VeraSun files bankruptcy
Ethanol market continues to see hard times
By David Hannon -- Purchasing, 12/11/2008 7:00:00 AM
Call it a collision of all the worst economic trends in a single company. The second-largest ethanol producer in the U.S., VerasSun Energy Corp., filed for bankruptcy in November citing a lack of available capital due to the credit crunch, rapidly declining prices for its product and a hedging strategy that was turned on its head by the spike and plunge of corn prices this year.
According to a statement, VeraSun "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."
Much like the airlines that got caught on fuel prices in the third quarter, VeraSun was caught by its hedging decisions for the price of its primary commodity, corn. Bloomberg says VeraSun abandoned its short positions, or bets prices will decline, in July after corn prices surged $2/bushel to almost $8 in less than two months because of the flooding and hedged thinking prices would continue up—they didn't. VeraSun's hedges required it to pay $6.75 to $7 for each bushel of corn in the third quarter when market prices averaged $5.78, Bloomberg reports.
At the same time, "There had been a de-linking of corn and ethanol where the price of corn shot way up but ethanol did not," says Chris DiMauro, managing director with the investment-banking firm of Houlihan Lokey Howard & Zukin in a recent Wall Street Journal article.
VeraSun plans to continue normal operations during the Chapter 11 proceedings and expects that it will "not scale back its purchases of raw materials, and corn and other suppliers will continue to be paid in full for all goods and services furnished after the filing date as required by the bankruptcy code."
VeraSun in July decided it would delay opening two plants in the wake of the Midwest floods.
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