ML Mac seeks to process own crop

In the face of rotting crops, the Big Island firm wants to process and market its nuts

ML Macadamia Orchards LP, the largest macadamia nut grower in Hawaii, has called a special unitholders meeting to amend the partnership to include macadamia processing and marketing.

The macadamia nut industry has been experiencing a decline in demand and prices, and Hawaii nut processors have suffered financial stress.

ML Macadamia has been left with nuts it can't sell.

ML Macadamia recently sued one of its buyers, Hamakua Macadamia Nut Co., for allegedly breaching its contract by processing only 3 million pounds of nuts in 2007 rather than the required 6 million.

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Facing the prospect of some of its macadamia nuts rotting in the field, ML Macadamia Orchards LP has sued one of its buyers and is asking unitholders to amend the partnership's business purpose to include macadamia processing and marketing.

ML Macadamia, the largest nut grower in the state, said in a proxy yesterday that given current market demand and pricing, a majority of the processors in Hawaii are experiencing financial stress. The company is asking unitholders to approve a broadening of the company's focus during a special meeting set for March 10 in Honolulu.

"It's important to our future that we control our own destiny, that we be able to make sure our nuts get processed and that we market Hawaiian nuts," said Dennis Simonis, president and chief executive of ML Macadamia. "We feel we need to vertically integrate the business."

Last month, ML Macadamia sued Hamakua Macadamia Nut Co. in Hilo Circuit Court for allegedly breaching a December 2004 nut purchase agreement that would require Hamakua to purchase and process 6 million pounds of wet-in-shell nuts annually from 2007 through 2012.

The suit alleges that Hamakua last year failed to process about 3 million pounds of nuts -- about half of what was required -- and caused in excess of $1.2 million in damages. The suit also alleges that Hamakua has refused to purchase nuts in 2008 and requests the court to compel Hamakua to abide by the contract and purchase the nuts, or pay for damages.

ML Macadamia said it will attempt to find other customers for the 6 million pounds of nuts per year that are not purchased by Hamakua, but if it is unable to do so, "the production that is not processed or purchased will rot in the field."

Richard Schnitzler, president of Hamakua, accused ML Macadamia of making unanticipated contractual demands for 2008 during a Christmas Eve 2007 e-mail. Schnitzler said he was surprised again by the lawsuit.

"Those demands caught us by surprise and we are in the process of trying to bring about a mutually satisfactory resolution, which addresses these demands," Schnitzler said.

Until last December, it appeared that ML Macadamia might be able to process its own nuts because of its pending acquisition of Mac Farms of Hawaii LLC, the second-largest processor and marketer in the state. But that deal fell through after an 18-month effort and left ML Macadamia at the mercy of other processors.

ML Macadamia said the failure of Hamakua to purchase the required allotment of nuts has adversely impacted ML Macadamia's net profits and cash flow for 2007 and may affect its financial performance in 2008.

The company also has advised its lenders that it may have failed to meet financial loan covenants as of Dec. 31, 2007, and may need a waiver from its lenders for noncompliance of those covenants.

ML Macadamia said several of the processors with whom it does business have either requested the partnership to forego their obligation to purchase macadamia nuts or have expressed a desire to terminate their respective nut purchase agreements.

Given its reliance on third parties, ML Macadamia said it needs to take an active role in the processing and marketing of the Hawaii-grown nuts.

Even though global macadamia nut production has grown steadily over the past two decades and is expected to increase moderately in the near future, demand and prices have been extremely volatile in recent years.

In 2004 and 2005, macadamia kernel could be sold for $6 per pound, hitting a record high in 2004 of more than $6.25 per kernel pound, or between 90 cents and $1 per pound on an in-shell basis. A strong economy, marketing momentum and the prominence of nuts in the Atkins diet all contributed to the higher prices. But over the past 24 months, demand has slowed in both the ingredient and retail sectors and prices have fallen dramatically, ML Macadamia said.

"Many farmers in Hawaii and Australia are unable to sell their crop at any price at this time," the company said.

ML Macadamia, which formed its partnership in 1986, used to sell its nuts on an exclusive basis to processor and marketer Mauna Loa Macadamia Nut Corp. under 20-year contracts that expired on Dec. 31, 2006. The alignment with Mauna Loa ensured ML Macadamia a sales outlet for its production and there was no need to participate in processing and marketing activities. But ML Macadamia, unhappy that the price it was getting for its nuts was below market value, decided to take advantage of the strong demand and high prices for nuts by signing new contracts with all of the major Hawaii processors in 2004 and 2005, with some contracts based on fixed pricing and others based on market-based pricing. Those contracts went into effect after the ones with Mauna Loa expired.

But with demand and prices slowing, ML Macadamia has been left with nuts it can't sell.

ML Macadamia said there may be several processing and marketing opportunities available but that it doesn't have a specific acquisition target at this time.