports County Bill 79”. Hawaii Reporter. Accessed October 2, 2013.

Graphic Sources
Kona Earth. “About Us”. Retrieved October 2, 2013.

KonaGirl Coffee. “Kona History”. Retrieved October 2, 2013.