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Economic Currents

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Q & A: Economics of Local Food

Posted October 4, 2012 | Categories: Q&A
1. You are hosting a special forum on Hawaii's economy this month. What are some of the topics are being covered?

On October 29, we are holding the first UHERO Forum on Hawaii's economy. There will be a forecast presentation covering the US and China by the Chief Economist of FedX, sessions on investing in clean technology, Hawaii energy policy sponsored by Hawaii Energy Policy Forum, and prospects for Hawaii Agriculture sponsored by Ulupono.

2. Tell us about the session on Agriculture.

That session his organized by PingSun Leung, a researcher at CTAHR. The research will address how Hawaii farms compare to their mainland competitors. One of the primary findings of research by Arita, Naomasa and Leung (2012) is that Hawaii farms lag significantly behind mainland farms in terms of efficiency and profitability. Our farms are 15-20% less productive than mainland farms.

3. Does the research explain why Hawaii farms fall short of the productivity of mainland farms?

Research by Arita, Hemachandra and Leung (2012) points to two main factors:

a) Lack of economies of scale. Research shows that agriculture efficiency and profitability is strongly increasing in farm size. In both Hawaii and the U.S. mainland, small producers are significantly less productive than larger producers. With the average Hawaii farm 2-3 times smaller than the average U.S. mainland farm, the widespread lack of economies of scale in Hawaii explains much of the relative underperformance in profitability and efficiency. In fact, after controlling for farm size, they find that Hawaii’s farm efficiency and profitability are more on par with U.S. mainland farms. Smaller farm size may explain why Hawaii farms are significantly less capital intensive (despite facing higher labor costs).

b) High labor costs. Hawaii’s labor costs are significantly higher than the U.S. mainland. Arita et. al. estimated that the effective wages of a Hawaii agriculture laborer may be up to 50% higher than what is paid to a U.S. agriculture laborer. In Hawaii, labor costs accounts for more than 1/3 of total input costs and is by far the most expensive input costs for Hawaii’s farms, including land.

4. So with these impediments, how can Hawaii’s farms remain economically viable?

Hawaii farms generally cannot compete in terms of efficiency and productivity. Compared to mainland producers, they are too small and face significantly higher labor costs. Due to high barriers of land expansion and lack of access to lower wage migrant workers, these problems will likely only get worse over time. Research by Arita, Hemachandra, and Leung (2012) that will be presented at the Forum confirms that mainland import competition is negatively affecting Hawaii’s local farm production, and the problem is likely to get worse over time.

One potential silver lining is the growing interest in consumption of ‘local foods’. Hawaii’s farms may be able to remain economically viable by differentiating their products and cultivating ‘local-food’ marketing.

Arita, S., E. Naomasa, P.S. Leung. 2012. “Comparison of Cost Structure and Economic Performance of Hawaiʻi and U.S. Mainland Farms.” Economic Issues, EI-21.

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