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Bankruptcy of VeraSun Energy leaves farmers, communities wondering what's nextBy Ken Root
At mid-summer, when corn prices were moving toward $8 per bushel, in Iowa, there was as much dread as euphoria within the farming communities. Record rainfall had delayed the planting of the crop and flooding of the most productive fields had greatly reduced the prospects for a good harvest. Buyers worldwide rushed in to claim their share, even at unheard of prices. The upsurge in demand for corn was mostly credited to the rapid expansion of the ethanol industry which was converting a bushel of grain into three gallons of fuel that was being sold into the marketplace with tax incentives, guaranteed acceptance and import restrictions. While livestock feeders were protesting loudly that their input costs were putting them in jeopardy, the ethanol industry kept expanding and paying more for grain each month. When the rivers began to recede, so did the grain market. Farmers and bankers realized all was not lost and that "rain makes grain" even if the crop was two weeks behind in maturity. Oil prices fell from record highs and everyone began to breathe again as it appeared an equilibrium was being sought by the marketplace. Rumblings At that point there were some rumblings about VeraSun Energy, Iowa's largest ethanol producer and one of the top three, nationwide, getting caught in its hedging of corn during the run-up in prices. The publicly traded company revealed in its next quarterly statement that it had lost millions of dollars by getting out of its hedges when prices were high and, in effect, owning corn at well over $6 per bushel. VeraSun entered the ethanol business with a flourish. Its plants were built by Fagan and considered state-of-the art in their distillation process. Each "grand opening" brought out political leaders and the company highlighted its involvement in the communities. VeraSun appeared to be aggressive and well-managed with a public image second to none. When the rumors of losses led to facts, the stock fell and the next step appeared to be bankruptcy. This occurred on Oct. 31 with all news from VeraSun now coming by pre-approved news releases. The filing seemed to be very public and the Delaware bankruptcy court began to dictate the way VeraSun could do business. Secured and unsecured creditors waited to see what portion of their assets would be returned and how VeraSun would do business under the Chapter 11 filing. Contracts Farmers within the region around each of the VeraSun plants had begun selling grain as soon as the ethanol market outbid feedlots and terminal shippers. Forward contracts were made at $6 per bushel and some above $7 when the futures market was at its highest. Now the bankruptcy court had control of those contracts and made a ruling farmers felt was unfair to them as well as threatening to their lenders. Joe Peiffer is a board certified business bankruptcy attorney with the Day, Rettig, Peiffer law firm in Cedar Rapids. His downtown office was inundated by the flood, and he spent almost four months working from temporary quarters outside the flood zone. He followed the bankruptcy filing and entered the case when farmers were told that their contracts could be accepted or rejected by VeraSun at the time of their maturity but the farmers could not default on the contracts without facing court action. The accounting of unsecured creditors in the VeraSun case include over 5,700 Iowans and over 8,000 nationwide. It is assumed many of these are farmers who sold grain to the ethanol giant. "The bankruptcy code is what gives VeraSun the authority to assume or reject contracts," says Peiffer. "Unless the farmer is in bankruptcy himself, he doesn't have that same luxury." Peiffer says the ruling is one-sided and unfair and is taking his clients case to the Delaware court. "I've been retained to attempt to do two things: See that the court sets a deadline that VeraSun accepts or rejects the contract with growers and that if VeraSun accepts any of the contracts, it provide adequate assurance of its ability to pay for the grain when it is delivered." "It's like playing Texas Hold 'em with a dealer (Verasun) who gets to see the flop card before he decides and you (the farmer) don't," says Peiffer. Corn grower organizations also gained access to the bankruptcy court and have filed a similar objection to the open-ended option of VeraSun to hold the contracts and wait out the market before determining whether to reject them. Gary Edwards, president of the Iowa Corn Growers and a farmer near Anamosa, says farmers have to be able to go into 2009 with some certainty. "Farmers can't control their risk management with this arrangement. VeraSun needs to make the determination now rather than 10 days before the contract is final." Mindy Larson-Poldberg, lobbyist and counsel for the association says they had to sue in the name of individuals so they named Ron Literer and Jay Lynch. Literer is the past president of the National Corn Growers and Lynch is a member of the ICA board of directors. Poldberg tries to be realistic on what growers should expect. "What we cannot do is raise producers' hopes that they will be paid in full. In the end, Verasun is under bankruptcy and there will be losses." She argues that producers should have the opportunity to market their grain and not pay for storage between now and the date of the contracts if the contracts will not be honored. Peiffer will present his case in front of the Delaware bankruptcy court this week and says he will ask for a ruling that requires VeraSun to accept or decline all future delivery contracts by Dec. 15. Dyersville hopes deflated On the farms around Dyersville there seems to be as much pessimism now as there was optimism when the VeraSun plant was under construction. It opened in September with many growers contracting grain during the price run-up of spring and summer. The 110 million gallon capacity plant closed on Nov. 18 with growers and businesses looking at a sharp decline in expected income. "It's definitely uncertain going into 2009. It's going to be a challenging year," is the comment of Marty Steffen, sales manager for Dyersville Implement, Inc., the local John Deere dealer. "Several farmers have not been fully compensated for their corn." This raised the question of what happened in the 20 day window before the bankruptcy when VeraSun was receiving grain but not paying for it. Joe Goebel was caught in that time period as he delivered grain that had been contracted for $6.01 per bushel. "They wrote me a check and then stopped payment on it." Goebel went in to see the grain buyer and was told that another check would be issued to him. "I got the other check in the mail this week and took it to the bank where they asked me if I wanted to go through this again. I said 'yeppers, I do' and they are now seeing if it is good." Not all news about VeraSun's grain buying practices is bad. A farmer who declined to give his name indicated that he had delivered grain to the Dyersville plant after the bankruptcy and received the contracted premium of more than $3 above the current price. The grain buyer asked if he would sell a like number of bushels at the current market price which was 26 cents over the Cedar Rapids terminal price on that day. He did so and was paid for both with checks that were good at the bank. Boom to bust in a few months Dyersville merchants say now, that they had mixed emotions about the company coming into town. "It was all so hurry up and some folks here made a lot of money," says Marty Steffens. "They hardly opened until they closed and farmers who bought equipment based on what they thought they'd get for the grain are now in a real bind." Steffen stood outside on a sunny but raw afternoon and said, "The light at the end of the tunnel isn't nearly as bright as it was originally portrayed to be." The nagging question about the "boom" of the ethanol industry in the Midwest over the past seven years is when the "bust" will come. Is VeraSun the first to fall or have the other plants contracted for grain more strategically and kept their costs down as oil prices plunged? Are locally owned plants competitive? Is the era of consolidation over and will the next administration continue supporting alternative fuels, such as ethanol? News from VeraSun, at this writing, is that they have a potential buyer of their assets. If the debt can be mitigated in the bankruptcy, the buyer would be able to add several barely used, multimillion dollar ethanol production facilities. It could make a single player, like Poet or ADM dominant in the industry or give a smaller company leverage to join the top tier of ethanol producers. Rural communities tied great hopes to the building of corn milling and refining facilities as they were placed at the center of a circle of abundant production with roads and railroads for shipping the finished product to pipeline terminals nationwide. The overall growth in the economic base of many communities may be attributed to the ethanol boom which now consumes one third of the corn crop and has doubled or tripled average crop revenues. Most of the benefit of economic development from the ethanol industry has gone to non-farm interests. 12/1/08 Date: 11/26/08
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Audio Report on VeraSun from Ken Root