September 25, 2008

For ethanol companies, big moves in the price of corn can mean large profits or major losses.
 

VeraSun Energy started this year with high expectations. The Sioux Falls based company, with 14 plants in operation, was one of the world's largest ethanol producers.

 

In May, VeraSun announced a first quarter profit despite rising corn prices. During a conference call with investors, CEO Don Endres was upbeat.

 

But even then, at least one part of the company's business strategy was in big trouble.

 

The company made a bet in the futures market that corn prices were going to fall but during that point of time, corn prices were actually escalating sky high.

 

Corn prices were spiking because of unrelenting rains in the Midwest. By the end of May, thousands of acres of farmland were flooded. June brought more rains as much of Cedar Rapids, Iowa was under water. To the market, it seemed like the nation's crop was at risk, with prospects of lower corn supplies driving prices way up.

 

Corn peaked right near the middle of the year at almost US$8 a bushel, up from US$5 a bushel in January.

 

It was then VeraSun bailed out of its bet that corn would fall, turning around and bet that corn prices would rise.

 

Again, that bet went wrong as corn prices fell as the rains stopped and farmers got almost two months of near perfect corn growing weather.

 

Prices fell back to what they had been early in the year and VeraSun's corn market position was in shambles. They were locked into contracts which had them paying almost two dollars more than what they needed to pay, based on current market rates.

 

The company is expected to lose as much as US $100 million dollars this quarter. VeraSun needs cash, but obtaining financing now of any kind has become extremely difficult next to impossible in some cases.

 

Last week VeraSun announced it would evaluate what it called "strategic alternatives", a polite way of saying it is looking for buyers, some believe. 

 

VeraSun is not the only ethanol business in trouble. Denver-based BioFuel Energy has announced it could lose nearly US $50 million this year on its corn contracts.

 

In a way, the ethanol industry created its own monster which in the end devoured its master: the rapid growth of the ethanol industry caused corn prices to rise to the extent that it's no longer profitable to make corn-based ethanol.

 

VeraSun and others in the industry have scaled back expansion plans as a result and even held off new plant openings because of poor economic conditions.

 

With corn still trading at historically high prices, it remains to be seen whether the ethanol industry can stage a recovery.