Cooperatives within markets

In a recent post on ChangingSociety I considered the question whether households in a rural community might be able to achieve energy self-sufficiency based on the cultivation of crops such as cattails and community production of ethanol. One question raised there is whether it is possible to estimate the land and labor that would be required for household self-sufficiency, and the other is whether we might describe an economically feasible distillery cooperative system that would permit a hundred families to distill their product. Based on assumptions that are drawn from a number of sources out of a very complicated domain of knowledge about the economics of ethanol, I put together several scenarios to see what the lifestyle consequences would be for "fuel farmers". A scenario based on moderate assumptions yielded these results: in order to produce a household stock of fuel of 2,400 gallons of ethanol, a household would need to cultivate 10 acres of cattails and would need to expend 4 hours per day year round on cultivation, harvesting, and distillery coop duties.

What I'd like to focus on in this posting is the feasibility and characteristics of cooperatives as a way for small- and medium-sized communities to handle some of the key material activities they need to accomplish. In a modern society we are so accustomed to market mechanisms and individual decision-making that it is somewhat difficult to imagine how coops might work in modern circumstances. So, for the example under consideration here, the market scenario is straightforward: farmers grow cattails to serve as a raw material for a privately owned distillery; the price of the cattails is eventually determined as a function of the quantity and value of the final products of distillation (ethanol and feed); and cattail farming is simply another crop within the private farmer's portfolio. And if the business case for a privately developed distillery is favorable -- that is, the raw materials will be available in sufficient quantity and low price and the value of the product will be sufficient to provide a profit -- then entrepreneurs will emerge to fill this economic niche. Everyone's interests are satisfied: farmers earn more income, private owners earn a profit, and society is presented with a growing volume of renewable fuels.

But consider the downside of this market-based story from the fuel farmers' point of view. They have no control over the price that their cattail crop will bring; they are subject to the vagaries of commodity prices and the semi-monopoly position held by the local distillery; and they are likely to believe that the "middle man" is taking too much of their crop and labor in the form of profits. And, after all, the farmers' interest is in achieving a sustainable energy supply -- not simply a level of income consistent with the budget necessities of everyday life. They're growing the cattails because they are a source of energy that can be produced and consumed separately from the market. So passing through the market twice -- selling the raw materials and purchasing ethanol -- seems like an unnecessary and risky detour; why not simply turn the crop into ethanol directly without passing through the marketplace?

So the fuel farmer has an interest in directly capturing the energy content of the crop, not simply growing another kind of cash crop. This could be done by establishing a farm still and processing the crop directly; but there are significant economies of scale in distillation, so this is not an ideal solution. An inefficient distillation process simply means that the farmer must farm a larger area and expend more labor in order to arrive at the net quantity of fuel required. A better solution would result from sharing the distillation process among an extended group of households and maintaining a small to medium-sized distillery for the use of the community. So we might imagine leaders coming forward who propose the establishment of a cooperative distillery. Coop members would share costs, labor time, and ethanol based on the volume of feedstock that they provide to the process. If all households were farming roughly the same amount of land at the same level of intensity, then all households would contribute cash and labor equally and would "earn" the same quantity of ethanol from the process.

So now let's do a little bit of scenario building. Suppose there is a turnkey distillery operation that can be purchased for $2 million, with a well-documented set of technical efficiency characteristics. (That way prospective coop members know what they're getting into.) The distillery processes 60,000 pounds of biomass a day and produces about 2,000 gallons of ethanol. The distillation process requires 30 hours of labor per day. And this scale of production is about right for the needs of a cooperative involving 100 households. Members are required to accept joint financial responsibility for debt and operations of the coop, and they are required to provide their full share of coop labor at the distillery based on a schedule of work times. And, given the technical characteristics of farming and distilling, they can be confident that their fuel farming labor will result in a quantity of biomass that will entitle them to 2,400 gallons of ethanol annually. On a plausible set of assumptions, this means that each household will have coop dues of $2,200 and a monthly labor obligation of 6 hours.

So far, so good; this sounds like a good deal for each of the households. Each household satisfies its annual energy needs with an investment of $2,200 in cash and about 1,000 hours of labor expended on cultivation, harvesting, transporting, and distilling; whereas the cost of purchasing this volume of ethanol would be about $10,000. So what obstacles might arise in implementing this cooperative solution to the problem of energy self-sufficiency?

There are several predictable challenges that this scenario is likely to raise, including especially in the areas of governance, technical management, work management, accounting, trust, taxation, and sustainability over time.

• Governance. The cooperative needs to make decisions about management, maintenance, and improvement of the facility. How should this be done? Are all decisions to be taken on the basis of a vote by the membership? Should there be an executive committee with some powers of decision-making? Is there an executive manager? How will conflicts among coop members be managed and resolved?
  
• Technical management. The distillery is technically complex. Maintenance requires skilled technicians or millwrights. Can the coop count on these kinds of expertise among its membership? Will it need to hire outside experts and engineers to maintain the facility? Who will take responsibility for maintaining safety processes and standards within the facility?
  
• Work management. Who will supervise the work of coop members while they are performing their tasks during coop labor? Is there a likelihood of "easy riding" -- coop members who bring their blackberries to work and keep checking their email rather than cleaning the boiler? What kinds of discipline processes are feasible within a coop -- for example, fines imposed on "no-show" workers? Will the coop need to reward internal experts with a somewhat larger share of the product?
• Accounting. There is a very substantial amount of accounting of inputs and outputs that needs to be accomplished. As coop members pull up with a load of biofuel the quantity and quality needs to be measured and recorded. Clear formulas governing the pay-out of ethanol need to be codified. There is a time lag between depositing the feedstock and withdrawing the ethanol; rules need to be established that govern the household's entitlement to a given quantity of ethanol on a regular basis (weekly, monthly, quarterly?).
  
• Trust. Members need to have a substantial level of trust in each other and in the non-professional managers of the process. Theft of assets is always a possibility by managers. Fraud on the part of coop members is also possible -- for example, mixing non-feedstock materials into a load of feedstock and taking credit for 6,000 pounds rather than 5,500 pounds of stock. More careful inspection procedures have a cost -- more labor time from the membership. Members need to be confident that other members will continue to pay their dues -- otherwise the debt obligations of the coop fall on a smaller and smaller circle of dues-payers.
• Taxation. The cooperative is likely to face expanding demand for improvements of the facility, the technology, or the use of labor. This means raising the obligations imposed on coop members, in the form of coop dues, a percentage of their ethanol share, or an increase in labor time required by coop members. How will these increases in assessment be decided?
  
• Sustainability over time. The economics of the cooperative distillery depend on a certain size of membership -- say 100 households. Like any human organization, there will be exits from the cooperative -- retirements, relocation, discouragement. Will the cooperative be able to continually recruit new members in sufficient numbers to keep the process in the black? Is there the risk of the "dying seminar" that Thomas Schelling writes about -- decline leading to rising costs for the remaining members, leading to further decline in membership (Micromotives and Macrobehavior)?
  

So -- there are significant challenges of governance, management, and trust that stand in the way of a successful cooperative. This doesn't mean that cooperatives are impossible to create or sustain, or that they don't have significant economic advantages for their members. But perhaps it does explain why this is not a common solution so far in modern social settings as a way of securing coordination and shared economic benefits among a mid-sized group of persons or households. At the same time, it seems very worthwhile to expend effort on trying to resolve these issues in ways that make cooperative arrangements more feasible and sustainable than they currently are in modern society.