November 24, 2008

 

Shrinking ethanol profits and a deepening recession that cause bio fuels giant VeraSun to go bankrupt last month make US farmers sceptical of their corn buyers in the future.

 

Farmers welcomed the rapid expansion of ethanol producers whose deep pockets helped propel price of corn to record highs.

 

But the financial woes of some ethanol makers are spilling into rural America, souring the once good relationship between farmers and companies that purchase corn and process it into fuel.

 

Iowa State University agricultural economist Chad Hart said that one have to look at who he is selling to and what sort of financial situation they are in.

 

South Dakota-based VeraSun, the second largest U.S. ethanol producer, filed for bankruptcy protection last month, citing a liquidity crisis as bad bets on corn, natural gas and ethanol prices hurt its ability to pay debt.

 

The company has been unable to honour some corn delivery contracts booked near this summer's record-high prices, so farmers holding those contracts now must resell the corn on the open market for significantly less money. Some may face six-figure losses.

 

Calls to VeraSun seeking comment were not returned.

 

Hart said that producers were counting on the high prices they locked in this summer and now, with the bankruptcy declaration, they are seeing those contracts evaporate into thin air.

 

These farmers went in thinking they had already sold corn at US$7 a bushel. They probably made other input or supply buying decisions that they maybe wouldn't have made knowing they were not going to get that US$7 a bushel, he added.

 

Corn futures prices have tumbled about 50 percent from an all-time high of US$7.65 a bushel this summer to less than US$4 a bushel.

 

While ethanol makers welcomed the decline in corn costs, their profits are dismal as the price of ethanol also plunged along with other energy markets.

 

Still, ethanol makers are expected to consume about a third of the more than 12 billion bushel US corn crop this year.

 

Bob Dineen, head of the Renewable Fuels Association, said this week he expects industry consolidation in 2009 as ethanol profit margins tighten and demand drops.

Several industry analysts predicted more bankruptcies in the sector. Several ethanol makers have shelved plans to build new plants.

 

In the meantime, many farmers are putting most of their unsold corn in storage and appear resigned to wait for a clearer picture of the market and higher corn prices.

 

Many older ethanol plants already paid off much or all of their debts when profits were better two or three years ago, before corn and fuel input costs soared. Those plants may weather the credit crunch better than newer, more leveraged facilities, economists said.