PAPA'IKOU, Hawai'i — One section of the dusty dirt road through the Hawaiian Sunshine Farms macadamia nut orchard is covered with an ankle-deep pile of dried old nuts still in the shell. In a bit of black humor, farm manager Charles Ensey describes the nuts as "expensive road cover."

The old nuts are the remnants of more than 100,000 pounds of macadamias that Hawaiian Sunshine crews harvested and then dumped in frustration two years ago when no buyers could be found.

It wasn't a question of price, Ensey said. There was simply no place that would accept the nuts for processing at any price. Since then, he said the farm has left an estimated 1 million pounds of nuts to spoil under 800 acres of macadamia trees because there were no buyers.

Many observers agree Hawai'i's once-promising macadamia nut industry is in a crisis. It is the fourth largest crop in Hawai'i, but prices for fuel, pesticides, fertilizer, equipment and labor are rising, foreign competition looms, and prices for unprocessed nuts are low.

Local nut processing is dominated by an unpredictable oligopoly of Big Island processors that may announce at any time they have no market for and no use for nuts being produced by hundreds of small farmers.

The price of nut-in-shell dropped to below the farmers' cost to harvest the crop in recent years, and the situation got even worse when processors simply stopped buying small and midsize farmers' nuts.

"That hasn't really happened before," said David Rietow, president of the Hawai'i Macadamia Nut Association. The association represents the producers of more than 95 percent of the Hawai'i crop. "The last couple of years have been brutal from the standpoint of not having a place to go at any price."

The U.S. Department of Agriculture estimates Hawai'i's macadamia nut harvest plummeted to 36 million pounds between July 1, 2007, and June 30, a drop of 22 million pounds from the previous season and the lowest harvest since the 1981-82 crop year. Rietow expects it may decline by an additional 10 million pounds this year, meaning production will have been halved in just the past three years.

The value of the state's crop declined from $38.8 million in 2006-07 to about $21 million in 2007-08, according to USDA statistics.

NUMBER OF PROBLEMS

Growers attribute the decline in production largely to farmers such as Hawaiian Sunshine who simply leave their nuts where they fall under the trees because there is no market for them.

However, Matthew Loke, administrator of the state Department of Agriculture's agricultural development division, said poor weather conditions also contributed to the declining production last year, with crop losses estimated at 10.7 million pounds from a combination of factors including nuts that did not mature as they should, a pest called koa seed worm, and losses from mold or rotten nuts.

The problems are hurting large and small farmers. The largest is ML Macadamia Orchards LP, which owns or leases about 4,190 acres of orchards, and had a net loss of $4 million in 2007.

The loss was partly because ML was unable to find customers or processors for part of its 2007 crop, and the publicly traded company suspended its quarterly dividend payments in March for the first time ever. ML has posted additional losses in the first two quarters of 2008, but has contracts to sell all of its nuts this year.

Dennis Simonis, president and CEO of ML Macadamia Orchards, said wild swings in price have been bad for the industry. Prices were so high in 2004 that food processors who had been using mac nuts switched to other nuts to cut costs.

Some blame global competition for the industry problems, but Simonis said global supply has been steady at about 55 million pounds for the past five years.

"Really, what has happened is demand has fallen off," he said.

Hawai'i farmers have taken a particular pounding because most of their nuts used to go into retail products such as gift packs of mac nuts, and much of that market demand is now filled by nuts produced in Australia or elsewhere. That includes some products that carry Hawai'i brand names, Simonis said.

Another problem is retail gift packs of macadamia nuts have become "somewhat ordinary," and are available at bargain prices in warehouse outlets, Simonis said. "We've kind of allowed that to happen. There's a good volume in those outlets, but you don't get the price and the margin that you get when you sell an upscale gift item" at a higher-priced retail outlet, he said.

Nuts that cannot be sold in the retail market end up being sold in the lower-priced commodities-type ingredient markets for cookies and other food products.

CHANGES NEEDED

"Usually the grower is at the bottom of the food chain, so if the processors and marketers aren't getting a good price, they lower the price to the growers in order to maintain their margins," Simonis said.

With small and midsized growers leaving nuts to rot under the trees or even bulldozing orchards to replace them with coffee, Rietow said the industry has got to change.

Rietow, Simonis and others recalled earlier days when macadamia processors and marketers were locally owned, and had more of a stake in promoting Hawai'i product and Hawai'i brand names.

Today the largest processor, Mauna Loa Macadamia Nut Corp, is owned by Hershey Foods. MacFarms of Hawai'i LLC, the state's second-largest farmer and second-largest processor, was just sold to the Australian company Buderim Ginger Ltd. in August. Buderim already owns Agrimac, Australia's third-largest producer of macadamia nuts.

"The industry worked a lot better when the processors and marketers were under local ownership because we were all in it together," Simonis said. "We all had the objective of marketing Hawaiian nuts at a premium. The fact that the processors and marketers are owned by non-Hawaiian entities I don't think has been helpful."

Hershey Foods and Mauna Loa did not respond to requests for comment.

MARKETING STRATEGY

Significant marketing is still going on, according to Loke of the state Department of Agriculture. He said Mauna Loa, for example, has done a "really good job" of marketing macadamia in Asia at premium prices, and Hamakua Macadamia Nut Co. has done well at marketing in Japan, Hong Kong and China.

However, Loke said that if the growers could strengthen their industry association and collect more in assessments, they would be able to hire staff to lobby for federal marketing money, which would probably help to boost demand.

In recent years one local partnership has tried to build a new processing facility at Kona airport or to buy a processing plant from Mauna Loa in Kea'au, but had no success.

Albert Kam, a former Mauna Loa Macadamia Nut Corp. executive, said his group was unable to convince the state to sign a lease for land the partnership needed at the Kona airport, and a dispute over the failed sale of the Mauna Loa plant is being fought out in court.

Kam contends the real problem in the macadamia industry is a lack of marketing, and said his PLK Macadamia Group LLC has a marketing plan ready to go. He declined to disclose specifics, but said he also wants to establish an independent processing facility to buy from the small farmers.

Kam said he has an immediate need for 10 million pounds of processed mac nuts, and can't buy the nuts he needs. He said the California almond crop is 1.3 billion pounds, and argues the world market can surely consume far more macadamia nuts if the product is marketed properly.

"Macadamia nuts should be marketed as a premium niche product rather than marketed as a price-driven commodity," he said. PLK includes Kam, Robert Lindsey and Frederick Parr.

This year conditions have improved slightly for farmers, with Mauna Loa offering small farmers about 60 cents a pound, which the farmers say is close to their break-even point. The processor needs nuts to fill a contract with Costco, and Hawaiian Host also is buying, Rietow said.

At 60 cents, farms including Hawaiian Sunshine resumed production, but price remains an issue.

"Mauna Loa wanted to pay us 50 cents again, and we said no," Rietow said. "We'll just shut it down and go home for 50 cents. With rising fuel prices, the rising fertilizer prices, the rising pesticide costs, there's no point. We're going to dig a big hole. Why would we do that?

"Nobody is going to farm and lose money. We'd rather go off and do something else."