Look for more ethanol plant bankruptcies soon. Mark Lakers, president of Ag and Food Associates, an Omaha, Neb., middle market merger and acquisitions investment bank, expects as many as 40 Chapter 11 filings by the end of January.
Those include the 16 VeraSun plants in 8 Midwestern states in bankruptcy proceedings since Oct. 31. The U.S. now has about 150 ethanol plants in operation.
Lakers anticipates rapid consolidation in the ethanol industry, with companies owning plants with less debt buying the mostly newer but more debt-ridden facilities. They will be getting good deals, Lakers says, with 50-million gallon yearly capacity plants selling for as little as $1.50 per gallon.. By comparison, building a new plant would cost $2.20 per gallon.
"You have 25% to 30% of the industry desperately looking for new lenders at a time you probably don't want to be doing that. It will cause some of these plants to change hands,” Lakers said at the National Agricultural Bankers Conference in Des Moines, Iowa Nov. 17.
"They'll be selling at a 25% discount of what the plants cost to build, a reduction from a premium of $2 a gallon. Over the next 3 to 5 years we'll go from 150 ethanol producers to 25 to 50. It could be faster. The good thing is, it should be an orderly process. There should not be a lot of disruption,” Lakers says.
"Farmers should be very cautious now. They're still going to have demand for corn, so they don't have to worry about demand. But at least 20% of the ethanol plants at the beginning of the year will not be there at the end of the year. The plants will be there but someone else will own them. So the farmer needs to be very careful who he's selling to. Not many want to have a lot of credit risk with a new ethanol plant. They need to be careful about credit risk management,” Lakers says.
Bankrupt ethanol plants will not honor corn contracts with farmers, Lakers says. That means that, rather than paying $7 or more per bushel which they contracted in mid-summer, they can buy corn at current, much lower, market prices.
Farmers have little recourse to remedy the situation, he says.
"It might cause farmer behavior to change. It might be a reason for the co-op to sell to the ethanol plant rather than the farmer. The co-op might be able to handle it better than the farmer if there's a problem,” Lakers says.