Corn Ethanol Producer VeraSun Files for Bankruptcy Protection
November 5, 2008
VeraSun Energy Corporation, one of the nation's largest ethanol producers, filed for relief under Chapter 11 of the U.S. Bankruptcy Code on October 31. Corn ethanol producers have struggled this year to produce profits while paying record-high costs for corn, but the situation turned really ugly with the recent drop in price for all commodities, including corn and gasoline. While dropping gasoline prices have pushed ethanol prices down, many ethanol producers had locked in high corn prices through so-called "hedging" agreements. Such agreements help to avoid price spikes when prices are going up, but they can prove to be bad investments if prices suddenly fall, as corn prices have recently. Although VeraSun has not released its third-quarter results, the company filed an 8-K form with the U.S. Securities and Exchange Commission in mid-September, warning that third-quarter losses would be $63-$103 million. The company noted that corn prices hit $8 per bushel in July, but then dropped to $5 per bushel by mid-August. VeraSun's hedging agreements resulted in the company paying about $7 per bushel in the third quarter, while ethanol prices had dropped to $2.35-$2.45 per gallon. See VeraSun's 8-K filing and Chapter 11 press release.
On the bright side, VeraSun announced on November 3 that it has secured commitments for up to $215 million in financing and is in negotiations to secure another $250 million. The funds will allow the company to pay outstanding employee paychecks, to pay its suppliers for goods and services, and to keep producing ethanol. However, on November 4 the company announced that it is delaying indefinitely the startup of its new ethanol biorefinery in Janesville, Minnesota, which has a production capacity of 110 million gallons of ethanol per year. Construction of the plant is nearly complete, and it was scheduled to begin operating by the end of the year. The company is immediately furloughing 53 employees that worked at the facility. VeraSun will continue to run its 14 facilities that are currently operating across eight states. See the VeraSun press releases on the financing and the startup delay.
According to the Renewable Fuels Association (RFA), the current economic crisis for ethanol producers has at least one silver lining: it refutes the argument that ethanol production was responsible for record-high corn prices. While corn prices were dropping dramatically in August, ethanol production reached a record 647,000 barrels per day, a pace that would result in a record 9.9 billion gallons of ethanol production per year. And although rising grain prices were blamed for increased grocery costs, the RFA notes that retail food costs have not dropped as the grain prices have dropped. Meanwhile, the RFA estimates that ethanol demand has reached an annualized rate of 10 billion gallons per year. The national renewable fuel standard requires that 9 billion gallons of ethanol be blended with gasoline products this year, rising to 11.1 billion gallons next year. See the RFA's press release, ethanol industry statistics, and report on food prices (PDF 763 KB). Download Adobe Reader.