Judge Rules VeraSun Can Cancel Corn Contracts
US Bankruptcy Judge Brendan Shannon ruled Tuesday that chapter 11 bankruptcy case VeraSun Energy Corp. can cancel contracts to buy corn through Jan. 15, if VeraSun gives 10 business days notice before delivery to cancel the said purchase contracts.
VeraSun said that the contracts relate mostly to buy corn for its U.S. BioEnergy plants. The company would also cancel contracts to buy corn for its Welcome, Delaware, plant through Jan. 31, but that contracts for its U.S. BioEnergy plant in Marion, South Dakota, were not included in the cancellation plans, the company said.
VeraSun lawyers said all eight of its U.S. BioEnergy plants, which were acquired earlier this year for less than $700 million, were in "hot idle," or ready to operate but not currently producing ethanol.
VeraSun Taking The P*ss
A formal objection was filed with the U.S. Bankruptcy Court in Delaware on Tuesday concerning VeraSun Energy's rejection of outstanding contracts for corn. After filing for Chapter 11 Bankruptcy, VeraSun began refusing to honour contract prices for corn offering market spot prices instead. Ron Litterer, chairman of the National Corn Growers Association, along with producers from several states filed the complaint.
"It is doubtful that we can influence the courts to require VeraSun to pay the contracted price for our corn. However, we do hope to influence other issues of concern to growers," Litterer said.
Chief among those concerns is a bankruptcy procedure that could allow VeraSun to wait until 10 days before a contracted delivery date to notify growers that the contract will be rejected. That would let VeraSun determine the market price before deciding whether to accept delivery under a contract, but it would leave growers up in the air until the last minute. Growers could lose out on their contracted price but by being in limbo it could mean losing the chance to sell corn someplace else at a better price.
Litterer says this is extremely unfair and hopes he and the committee of producers from other states can serve as a voice for corn growers in the case and advocate for corn suppliers' interests with the court.
Poet To Buy VeraSun?
Poet, the largest US ethanol producer, has said that it is in "serious" talks on possible acquisitions in the alternative fuel industry, despite the economic downturn and falling crude oil price.
Without naming names, the obvious assumption everybody is making is that the private 10,000 farmer owned group is talking about VeraSun.
VeraSun, who went bankrupt at the end of last month, said Monday that it had received a nonbinding unsolicited indication of interest for the purchase of "substantially all of its assets."
A Poet acquisition would however potentially give them close to 25% of the US ethanol market triggering competition concerns.
Cargill and ADM are seen as other likely candidates to take on some, if not all, of VeraSun's 16 US facilities.
When Is A Contract Not A Contract?
As ethanol giant VeraSun spirals into further peril, some Minnesota corn farmers and local elevators are growing worried about who might be dragged down with it.
Back when grain prices were high, a number of southern Minnesota farmers had agreed to sell corn to VeraSun for its huge new Minnesota plants in Janesville and Welcome. But on Oct. 31, VeraSun filed for bankruptcy protection and now says it will not honour those contracts.
Several grain elevators are caught in the middle, because they agreed to buy corn from farmers and sell it to VeraSun. They're still obligated to buy corn from local farmers at a high price, but can't resell it at that price, or anything near it.
Growers who contracted with VeraSun to supply the ethanol producer with corn during the 20 days leading up to the bankruptcy filing can get prompt payment in full — but there's a catch.
By endorsing a newly issued cheque from VeraSun, producers would be agreeing to continue supplying the company not at contracted prices, but at "prevailing market prices in accordance with the most favorable terms and conditions" for the next 12 months, according to court documents.
VeraSun, which purchased US BioEnergy of Inver Grove Heights in April, has a chain of 16 ethanol plants. That includes the two in southern Minnesota that were on the brink of starting up, but now are idle.
Minnesota state officials have been monitoring complaints from farmers and elevators, but because no grain wahas been delivered on most of those voided contracts, state law provides little protection.
This casts a huge shadow over the entire grain industry.
"The real concern I have is that we have farmers questioning the validity of all contracts out there," said the head of the Minnesota Grain and Feed Dealers Association.
Outlook For VeraSun Not Too Bright
Troubled US ethanol manufacturer VeraSun has said that it has stopped taking deliveries of corn into an unspecified number of it's US operations whilst it seeks additional financing.
The company is the largest publicly traded ethanol manufacturer in the US, and has has 16 ethanol plants strung across the Midwest.
That didn't stop it filing for Chapter 11 bankruptcy protection last month, and announcing last week a net quarterly loss for the period ended Sept 30th of $476.1 million versus net income of $7.8 million in the year-ago quarter.
By way of graphically illustrating that turnover isn't necessarily the key to making money, the company reported net sales of $1.08 billion, up from $221.9 million a year earlier. It also said it had $9.2 million in cash on hand as of Sept. 30, down from nearly $111 million just one year ago.
Relative to its loss, the firm said in filings with the Securities & Exchange Commission (SEC) that it was "currently evaluating various courses of action to address the operational and liquidity issues the company is facing."
The figures make rival Pacific Ethanol's loss for the same quarter of "just" $54.9 million look positively glowing!
VeraSun is said to be seeking permission to void existing corn contracts tied to at least two of the company's plants.
VeraSun Seeks To Void Corn Contracts
Troubled ethanol maker VeraSun who reported a sizable loss in the quarter ended Sept. 30, has asked a bankruptcy judge to allow it to void contracts it holds with farmers to buy corn, reports say. The firm agreed the contracts at prices considerably higher than current price levels.
For the quarter ended Sept. 30, VeraSun reported a net loss of $476 million, compared with net income of $7.7 million a year earlier. The company reported net sales of $1.08 billion, up from $221.9 million a year earlier. It also said it had $9.2 million in cash on hand as of Sept. 30, down from nearly $111 million just one year ago.
Relative to its loss, the firm said in filings with the Securities & Exchange Commission (SEC) that it was "currently evaluating various courses of action to address the operational and liquidity issues the company is facing."
The company filed for Chapter 11 bankruptcy protection on October 31st.
VeraSun - One Giant Bet That Went Wrong
Details are emerging of how VeraSun, the ethanol firm that filed for Chapter 11 bankruptcy protection last week, got itself into so much trouble.
Abandoning its traditional use of short hedges in July, the firm, convinced that corn prices would continue to rise, entered into a number of "accumulator contracts" to cover corn requirements for the third and fourth quarters.
What's an accumulator contract?
A high-risk strategy that allows you to buy a specified volume of corn below the then-prevailing market price if prices rise, but also commits you to buying DOUBLE the intended volume at a set price if futures prices decline.
VeraSun said in a report filed with the Securities and Exchange Commission in September that strategy resulted in their incurring average corn prices between $6.75 and $7.00 a bushel in the third quarter, contributing to third quarter losses of $100 million.
More info here: Put it all on 33 black please
VeraSun Not The Last Merely The Latest
VeraSun Energy Corp, the largest publicly traded US ethanol company with 14 distilleries across eight states, said on Friday it was seeking bankruptcy protection.
It certainly isn't the first ethanol company to run into difficulties. Gateway Ethanol and Greater Ohio Ethanol both declared bankruptcy early last month.
Renova Energy LLC, a company that owns a partially built 20 million-gallons-per year ethanol plant in Idaho, declared bankruptcy in the summer, following Kansas-based Ethanex Energy Inc who declared bankruptcy in March.
So VeraSun becomes the largest and latest ethanol producer to run into trouble after corn and crude prices have halved from summer highs. It seems likely that there will be more casualties along the way, as US capacity is already higher than the government's mandate of 11.1 billion gallons for next year.
Pacific Ethanol shares are down 90 percent since their twelve month of $9.88 in December, and closed at one dollar Tuesday on Nasdaq. Shares of Aventine Renewable Holdings Inc, which closed on Tuesday at $2 on the New York Stock Exchange, have lost 85 percent of their value since hitting a 52-week high of $13.65 in December.
VeraSun Files For Chapter 11
VeraSun, one of the USA's largest ethanol producers, filed for Chapter 11 bankruptcy protection on Friday. The move, says the company, follows a series of events which have impacted on its liquidity and will give it the opportunity to reorganize under the protection of the Chapter 11 filing.
Commenting on the situation Don Endres VeraSun's CEO said; "Today's filing allows 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. We appreciate the loyalty of our employees, customers and suppliers during this challenging time."
Explaining its downturn in fortunes the company said that it suffered significant losses in the third quarter of 2008 from a dramatic spike in its corn costs, reflecting in part costs attributable to its corn procurement and hedging arrangements, and historically unfavorable margins. Beginning in the third quarter, worsening capital market conditions and a tightening of trade credit resulted in severe constraints on the company’s liquidity position. Faced with these constraints, VeraSun and 24 of its subsidiaries filed their chapter 11 petitions to facilitate access to additional liquidity while they reorganize to take better advantage of VeraSun’s position as one of the nation's largest producers of ethanol.
The Rumour Mill: VeraSun May Have A Buyer
Shares of corn ethanol giant VeraSun Energy Corp shot up 32% Friday in heavy trading, on speculation that the company is close to striking a deal to sell itself.
The company's practice of not buying corn requirements far ahead of time hit a brick wall when the June Midwest floods caused a major spike in grain commodity prices.
The company clearly panicked, and went long corn during the upswing, and now is riding on an undetermined loss on commodity trading and corn inventories. In its now-cancelled equity offering prospectus filed on September 16, VeraSun estimated third quarter corn costs would be $6.75 to 7.00 per bushel, and the company would record a third quarter loss of $63 to $103 million based on input and output prices and various assumptions including a New York Harbor ethanol price of $2.35 to $2.45 per gallon.
Currently, NYH ethanol is trading 9 cents over $2.24, or about $2.33/gallon. Chicago corn is around $5.30/bushel.
Likely interested parties include the usual suspects, Archer Daniels Midland (ADM) and Cargill, although the latter company may have lost its taste for corn ethanol as it helped create Biofuel Energy.
More likely suitors could be two foreign multinationals, both already in the ethanol and biofuel business in the USA. These include Cilion, backed by Virgin Fuels, part of Richard Branson's Virgin Group, and Khosla Ventures. Cilion has two corn ethanol plants under development in New York State.
Another potential suitor is Hong-Kong based Noble Group, which is an international agriculture and commodity trader with 2007 revenues of $23 billion US and $19.9 billion US in the first half of 2008. Noble has interests in several ethanol plants and markets ethanol for ten plants across the US.
If an oil company were to decide to take the plunge into ethanol refining, it probably would be Marathon Oil (MRO). Marathon partnered with The Andersons, a well-run grain handling, rail transport and ethanol production company, to open ethanol plants in Ohio, Indiana and Illinois. The partnership might be interested in becoming a major ethanol producer with a VeraSun acquisition.
Competitors of VeraSun such as Poet, Aventine and Hawkeye probably lack the deep pockets required to do a deal. They might hope for a bankruptcy sale of assets.
Vera To Jack It In?
VeraSun Energy Corp. said late Thursday that it has retained Morgan Stanley to help it "evaluate strategic alternatives."
VeraSun shares plunged to $1.33, an all-time low, and lost nearly three-quarters of their value Wednesday after the company began a public offering of 20 million shares and said it expects to post a third-quarter loss between $63 million and $103 million. The stock had traded as high as $17.75 in December.
The company late Thursday abandoned the stock offering, which comes as little surprise considering the sharp share price drop.
VeraSun, founded in 2001, went public in June 2006 amid perfect market conditions. Corn was cheap, gas was expensive and refiners were clamoring for more ethanol to use as a cleaner-burning alternative to the additive MTBE.
It appears that the company locked in much of its corn requirements around $7/bushel, leaving it unable to take advantage of the commodity's recent fall to $5-5.50/bushel, and facing crippling margin calls.
Poet or ADM may be potentail buyers, but any aquisition of VeraSun would give them close to a quarter of the US ethanol market, triggering competition concerns.
Ethanol producers have so far successfully lobbied to keep the current federal mandates and subsidies for renewable fuels. However, agriculture secretary Ed Schafer said last week that the industry needed to become "self sustaining" and wean itself from subsidies.
A removal of the 46c a gallon tax break on ethanol could spell the end of the industry overnight.
Outlook For VeraSun Not So Bright
US ethanol producer VeraSun's shares took a thrashing Wednesday after the company announced it was caught on the wrong side of the corn market.
The company lowered its third-quarter forecast to expect a net loss in the range of $63.0 million to $103.0 million, or 40 cents to 65 cents a share. Analysts had been expecting a third-quarter loss of two cents a share.
VeraSun's shares plunged 73% to $1.41. Despite this the company announced a 20m stock offering of shares, which seems to indicate it needs the cash and this is the easiest way to get it in the current market.
VeraSun said in July, when futures approached $8 a bushel, it unwound short position used to hedge corn it purchased to cut its margin exposure, effectively pricing the grain in the cash market. Believing prices would rise further, the firm then used “accumulator” contracts that required it to buy more corn at above market prices as futures dropped.
Ouch!
See also: Is The Writing On The Wall For US Ethanol From Corn Industry?
Verasun Delays Opening Of Two Ethanol Plants
(FinancialWire)-- Verasun said it is delaying the opening of two midwestern ethanol distilleries until market conditions improve. The plants, each scheduled to produce 110 million gallons per year, were to be built in Welcome, Minnesota, and Hartley, Iowa.
VeraSun spokesman Michael Lockrem said record corn prices and low ethanol prices, relative to spikes in gasoline, have made making the biofuel difficult. The plants had been scheduled to come on line during the second quarter of 2008. Lockrem could not say if they would start this year.
