Going nuts!

Hawaii’s largest grower of macadamia nuts plans to break into the business of making and selling processed food products after decades of selling raw nuts to processing and marketing companies, including Hershey Co.

Hilo-based ML Macadamia Orchards LP disclosed the strategic plan in its annual report filed with the Securities and Exchange Commission Wednesday, saying it intends to gradually cease selling nuts to Hershey’s Mauna Loa brand in favor of creating and selling its own line of packaged products under the Royal Hawaiian Orchards name.

The shift, which could include building a $10 million to $12 million processing facility on Hawaii island, is slated to begin next year and increase through the next two years as nut sale contracts with Mauna Loa expire.

"Our intention is to vertically integrate, and market and sell our own nuts under our own brand," said Dennis Simonis, president and CEO of ML Macadamia. "We’re excited. We’ve always been just a grower. This is a big step for us."

ML Macadamia believes it is in a fairly good position to process and sell a line of Hawaii macadamia products from nuts it grows.

The company said in its report that there exists a limited selection of branded macadamia nut products with wide U.S. retail distribution, and that few companies in the U.S. farm macadamia nuts and also market and sell value-added branded products containing the nuts.

ML Macadamia is already experimenting in Europe with a small line of products under the Ono Ono brand in conjuction with a Colorado marketing company. The line, which includes mac nuts covered with Ghirardelli dark chocolate, sea salt or chili lime flavoring, are being presented to distributors and retailers for sale in Europe.

A subsidiary of ML Macadamia will own 20 percent of the Ono Ono brand, and the marketing company will own 80 percent. Ono Ono sales also are being pursued in Asia, though Simonis said the emphasis of the packaged product business will be under the Royal Hawaiian Orchards name.

Helping ramp up the new endeavor is Scott C. Wallace, who joined ML Macadamia in January as executive vice president of sales and marketing.

Wallace had been an independent board director for ML Macadamia since 2007. He led Mauna Loa as president and CEO until 2000. Wallace more recently was president and CEO of Fruit Patch, a processor and marketer of fresh fruits.

ML Macadamia said there are risks with its strategy, which may not be successful. But the company said it can get more revenue from its nuts when prices are high, and offset nut price declines with more stable retail sales revenue.

Historically, ML Macadamia sold all its nuts raw in bulk, often at fixed prices under long-term contracts. The practice helped protect the company when spot market prices declined, but also kept the company from capitalizing on strong prices.

Mac nut prices right now are at historically high levels because of constrained global supply, but ML Macadamia is selling all its nuts to Mauna Loa under contract for substantially less than it could get on the spot market.

"Mauna Loa has been a great customer," Simonis said. "But we feel we should control our own destiny."

ML Macadamia’s move into processing and marketing, in a way, would reconnect the company with a part of its history.

Some orchards farmed by ML Macadamia were once owned by Castle & Cooke, which farmed, processed and sold nuts under the Royal Hawaiian Macadamia Nut Co. it established in 1948. Castle & Cooke sold the orchard and processing plant — but not the brand — in 1973 to another one of Hawaii’s "Big Five" agriculture firms, C. Brewer & Co.

Brewer created Mauna Loa Macadamia Nut Corp. and continued farming, processing and marketing packaged products. In 1986, Brewer sold its macadamia orchards to ML Macadamia. Brewer sold Mauna Loa in 2000 to a private equity partnership that sold the business to Hershey in 2004.

Ending ML Macadamia’s supply to Mauna Loa isn’t expected be a big blow for Hershey, a company that had $6 billion in sales last year.

ML Macadamia noted in its report withdrawing its supply could hurt Mauna Loa’s macadamia processing plant in Hilo. A Hershey representative could not be reached for comment Wednesday.

ML Macadamia has an option to pay Mauna Loa to process its nuts for two years after contracts terminate. A contract covering roughly one-third of production expires at the end of this year. Two similar contracts expire at the end of 2013 and 2014.

To process its own nuts, ML Macadamia is considering options that include working with other Hawaii processors, sending nuts offshore or building its own facility.

ML Macadamia said it will need to raise capital for its plans, which also include expanding and improving orchard operations. Simonis said it was too early to estimate a rough total cost of the ambitious endeavor.