A disastrous venture into the corn futures market this past summer has landed Iowa's largest ethanol producer, VeraSun Energy Corp. of Sioux Falls, S.D., in bankruptcy court. VeraSun filed for Chapter 11 bankruptcy last week to enhance its liquidity while it reorganizes financially. The company's ethanol production facilities are expected to continue operations.
VeraSun Chairman Don Endres said in a statement issued November 1 that "the company expects that it will not scale back its purchases of raw materials and corn and other suppliers will continue to be paid in full for all goods and services furnished after the filing date as required by the bankruptcy code."
Endres described the bankruptcy filing as a way to "allow VeraSun to address its short-term liquidity constraints as we navigate historically challenging market conditions while we focus on restructuring to address the company's long-term future."
VeraSun has five ethanol plants in Iowa
VeraSun officials say they the company will continue to operate its 110-million- gallon-per-year facilities at Ft. Dodge, Albert City, Charles City, Hartley and Dyersville. VeraSun also has 11 other plants in Nebraska, South Dakota, Minnesota, Ohio, Michigan and Indiana.
With total capacity of 550 million gallons per year, VeraSun accounts for more than 20% of the 2.5 billion gallons of ethanol produced annually in Iowa. Iowa currently has 32 ethanol plants in operation, with several more being built.
VeraSun appeared to be having a good year through June 30, with six-month profits of $31.5 million on revenues of $1.5 billion. A publicly traded company, VeraSun stock was bolstered by its merger April 1 with U.S. Biofuels, which resulted in the plant at Albert City being brought into the VeraSun fold. VeraSun also this year opened new plants at Hartley in northwest Iowa and Dyersville in northeast Iowa.
Problems began surfacing in September
In September, VeraSun shocked the investment community by disclosing that it will lose up to $103 million in the current quarter. VeraSun officials said the problem was caused when the firm was caught in a large short-sale position in corn futures markets last summer at a time the price of corn reached record highs of almost $8 per bushel.
A short sale is the sale of a commodity not owned by the seller. Investors who sell short believe the price of the investment will fall so they can buy the stock or commodity at the lower price and make a profit. If the stock or commodity rises in price, the investor must buy it back later at the higher price and incur a loss.
For protection against the risky fluctuations in the market, brokerage houses or trading partners often require "margin money" or financial collateral to be put up to cover the position. If the spread between the target short price and the actual selling price widens, brokerage companies will call for more cash margin money.
VeraSun got stuck on wrong side of the market
VeraSun hasn't specified the exact details of its trading positions except to say that it faced heavy margin expenses to cover short positions. VeraSun said it responded by buying out of the futures positions and then contracting for corn to be delivered at its plants at prices averaging nearly $7 per bushel. But since those contracts were executed in late summer, the price of corn has dropped to below $4 per bushel on both futures and cash markets.
At the same time the price of ethanol has similarly declined from $2.90 per gallon in July to $1.76 per gallon on October 31 on the Chicago Board of Trade, a market reversal that added further stress to VeraSun's cash position.
VeraSun's bankruptcy filing "is a result of the significant volatility in the commodity markets," says Bruce Rastetter, president and CEO of Hawkeye Renewables LLC, a company that has a 440-million-gallon-per-year capacity, making it the second-largest ethanol producer in Iowa behind VeraSun.
Harder for ethanol plants to make profit
Monte Shaw, president of the Iowa Renewable Fuels Association, says the ethanol industry "is in a tough operating environment right now. Every plant is chewing through more expensive corn they bought months ago at higher prices at a time when the price of ethanol has declined."
Shaw says it is heartening to hear that VeraSun intends to continue to operate. Each plant employs 45 to 50 workers. "Their plant operations have been very efficient and profitable, but they were caught in a bind in the market and had to come up with a lot of cash," says Shaw.
VeraSun's future is undetermined. In September, after revealing its commodities speculation debacle, VeraSun said it hired the New York investment bank Morgan Stanley to "explore strategic alternatives," which means it was seeking a potential buyer and was for sale. Speculation about possible buyers has ranged from Archer Daniels Midland, the big gain processor that has been an ethanol pioneer and has a large ethanol production facility in Cedar Rapids, to major oil companies such as Shell and Marathon.