Grain suppliers learn to combat uncertainty with corn contracts

By Bryan Sims | February 04, 2009
Grain suppliers with corn contracts linked to bankrupt ethanol producer VeraSun Energy Corp. are taking proactive measures to protect themselves from ramifications associated with defaulted or rejected corn contracts.

At a court hearing in early December, U.S. Bankruptcy Judge Brendan Shannon gave VeraSun Energy Corp. approval to reject certain corn purchase contracts 10 business days before a contracted delivery date. The decision was better than what VeraSun originally sought, but it put a serious crimp in its relationship with farmers and grain elevators, according to Mark Lakers, president of Ag and Food Associates, an Omaha, Neb.-based middle market merger and acquisitions investment bank. "There's a second wave that producers need to be cautious of," Lakers said. "Some of the VeraSun defaults could significantly weaken [farmer] cooperatives." VeraSun's default on corn contracts forced farmers to sell their grain on the open market, where it was difficult to recoup the difference in value between the contract price and the market price.

In light of VeraSun's default on forward corn contracts, the American Corn Growers Association called for federal policy reform to protect American farmers, consumers and investors against these instances. The association offered the following policy recommendations:

That forward contracts held by buyers of farm commodities be treated no differently than delivered goods or services in a court of law

That federal credit guarantees be given to struggling ethanol companies

That transparency be increased on speculative positions in futures trading

That minimum prices be set on ethanol through a price support mechanism and a strategic ethanol reserve

That realistic price supports be enacted for grains and oilseeds

That strategic grain reserves be enacted to ensure adequate feedstocks and allow for supply buffers.

Meanwhile, the Nebraska Department of Agriculture, through its Farm Mediation Program, hosted two workshops for Nebraska farmers to learn more about handling their obligations under forward contracts with ethanol producers. The meetings were held in Central City and Ord in early January, and in Albion in December. An attorney was on hand to address sellers' rights under grain contracts and to explain how those rights could be affected by bankruptcy.

According to Lakers, some states provide recourse for grain suppliers to circumvent potential issues in connection with contract defaults. "For example, Iowa has an indemnity fund whereby it covers financial losses to a point, but in states such as Nebraska and Minnesota, there is no such state fund, so grain suppliers are on their own."