VeraSun's Big Gamble
Nov 07, 2008
VeraSun used to stake its claim as one of the nation’s largest ethanol producers. But a claim that grand means little when corn jumps to record high prices. The energy company bought contract positions betting that corn would rise even higher, but lost out when corn prices dropped this fall.
“They took a gamble and they lost,” a farmer said to me yesterday at a field day in Iowa. “We all take gambles, but this one was a doozey.”
A doozey indeed. In its bankruptcy filing last Friday, VeraSun officials said the company is “essentially out of cash”. Meanwhile, the value of its stock - which was already on the downturn – fell 98% before trading was suspended due to the bankruptcy.
As for farmers who supply VeraSun with the corn, they took a gamble, too. VeraSun is working to continue operations and pay its corn suppliers. The company operates 17 ethanol plants in eight states, including Indiana, Iowa, Michigan, Minnesota, Nebraska, North Dakota, Ohio and South Dakota.
Will VeraSun treat all corn suppliers the same? VeraSun will treat claims of corn suppliers that supplied corn to it at different times differently as required by the bankruptcy code, says Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation. VeraSun will treat all corn suppliers that supplied corn to its plants before Oct. 11, 2008 as unsecured creditors that may share in a dividend at some time, many months in the future. However, VeraSun has received confirmation from the Delaware Bankruptcy Court that corn suppliers who supplied corn from October 11 through October 21 will be treated as priority creditors that can be paid in full from VeraSun’s cash provided they agree to continue supplying corn at prevailing market prices, not contracted prices.
Will VeraSun honor its contracts? McEowen says the bankruptcy code allows a debtor to decide whether to accept or reject contracts like grain supply contracts through the date of confirmation of the plan. Thus, if a farmer or elevator has a contract to sell grain to VeraSun for $5.25 per bushel and the prevailing market price increases to $6.00 per bushel VeraSun has the option to enforce the contract by accepting the contract.
“At this time, VeraSun appears to have the upper hand as it can wait until plan confirmation to decide whether to accept or reject corn contracts while the farmers and elevators that have agreed to sell to VeraSun are required to honor those contracts until VeraSun decides whether to accept them,” McEowen says.