Value Chain Analysis

Hawai'i Island

Understanding the value chains of the island's agricultural products from production to consumption helps to identify the factors that determine the prices producers get for their products and where different market opportunities might exist, particularly for more value-add to products that can increase farm profitability. Analyzing vertical linkages amongst value chain functions and horizontal linkages amongst producers can yield potential new opportunities. The following diagram displays each of the value chain functions and market segments determined by farm size and income.

Export Commodities Value Chain Diagram.png

The export commodities value chain on Hawai’i Island includes key sectors such as coffee, macadamia nuts, floriculture and nursery, aquaculture, and papayas. Each of these sectors has unique production systems and market channels but also shares several commonalities. These commodities rely on Hawai’i’s unique climate, soils, and reputation for high-quality products. Most producers are small to medium-sized farms, but there is a trend of increasing vertical integration, particularly among larger operations that handle processing, distribution, and marketing in-house. Value chain functions such as aggregation, cold chain management, and distribution are critical in reaching local, domestic, and international markets, with transport costs being a significant challenge due to the island’s geographical isolation.

Common constraints across all five industries include high transportation costs, labor shortages, and regulatory challenges. These sectors face high production costs because of Hawaii's reliance on importing inputs such as feed, energy, and fertilizers. Labor, particularly skilled and seasonal workers, is scarce and costly, which impacts production and harvest schedules. Pests and diseases are another shared challenge, with industries like coffee grappling with the Coffee Berry Borer and Coffee Leaf Rust, while macadamia nuts contend with pests like the macadamia felted coccid. However, despite these constraints, sectors like coffee and macadamia nuts have been able to leverage Hawaii's strong branding and international demand to maintain competitive positions in global markets.

While the industries share these broad challenges, they also have distinct differences in value chain dynamics. The coffee and macadamia nut sectors have long-established infrastructures for processing and distribution, which help with scalability and market access. Floriculture and aquaculture, on the other hand, rely heavily on air freight for fresh exports and have higher input costs for packaging and preservation. Papayas, being highly perishable, face greater challenges in maintaining freshness and quality during distribution. The diversification in products also means that industries like aquaculture and floriculture have specialized value chains, where small producers often handle their own aggregation and distribution to meet niche market demands.

Key Takeaways

Transportation Costs: All export industries face significant challenges with high transportation costs, particularly for perishable products.
Labor Shortages: Skilled and seasonal labor shortages are a shared constraint, driving up production costs and limiting scalability.
Pests and Diseases: Coffee, macadamia nuts, and other crops continue to struggle with pests, impacting yields and quality.
Infrastructure Needs: Improvements in processing facilities, cold chain logistics, and distribution infrastructure are essential to reduce costs and improve product quality.
Market Intelligence: There is an opportunity to enhance market forecasting and demand analysis to better align production with market needs.
Branding and Marketing: Strong branding for Hawaii-grown products remains a valuable asset, but further development of sustainable and niche marketing strategies could expand market reach.

Staple Food Crops Value Chain Diagram.png

Horizontal linkages among producers of similar products are crucial for achieving economies of scale, sharing resources, and collective marketing. Several industry groups and producer associations exist, demonstrating a reasonably high level of horizontal linkages within the value chain.

Vertical linkages involve the connections between different functions in the value chain, from production to processing, distribution, marketing, and sales. Effective vertical linkages ensure smooth transitions of products through the value chain, enhancing overall efficiency and profitability.

The relationship between producers and processors is critical for timely and efficient processing of agricultural products. The data indicates that many small-scale farmers lack access to adequate processing facilities, creating a bottleneck in the value chain. Initiatives to develop localized processing infrastructure, such as The Food Basket's Agriculture Innovation Center, aim to address this gap by providing shared facilities for value-added production. This will enable farmers to process their products locally, adding value and reducing the need for costly off-island processing.

The agribusiness services value chain diagram below illustrates the relationships and flows between service providers and producers within Hawaiʻi Island's agricultural market system. It highlights how various entities interact through core value chain functions to support the agricultural sector to improve productivity, profitability, and sustainability for producers of staple food and export commodities.

Agribusiness Services Value Chain Diagram.png

Core Value Chain Functions

Service Development involves creating and designing agribusiness services that cater to the specific needs of Hawaiʻi Island's producers. This function encompasses the identification of producer needs, development of tailored solutions, and continuous improvement of services. Service providers—such as agricultural consultants, educational institutions, and research organizations—are primarily responsible for this function.
Aggregation refers to the consolidation of services, resources, or producers to achieve greater efficiency and economies of scale. In the agribusiness services value chain, this function can involve bundling multiple services into comprehensive packages or coordinating groups of producers for collective benefits. Entities like cooperatives, producer associations, and brokers often play key roles in aggregation. They facilitate access to shared services such as bulk purchasing of inputs, group training sessions, or collective marketing efforts, enhancing value and reducing costs for individual producers.
Marketing involves promoting agribusiness services to producers to raise awareness and encourage uptake. This function encompasses advertising, outreach campaigns, informational events, and communication strategies that highlight the benefits and value of the services offered. Both service providers and intermediaries—such as industry associations, extension agents, and cooperatives—can engage in marketing efforts.
Sales/Contracting is the process through which producers engage with service providers to procure agribusiness services. This function includes negotiating terms, pricing, and formalizing agreements. Service providers handle sales directly, but brokers or cooperative arrangements can facilitate this function by representing groups of producers.
Distribution is the process of coordinating the availability of agribusiness services to producers across Hawaiʻi Island. This function includes the logistics of service provision, ensuring that services are accessible to producers regardless of their location or schedule. This function enables multiple distribution channels for services to reach producers, which may involve in-person consultations, online platforms, mobile service units, or partnerships with local organizations.
Service Delivery is the execution phase where agribusiness services are provided directly to producers. This function involves implementing the services as agreed upon, which may include on-site technical assistance, training workshops, consulting sessions, or remote support via digital platforms. Service providers carry out this function, often collaborating with extension agents, specialists, or technology providers.

Value Chain Analysis

The value chain diagram highlights a significant reliance on government-provided services and support. Government agencies, educational institutions, and non-profits play a pivotal role in offering extension services, research, training, skills development, laboratory services and guidance on pests and diseases. These services are essential, especially for small and medium-sized producers who may lack the resources to access private sector offerings. However, this heavy dependence indicates potential vulnerabilities, such as limited scalability, bureaucratic constraints, and susceptibility to policy and funding changes that can affect service availability and effectiveness.

Horizontal and vertical linkages are crucial in this value chain. Horizontal linkages refer to the connections among service providers that enables resource sharing, collective bargaining, and knowledge exchange. Vertical linkages connect different levels of the value chain, such as service providers to producers, facilitating the flow of services and information. In the diagram, vertical integration is evident where large private companies offer specialized technical, business, and financial services directly to large commercial operations. Conversely, smaller service providers often rely on intermediaries like digital platforms, collaborative networks, and producer groups to offer services, highlighting gaps in direct vertical linkages between service providers and producers.

A key systemic problem constraining the growth potential of the sector is the limited capacity and reach of private sector service providers to meet the diverse and specialized needs of Hawaiʻi Island's agricultural producers. Small farms dominate the landscape—over 3,600 farms with two-thirds under ten acres—and they produce a wide variety of crops. The fragmentation and diversity make it challenging for private providers to offer cost-effective services at scale. Moreover, producers' reliance on off-farm income (65% work off-farm) and advanced age (average of 61 years) limit their ability to invest time and resources into accessing and utilizing services. This situation creates a market failure where the demand for tailored, affordable services is not adequately met by the private sector, reinforcing dependence on government and non-profit organizations.

The diagram also underscores the lack of strong horizontal linkages among producers, which hampers collective action and limits economies of scale. Without the support of producer associations or cooperatives, small and medium-sized farmers struggle to aggregate demand for services, access group discounts, or influence service offerings. Similarly, weak vertical linkages between service providers and producers, particularly for smaller farms, result in gaps where services do not reach those who may benefit most. Intermediaries attempt to bridge these gaps, but their effectiveness may be constrained by limited resources and capacity.

These systemic issues impact the viability and profitability of the island's farms. Producers are not receiving the necessary support to improve practices, comply with regulations, or access new markets. The heavy reliance on government services, which may face funding limitations or policy shifts, poses risks to the sustainability of support mechanisms. Without addressing these challenges, the agricultural sector may struggle to innovate, grow, and remain competitive, affecting food security and economic resilience on Hawaiʻi Island.

Key Takeaways:

Heavy Reliance on Government Services: The agrifood cluster's dependence on government agencies and non-profits for essential services indicates potential vulnerabilities and highlights the need to diversify service provision.
Weak Horizontal Linkages Among Service Providers: Limited collaboration among service providers hampers collective action, economies of scale, and the ability to influence service offerings to meet Producer needs effectively.
Insufficient Vertical Linkages for Small Producers: Small and medium-sized farms lack direct connections with service providers, leading to gaps in service access and utilization, which intermediaries only partially bridge.
Market Failure in Private Service Provision: The private sector struggles to offer affordable, tailored services to a fragmented and diverse producer base, constraining the sector's growth and innovation potential.
Impact of Producer Demographics: The advanced age of farmers and their reliance on off-farm income limit their capacity to engage with services, affecting the adoption of improved practices and technologies.