Agricultural Cooperatives and Marketing Bioenergy Crops: Case Studies of Emerging Cooperative Development for Agriculture and EnergyMark Downing, Christian Demeter, Martin Braster, Chris Hanson, Greg Larson, and Timothy Volk |
Paper presented at BioEnergy '98: Expanding Bioenergy Partnerships, Madison, Wisconsin, October 4-8, 1998.
Agricultural cooperatives play an important role in marketing agricultural crops. A cooperative structure serves to provide agricultural producers the opportunity to process and market their crops in a joint business venture with other producers. Producer cooperatives provide uniformity in quality by inspection during production, at harvest, and upon delivery. Uniform preparation of a commodity for a buyer can also be achieved, as can minimization of the numbers of farmers with whom a commodity purchaser must do business. Additional benefits of cooperatives are:
Four agricultural producer cooperatives have been, or are in the process of being formed as a direct outcome of a U.S. Department of Energy (DOE) Biomass Power for Rural Development initiative. The energy crops being established are alfalfa, switchgrass, willow, and hybrid poplar. Each of these cooperatives or developing cooperatives will necessarily have different structures to achieve particular goals. This paper will describe the structure, conduct, and anticipated performance of these four cooperatives. Keywords: market development, agricultural cooperatives, energy crops, bioenergy
A cooperative is a private business organized and joined by members to fulfill their mutual economic needs as patrons of the business, with the key control, ownership, and income distribution decisions based on patronage proportions; namely, member voting, equity capital investment by patrons, and distribution of net income to patrons are proportional to use of the cooperative (Barton, 1989).
Barton outlines three principles embodied in cooperatives related to business decision-making. First, those that use the cooperative are owners and financiers. Second, because only owners use the cooperative, they maintain control. Third, those user-owners receive distributed benefits from the cooperative. These three principles distinguish cooperatives from all other forms of business.
Agriculture is only one industry in which cooperative business structures are found. Other types of cooperatives are consumer goods cooperatives, financial credit unions, housing, insurance, and rural electric system cooperatives. These cooperative businesses may be owned by consumers, employees, business, or by government and non-profit organizations.
Agricultural cooperatives may be organized by function. Production cooperatives, more commonly found in California agriculture, permit farmers to organize their farms as cooperative corporations. Supply cooperatives offer the function of providing inputs to processes at competitive prices. Service cooperatives provide services to members such as credit, utilities, and insurance.
Agricultural marketing cooperatives are commonly organized by farm commodity or groups of commodities such as sugar, grains, corn, and poultry. Marketing cooperative structures may function as contract and price bargaining cooperatives, or may be involved in processing or manufacturing of specific agricultural commodities. The remainder of this paper, and the case studies and examples presented address the processing and marketing cooperative structure.
There are some very general reasons for forming agricultural cooperatives. Most of the reasons permit analysis for determining the effectiveness the cooperative as a method for marketing agricultural products. Agricultural cooperatives are formed to solve market failure. Market failure occurs when goods are not distributed to the benefit of all persons involved in markets. In particular, two instances characterize market failure. First, large numbers of buyers and sellers may fail to enter the market. Second, equilibrium prices may never be reached because market prices are too low or too high, which may adversely affect the sellers or buyers, respectively. By solving market failure, farming and commodity systems become more economically efficient.
Cooperatives are also formed to achieve market power, or to influence terms of trade. This trade may take the form of domestic or international markets. Terms of trade relate to price, timing, form, and other quality or quantity specifications.
Agricultural cooperatives are formed by commodity producers, or manufacturers to take advantages of the benefits and economies of size and scale.
Variable and fixed input costs, and capital investment play roles in these kinds of decisions. Farmer marketing or supply cooperatives are commonly formed to provide new or missing services. A good example is development of fertilizer blending cooperatives; a phenomenon that occurred as a result of farmer-producer demand for custom fertilizer blended ratios based on soil and crop analyses.
A major local or regional challenge is coordination of the flow of supplies to farmers, such as fertilizer and chemicals, or the flow of farmer products from the farm to processing facilities. Grain elevator cooperatives are good examples of effective coordination of flow of quantities, and quality of grains.
Rather than expecting farmers to assume the entire economic, and agricultural risk of marketing and development of markets for specific crops, cooperatives serve the function of sharing risk among cooperative owner-members. This risk sharing plays an important part in development of farm enterprises, and developing markets.
Finally, a very critical role, although not traditionally played by cooperatives, is in the public policy making arena. By influencing public policy, but not to the extent that these influences unduly enhance price, agricultural cooperatives could play a very strong role influencing agricultural policy, in addition to environmental, and energy policy.
The U.S. Department of Energy (DOE) has been working toward development of this initiative since 1990. Original discussion and development centered on fast growing energy crop utilization for electric power, and liquid fuels production. These energy crops were hybrid poplar, hybrid willow, and switchgrass. Electric power generation technologies considered were direct combustion, co-firing with coal, and advanced generation technologies such as gasification. A number of liquid fuels, and production technologies were considered. In 1994, a request for proposals for the Biomass Power for Rural Development Initiative was issued and 3 projects were selected for full project development. These projects were located in Minnesota, New York, and Iowa.
In Minnesota, a number of cooperators organized to develop an alfalfa production and separation technology, and to invest in technologies to convert the stems to electric power, and technologies for pelletizing alfalfa leaves into an agricultural livestock feed product. Project plans include building a gasifier for electric power generation.
In New York, the Salix Consortium was formed, consisting of researchers, electric power companies, and others. Crop production techniques proposed followed the Swedish double row system of hybrid willow production. Combustion technology currently being used in the New York project is 10 to 15 percent cofiring of forest residues in existing coal-fired power plants. Project plans assume willow will substitute for forest residues, once it becomes available.
The Chariton Valley Biomass Project in south central Iowa is utilizing Conservation Reserve Program (CRP) land to produce switchgrass. Project plans are to cofire the switchgrass in a large existing coal-fired power plant in the region.
Each of these projects anticipates achieving fully integrated commercial agriculture and electric power production and operation is expected to be privately funded by the final phase of the three-phase projects. The first two phases of each project involve federal cost-sharing in the research, development, deployment and demonstration of biomass crops, the demonstration of biomass conversion to electric power, and the development of harvesting, handling, and transportation infrastructures. "Expanding the opportunities for agriculture and energy requires a vision of tomorrow’s farm infrastructure and how it will interface with a changing electric power industry." (Demeter, et al., 1995) The agricultural cooperatives discussed in this paper are being established in integration with the entire power enterprise and their development is a direct outcome of the DOE initiative.
Minnesota Valley Alfalfa Producers (MnVAP) is a Minnesota agricultural cooperative corporation and as of 1997, owned by 223 alfalfa farmers in the southwest region of Minnesota. The cooperative was formed to commercialize the storage, transportation, value-added processing, and marketing of locally grown alfalfa on a cooperative basis. Through ownership and operation of one or more alfalfa processing facilities (the cooperative currently owns and operates one processing facility in Priam, Minnesota), the cooperative intends to provide its shareholders with the ability to develop commercial markets for alfalfa and to process alfalfa into alfalfa pellets, alfalfa leaf meal, and high fiber alfalfa stem products. Presently, the cooperative produces alfalfa pellets only at its Priam facility. The alfalfa pellets are currently marketed by the cooperative to both domestic and international purchasers of livestock feed ingredients. The cooperative has processed over 30,000 tons of alfalfa to date.
MnVAP was established primarily to market alfalfa and alfalfa products for its member owners. The cooperative’s Board of Directors believes that alfalfa production will continue to compete favorably, on economic terms, with corn and soybean production in the region and that the benefits derived from including alfalfa in the rotation and the potential for increasing the value of alfalfa through processing will provide substantial economic opportunities for the cooperative.
The cooperative is also pursuing the development of a 75-megawatt electrical power generation facility based on the use of high fiber stem material from alfalfa as a major source of fuel. The company has recently signed a power purchase agreement with Northern States Power. The technology for power generation is an advanced biomass gasification, low BTU gas, combined cycle power plant to be constructed and operated in Granite Falls, Minnesota. A joint development agreement called Minnesota Agri-Power (MAP) encompasses development, ownership, and management of this plant.
MnVAP was incorporated as a cooperative corporation under chapter 308A of the laws of the state of Minnesota on December 7, 1995. MnVAP’s corporate headquarters are located in Granite Falls, Minnesota. The company operates on a cooperative basis in accordance with its Articles of Incorporation and Bylaws, which were amended and restated in August 1996. The cooperative distributes its earnings, or "net margins", to its patrons based on the amount of business the patron conducts with the cooperative (amount of alfalfa the patron delivered to the cooperative), rather than to investors based on investment. Consequently, ownership of the cooperative’s common stock has no direct impact on a patron’s portion of the net margins of the cooperative. For each share of common stock of the cooperative owned, however, a patron is entitled and obligated to deliver one (1) ton of alfalfa annually to the cooperative pursuant to a uniform delivery and marketing agreement.
A $200 membership fee is required to become eligible to purchase shares in the cooperative. Currenty, each share in the cooperative may be purchased for $50, with a minimum purchase of 150 tons. This makes minimum individual shareholder member investment of $7500, plus the $200 membership fee. With a projected 700,000 tons to be supplied to the cooperative at $50 per share, the total cooperative investment will be $35 million dollars.
The Prairie Lands Bio-Products Inc. (PL) was established as an Iowa Nonprofit Corporation in June 1997. The cooperative is organized exclusively for agricultural and horticultural purposes within the meaning of Section 501(c)(5) of the Internal Revenue Code (IRS), as amended. The primary purposes of the cooperative are to promote the development of agriculture and the general welfare of those who are involved and are dependent directly on agriculture; to promote the development of legumes, grasses, forage, trees, shrubs and other plants as commercial crop; to develop markets for such crops; to educate farmers and other involved in growing such crops; and to promote an economic climate favorable to such development; and to perform all such other activities legal within the State of Iowa as are related to these stated purposes.
The cooperative has 30 of its 40 members active in switchgrass production. They have elected a 5 member Board of Directors. Technical and administrative staff support comes from the Chariton Valley Resource Conservation and Development (CVRC&D), E.L. Woolsey & Associates, and Iowa State University.
Currently, representatives of PL serve a technical advisory role on the CVRC&D Biomass Project team. Members provide a switchgrass producer’s perspective to assist the team with project activities including:
PL has worked with the Iowa Farm Bureau to secure $20,000 in funds to partially support research that will assess the net impact on atmospheric carbon of producing and using switchgrass as a biomass crop to generate energy. Research will be conducted by investigators at Iowa State University and the University of Iowa. PL members will participate in the research by providing access to land that they own and manage as well as identifying additional land available for the collection of field data.
PL plans and conducts information and education opportunities related to the Chariton Valley Biomass Project. The organization receives funds from the Leopold Center for Sustainable Agriculture to support these activities. PL has contracted an education specialist to assist members with these activities. As part of these efforts, PL:
PL has received funds and technical assistance from the U.S. Department of Agriculture (USDA) and Iowa Farm Bureau to evaluate the feasibility of alternative for-profit organizational structures to undertake the production and marketing of biomass. It is anticipated that PL will be a precursor to, or assist the formation of, this for-profit organization. As a result of this work, PL members have focused their efforts on comparing the function and benefits of a limited liability company and traditional or open cooperative. PL members have identified the following key points in evaluating organization structures:
PL considers the most effective role that this landowner based organization will be able to play is production and delivery of biomass to satisfy developing markets. As opposed to focusing its efforts on developing markets for biomass, the organization will direct its production and delivery capabilities to support the marketing activities of its members.
A sustainable commercial industry for willow biomass crops requires the commitment of both growers to produce and supply the raw material and the end consumers who will use the material. At the market end there are two utilities in New York actively involved in cofiring operations. Both of them are developing willow biomass as a component of their fuel mix. Initial response from farmers and other potential producers to the idea of willow biomass crop has also been favorable. The two ends of the system seem poised to come together and make willow a successful alternative crop. Concerns about costs and marketing among potential growers need to be overcome in order to ensure a steady supply of material for developing markets.
Cooperatives have the potential to play an integral role in overcoming some of the hurdles that are currently present for growers in production of willow biomass crops. One barrier often cited by potential growers is the capital expense over the first three years of establishment before any return is obtained. A parcel of land that is prepared for planting and planted with willow will require four growing seasons before a return is obtained.
Establishment costs for the first two years per acre of land are estimated to be $650-890 per acre (Kopp et al., 1997; White et al., 1995). If a producer wants an annual cash flow during the subsequent 20 years of the crop rotation, then willow biomass crops should be planted over three consecutive years. In each of these years there will be an outlay of cash with no direct return until the first harvest four years later. About 3/4 of the establishment costs are accounted for in the planting stock (Kopp et al., 1997). While there is a potential for costs of planting stock to decline due to changes in cutting production and planting machinery, planting stock will remain a substantial portion of the establishment cost. Planting stock prices in the UK have dropped by more then 35% since 1994 (Turnbull, 1997). A cooperative could lower planting stock costs by becoming directly involved in the production and storage of willow planting stock and selling the material to cooperative members at a reduced cost. An alternative approach would be to operate as a bulk buyer of planting stock, thereby obtaining the material at a reduced priced. For every cent reduction in the cost of the planting stock, establishment costs are reduced approximately $62 per acre, or nearly 7-10%.
Specialized planting equipment has been developed in Europe for establishing willow biomass crops (Kopp et al., 1997). Currently the industry standard in Europe is the STEP planter, which makes use of 4 to 6foot whips as planting stock. The machine cuts them off at the appropriate length of 8to 10 inches as they are inserted into the ground. This piece of machinery costs between $55,000 and $70,000. This is also a substantial capital cost for a piece of machinery that might be used for three or four years and then not required again for another 20 to 25 years, the proposed willow rotation. Having a cooperative hold this piece of equipment and make it available at cost to members would be an effective service for reducing the cost of establishment and hence improving the profitability of willow biomass crops. The same may be true for willow harvesting machinery. While some of the specialized machinery such as the Claas Jaguar or the Bender equipment may be able to harvest other crops in addition to willow, their capital cost is still substantial. Spreading that cost across cooperative members, and making use of the machine across a larger acreage would improve the economics efficiency of the system.
A major concern frequently raised by potential growers of willow biomass crops is size and stability of the market. While producers desire a reliable market, power producers require a steady and consistent supply of fuel. It is unlikely that utilities that are planning to co-fire willow biomass with coal will deal with a large number of small producers to secure a supply of willow biomass. A cooperative with a marketing emphasis could play an essential role in securing a market for growers because they would be able to ensure a reliable and steady supply of biomass. A cooperative would also be able to spend more time and energy than an individual producer in locating and securing additional markets for the biomass. A cooperative could not only secure the markets but also be responsible for harvesting and delivering the biomass to the end user.
Perhaps the ideal cooperative in a commercial willow biomass industry would provide value added processing rather then just the more traditional approach of marketing or offering services. This type of cooperative has a limited number of members and there is an agreement between the members and the cooperative. The member would be required to produce and deliver a specified amount of the biomass, while the cooperative would be committed to accept delivery of the biomass. Dozens of such cooperatives have been established in Minnesota and North Dakota over the past few years. The potential exists to develop a processing cooperative for willow biomass crops where the end product of the cooperative is heat and/or electrical energy rather then biomass.
The size of new generation type cooperative for willow biomass could vary greatly. In Sweden a small cooperative has been formed with about 20 members to generate 8,500 MW/year of heat energy for the nearby town of Kolbeck. Membership is limited to farmers who are actively growing willow biomass crops. The shares in the power plant are divided according to the acreage of willow that is grown. Each member is actively growing between 15 and 40 acres of willow biomass crops. The group has a 15 year contract to supply heat to the nearby town of Kolbeck. The contract is renegotiated every five years. Ninety percent of the capital expenses for the power plant were raised entirely by the group. The remaining 10% came from a grant. The majority (80%) of the capital was provided by a business loan. Shares in the organization made up the remainder. Capital investment in the plant should be paid back over a 15 year period based on the original contract with the town. The majority of profit for the producers is generated from the production of the willow crop rather then from the sale of the heat. Members of the cooperative are enthusiastic about returns they are receiving and pleased with the investment they have made. Cooperatives that produce a mix of value added products might be even more attractive then selling a single product like energy. With willow biomass the potential exists to develop a marketing/processing cooperatives at a variety of scales. Members could grow the crop, produce the power and then use it to process other agricultural crops. The end product would then be a processed commodity, which could then be sold as an additional value added product.
While research and development work with willow biomass crops has been ongoing for over a decade in North America, the establishment of commercial acreage has just begin. To date about 150 acres of willow biomass crops have been established in North America. The Salix Consortium is aiming to have this area increased to 1000 acres in the next few years as part of a demonstration and commercialization effort. The goal of the Consortium through this project is to develop a commercially viable willow biomass industry in North America. The potential is there and growers could benefit in a variety of ways if they formed a cooperative at one level or another. While that goal of a commercial willow biomass industry is still a few years away, now is the time to begin to explore the role that cooperatives can play in the development of this industry.
The Minnesota Agro-Forestry Cooperative (MAFC) is being formed as a result, at least in part, of a Bioenergy Feedstock Development Program (BFDP) subcontract with the WesMin Resource Conservation Development Council (WesMin) to plant nearly 2000 acres of hybrid poplar in west central Minnesota. This acreage planted has no long-term contract for sale or use, and the demonstration planting of 2000 acres is not included in the Biomass Power for Rural Development Initiative. It does represent a substantial effort to deploy hybrid poplar for any of a number of possible end-uses. The land utilized was CRP land, and by the end of 1998, it is projected that between 6000 and 8000 acres of hybrid poplar will be planted by private and public funding in the state of Minnesota. By law and by proposed definition, the MAFC will distribute the economic benefits back to it’s members based on patronage, not on ownership percentage.
This cooperative has projected three primary goals:
The two anticipated marketing objectives are: 1) to market the cooperative to prospective members of the cooperative in order to expand the membership, increase the potential for hybrid poplar production, and to provide a portion of the capital needed to fund the cooperative’s first year of operations, and 2) to market the cooperative to prospective buyers of hybrid poplar as a feedstock for pulp mills, for the oriented strand fiber market, and/or for lumber mills.
At this time, WesMin is serving as a business incubator facilitates development of the cooperative in cooperation with the Cooperative Development Services, Madison, WI, the Agricultural Utilization Research Institute, (AURI), and the Cooperative Development Initiative (CDI) at the University of Wisconsin - River Falls.
WesMin is currently seeking funding for the cooperative from the Minnesota Department of Agriculture (MDA) and private sources. Any grant monies will be used to contract services for a developer for the MAFC. The MAFC is in the process of contacting USDA and the Board of Water and Soil Resources to seek limited harvest on Conservation Reserve Enhancement Program (CREP) acres in the Minnesota River Basin. Limited harvest of hybrid poplar trees will provide increased economic benefits to landowners and would increase the potential number of CREP acres.
The MAFC will also be looking into opportunities for planting Short Rotation Woody Crops (SRWC) under the New Conservation Farm Option Pilot Program recently announced by USDA. Acceptance to plant SRWC on Farm Program acres is needed to provide annual income to farmers for the 10-12 year period between planting and harvest.
Using cooperative structures in agriculture provides economists opportunities to measure how well cooperatives function in marketing agricultural products and services. For each of the cooperatives presented above, structure, conduct and performance of markets will be used to determine how well cooperatives work to market these goods and services. Several structures and combinations of structures have been presented. Conduct is the range of business methods, strategies, and policies that cooperatives use in responding to certain business environments. Performance is the result of cooperative conduct. Economists use prices and output levels to measure cooperative performance. Industry conduct is also an indicator of cooperator performance.
Economic justification, or objectives of a marketing cooperative are to maximize net income, to simply permit farmers to break even, and to assist farmers in maximization of net price received by cooperative members. In many cases, maximizing net income, and maximization of price received by members of a cooperative are in conflict with each other. These and other goals and objectives must be coordinated to achieve success and to maximize multiple and mutual benefits of agricultural cooperatives.
Perhaps the greatest challenge to the four developing agricultural cooperatives is the minor role that cooperatives have traditionally played in determination of agricultural policy. Agricultural cooperatives have traditionally taken more of a neutral policy role in government programs. Knutson, et al., 1986, have suggested that "realistically, the interests of cooperative members would be most effectively reflected in the policy process if cooperatives, themselves, become more directly involved in farm policy making." This is true of the new agricultural cooperative examples presented in this paper because of the potential influence of agricultural, environmental, and energy policy on deregulated electric markets. In particular, the inter-connectedness of all three areas of policy decisions may have more of an influence on these newly formed agricultural marketing cooperatives than simply a changing and developing agricultural policy.
The Freedom to Farm Act has immediate effects on farmer-producers, and on cooperative performance. Price supports, and acreage reductions have had major impacts on cooperatives and farmers in recent agricultural history. This is largely due to the benefits received by individual farmers, rather than cooperative farmer members. Larger farmer organizations, or commodity organization such as National Corn Growers Association and others have played more influential roles.
Barton, David. 1989. in: Cooperatives in Agriculture. ed. David Cobia. Prentice Hall, Englewood Cliffs, NJ., p. 30.
Demeter, C., E. Gray, and P. McCallum. 1995. A Business Manual for Crop/Energy Enterprises. National Renewable Energy Laboratory, Golden, CO. Contract #KAP-4- 14083-00.
Knutson, Ronald, and W.E. Black. 1986. Cooperative Involvement in Issues of Domestic Farm Policy. Department of Agricultural Economics Information Report 86-4. Texas A&M University, College Station, TX.
Kopp, R.F., L.P. Abrahamson, E. H. White, T.A. Volk, and J.M. Peterson. 1997. Willow Bioenergy Producer’s Handbook. NYSERDA, Albany, NY. 30pp.
Turnbull, D.J. 1997. The commercial reality of producing biomass form short rotation coppice. Aspects of Applied Biology 49: 71-78
White, E.H., Abrahamson, L.P., and Robison, D.J. 1995. Commercialization of Willow Bioenergy - A Dedicated Feedstock Supply System. Second Biomass Conference of the Americas: Energy, Environment, Agriculture, and Industry, pp. 1534-1546.