VeraSun renegotiates corn contracts

By Bryan Sims | November 03, 2008
Web exclusive posted Dec. 1, 2008 at 11:31 a.m. CST

Farmers and grain elevator operators are concerned about the viability of grain contracts and if South Dakota-based VeraSun Energy Corp. will have sufficient working capital available to sustain operations heading into next year.

According to a motion filed by VeraSun Energy Corp. in U.S. Bankruptcy Court's Delaware District, the company requested permission to reject corn contracts for delivery in October, November and December to its two idled ethanol plants in Janesville and Welcome, Minn., and "establish a streamlined procedure for the future rejection of additional contracts the company deemed necessary or burdensome to ongoing business operations."

Farmers had until Nov. 21 to object to VeraSun's proposal to reject outstanding corn contracts. Several objections were filed, including one by Ron Litterer, chairman of the National Corn Growers Association. VeraSun's proposed procedures for honoring or rejecting contracts allow the company to provide grain producers with a 10-day notice period to object to proposed rejections. A court hearing on those objections is scheduled for Dec. 2.

According to court documents, VeraSun has 120 days to file a reorganization plan through the court and then another 60 days to have the plan confirmed by the court. VeraSun also has until the final confirmation hearing in late April 2009 to accept or reject bids.

"I think one of the main concerns from the corn providers' standpoint is the way they're going to deal with these priced contracts," said Litterer, who is a corn grower in Greene, Iowa, and has an outstanding contract to deliver corn to VeraSun's 110 MMgy facility in Charles City, Iowa.

"You can't just do another sale on those bushels," he said. "You have to wait until 10 days prior to the contract delivery point and then [VeraSun] will decide whether to honor those or not and that really leaves a lot of uncertainty to the farmer, let alone a lower price, which is almost certain. So, if you get a chance to resell your corn you really can't."

Some grain producers have received checks from VeraSun based on the current market price for pre-positioned grain deliveries. However, by signing the check; the grain producer agrees to deliver the rest of the contracted grain at market prices. This is known as priced contracts where farmers' exposure is limited by hedged futures positions on the Chicago Board of Trade.

Ethanol Producer Magazine was unable to reach VeraSun to confirm the claim, but the company said in a Nov. 21 release that it "has paid or will pay for substantially all pre-petition corn."

"My speculation would be that it would be very difficult for them to honor that contract because that statement doesn't say if its market price or not," Litterer said. "We're hoping that the bankruptcy court will be open to listening to farmers' concerns and hopefully we make the case that there needs to be some kind of changes to work for the farmer or the elevator selling the grain and, if possible, keep VeraSun operating as well."

In June, corn futures on the CBOT traded well above $7.50 per bushel. Farmers that locked in prices around that level and were forced to renegotiate sales contracts at current market conditions are facing cash prices approximately $3 per bushel and March CBOT corn futures are at around $3.70 per bushel.

Some grain elevators are also caught in the storm as some have bought high-priced grain from farmers and locked in basis contracts with VeraSun for future delivery while protecting price exposure on the CBOT. If VeraSun chooses to back out of a basis contract, the merchant's loss potential is limited to whatever basis exposure existed when the contract was signed.

In the meantime, reports have circulated about the closing of VeraSun's 110 MMgy plant in Dyersville, Iowa, and its 50 MMgy facility in Lake Odessa, Mich. According to a release by the company, VeraSun has stopped receiving corn shipments and processing at "certain" ethanol plants. The company has 16 ethanol facilities throughout the Midwest, but Ethanol Producer Magazine was unable to verify if these plants were closed. The news comes on the heels of the company posting a $476.1 million net loss for third quarter 2008. In early November, VeraSun announced that it was "indefinitely" delaying the start-up of its 110 MMgy ethanol plant in Janesville, Minn.

Meanwhile, VeraSun released a statement on Nov. 24 confirming that it had "received a non-binding unsolicited indication of interest with respect to the purchase of substantially all of its assets" from an undisclosed third-party. Terms of the interest for a possible acquisition were not released.

Later that same day, Poet LLC Chief Executive Officer Jeff Broin was quoted in an Associated Press story admitting that his company "is in serious discussions with a couple of ethanol producers regarding possible acquisitions." Neither Poet nor VeraSun disclosed specifics of such a deal. Poet and VeraSun, both based in South Dakota, control approximately a third of the nation's ethanol capacity. Privately-held Poet, which has been in the business for 20 years, owns and operates 26 plants that collectively produce approximately 1.54 billion gallons.

Who ever steps in and acquires VeraSun, either in aggregate or buying some of its assets, Litterer is hopeful that the move would be a seamless transition for the corn farmers and elevators VeraSun has contracted with to provide corn for the operating ethanol facilities.

"On one hand, you're upset because if you've priced grain you're probably going to loose some money on that deal," Litterer said. "But, on the other hand, the ethanol plants are there and they're probably going to be running someday whether it's VeraSun if they can get things back on track or whether they have to liquidate some of their facilities to keep running as a company."

As for VeraSun's relationships with its farmers, which run deep, Litterer said the ties will likely be temporarily scarred but not permanently severed.

"I think VeraSun, in the past, has had a very good relationship with its farmer customers," he said. "I'm sure people are going to have their concerns going forward selling grain to VeraSun; but, that's just natural."