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VeraSun loses another $246 million

By Staff | Dec 1, 2008

Farm News news editorThe continuing trials and tribulations of VeraSun Energy is a stark reminder of what a difference a year can make.VeraSun released a third quarter financial report Wednesday stating that although it increased revenue in the period ending Sept. 30 to $1.08 billion, a 389 percent increase over the same period in 2007, it lost a total of $476.1 million, while the previous year it banked $7.8 million in profits.Another development in the ethanol manufacturer’s struggles after filing for Chapter 11 bankruptcy protection on Oct. 31, is that VeraSun has now sought permission from the bankruptcy judge to cancel its outstanding futures contracts if, by honoring the contracts, it will hurt the company.In the meantime, however, the contracts would remain open, locking up suppliers’ corn from being delivered elsewhere.VeraSun has drawn an objection from a group of approximately 100 farmers on how the ethanol producer is proposing to manage its contracts to buy corn from farmers, according to Roger McEowen, who directs the Center for Agricultural Law and Taxation at Iowa State University.The motion filed Nov. 21 objects to VeraSun’s motion and asks the court to establish a time certain for VeraSun to move to either accept or reject executory corn contracts. A hearing on the matter has been set for Dec. 2 in the United States Bankruptcy Court for the District of Delaware where VeraSun has its corporate headquarters.Verasun’s request, said one Iowa corn grower, creates a financial concern for corn suppliers who sold the contracts to VeraSun for future deliveries. VeraSun has five plants in Iowa including Fort Dodge, Charles City, Albert City, Dyersville and Hartley.Gary Edwards, a grain producer in Anamosa and president of the Iowa Corn Growers Association, said that producers and elevators alike are in a bind with the VeraSun contracts.Producers, Edwards said, ”are trying to make decisions on their (2009) inputs based on their expected income from the contracts.”If the court grants VeraSun’s request, Edwards noted, it would mean that producers would have their grain locked so they could not sell elsewhere, but they would also not know if they will get their full price for the grain. Most futures contracts were locked in at above the $6 per bushel mark. The local corn price closed Wednesday at $3.50 per bushel at NEW Cooperative in Otho. VeraSun in Fort Dodge was offering $3.69 at the end of the day.Edwards said the ICGA was working alongside the Iowa Department of Agriculture and Land Stewardship to try and find ways for producers to manage this new risk to their income.Bill Northey, Iowa secretary of agriculture, said he doubted that the bankruptcy court, based in Delaware, would force VeraSun to accept the futures contracts as they exist today. ”The court’s first priority is to help VeraSun to work out of the bankruptcy,” Northey said. ”Contracts get broken in bankruptcy. It’s what happens.”According to Northey, the Fort Dodge plant has honored October and November contracts at full price.Nevertheless, corn suppliers, he added, have two worries. If VeraSun goes under, they will get no income, but if the futures contracts are canceled, they will also lose income.”So we are recommending that those who hold the contracts should renegotiate with VeraSun,” Northey said.ICGA’s Edwards agreed, saying it would be to VeraSun’s best interest to renegotiate. In event the company does survive this marketing crisis, he explained, ”it will need to have good relations with nearby suppliers in the months ahead.”In its Nov. 19 financial statement, VeraSun stated that of its $426.1 million loss, $121.2 million is ”arising from impairment of long-lived assets.”Those long-lived assets include futures contracts. Noting in its third quarter report that its risks come from commodity pricing and fluctuations in interest rates, VeraSun said it attempted to manage its risks by hedging commodity contracts.”During the third quarter,” the report states, ”VeraSun – became exposed to market risk on priced future corn purchased commitments.”Subsequent to Sept. 30, the Company (sic) liquidated all remaining corn futures positions. Presently, because of its limited liquidity, VeraSun attempts to manage its risks by relying on natural hedging imbedded in its business.”If a supplier is holding a futures contract that VeraSun rejects, the supplier can then sell the grain elsewhere, then file a claim for any lost in VeraSun’s bankruptcy and be treated as an unsecured claim and share in the dividend payment, which could be months later, if at all.Contact Larry Kershner at kersh@farm-news.com.

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