December 19, 2008
VeraSun leaves corn farmers in limbo as ethanol industry breaks down
For many American farmers, once-lucrative corn shipments to ethanol plants run by VeraSun Energy Corp. are now in limbo.
Farmers like Mark Kuhn and Ron Litterer have no idea if the ambitious biofuels producer currently in Ch. 11 bankruptcy reorganization will honour their delivery contracts. Even worse, the farmers can't sell that corn elsewhere - at least for now.
This is putting financial stress on some farmers, who had planned to sell most of their corn to VeraSun and plow the cash from those expensive contracts into mortgage payments on their farms or equipment.
Also in jeopardy are small grain-elevator operators, who buy corn from farmers, store it, and contract to sell it to ethanol producers.
"This puts people in a terrible bind," said Kuhn of Charles City, Iowa, where VeraSun runs a plant. "There is so much uncertainty with the contracts and how they will be dealt with. We're being held hostage."
Kuhn, also an Iowa state legislator, holds a contract to sell VeraSun corn for US$6.03 a bushel.
But the fate of his contract - and others that stretch as far out as 2011 - won't be known until 10 days prior to the scheduled delivery date. At that time, VeraSun can opt to buy the corn at the original price or cancel the contract, according to a recent Delaware court ruling.
"We want VeraSun to operate and for the producers to make the best of a bad situation," said Litterer, who grows corn on a 1,000 acre farm in Greene, Iowa, and also serves as chairman of the National Corn Growers Association.
He still has a contract to sell 15 percent of his crop to VeraSun in March.
Farmers once believed a big payday was coming. This past summer, corn was trading at historic highs on US grain exchanges, climbing close to US$8 a bushel. But corn prices have plunged since then, with corn now fetching around US$3.30 a bushel.
"What [farmers] had counted on for their income is just gone," said Darin Newsom, grains analyst at market-researcher DTN Ag in Omaha, Neb.
Before the company went bust, VeraSun had signed many deals to buy the corn between US$5 and US$7 a bushel. One contract was even inked for US$7.70 a bushel, according to farmers.
VeraSun has "no intention of honouring some of these contracts," claims Keith Bolin, who runs the American Corn Growers Association and grows corn in Illinois.
VeraSun didn't respond to questions for this story.
"Sellers are sitting back looking for lower prices," DTN's Newsom said. "They are not pushing for huge amounts of corn."
VeraSun was the largest publicly-traded, stand-alone ethanol maker before it filed for bankruptcy Oct. 31. The Brookings, S.D., company, started in 2001, has been one of the key beneficiaries of US policies designed to encourage the use of alternative fuels.
A lucrative initial public offering helped fund its rapid expansion, including the acquisition of rival US BioEnergy. But the bets VeraSun made on corn when prices were high soured, the company swallowed too much debt and ran into cash problems.
It's not alone: Five smaller ethanol producers are in bankruptcy, too.
Those left standing include privately held Poet LLC; Cargill; giant Archer Daniels Midland (ADM); Aventine Renewable (AVR); and Pacific Ethanol (PEIX).
The industry's plight has already taken a toll. In its most recent report, the US Agriculture Dept. slashed its estimate on corn used for ethanol by 300 million bushels to 3.7 billion bushels. It cut its forecast for the average farm price of corn to a range of US$3.65 to US$4.35 a bushel, from US$4 to US$4.80.
VeraSun's 16 ethanol plants have the capacity to take 624 million of corn bushels a year, state legislator Kuhn said. But just a small number of those plants are currently in operation as the producer seeks to secure more permanent bankruptcy financing.
As it tries to climb out of bankruptcy, VeraSun faces another important task: mending relationships with corn farmers who championed the ethanol business long before VeraSun ever processed the grain for use at the gas pumps.
"[VeraSun's] speculation has brought millions of dollars of losses to family farmers in the Midwest," said Bolin. "VeraSun has done more damage to the ethanol industry than those that dislike and despise it."