Northey: Talk with VeraSun about corn contracts

The company seemed to be a promising economic development prospect for Clay County just over two years ago.

Ethanol producer VeraSun Energy acquired options to buy three potential northwest Iowa sites, each larger than 300 acres, near Hartley and Everly in the spring of 2006. VeraSun ultimately selected a site near Hartley for a plant capable of processing 39 million bushels of corn per year.

The company also announced plans to trade on the New York Stock Exchange in an effort to raise more than $328 million for expansions.

Now bankruptcy and the decision to announce a plant closing in Dyersville has some northwest Iowa producers concerned about the future of their corn contracts. Some corn producers are being told the company doesn't necessarily have to honor its corn contracts under Chapter 11 bankruptcy protection.

VeraSun has the flexibility to reject existing contracts, but farmers and elevator operators remain bound by the terms they agreed to, Roger McEowen, director of the Iowa State University Center for Agricultural Law and Taxation told AP energy writer Dirk Lammers.

"A lot of farmers may feel that it's not fair, but that's the way the bankruptcy rules are right now," McEowen told Lammers on Thursday.

McEowen recommended that farmers and elevators consider a bankruptcy lawyer to collectively represent them. They had until Friday to ask a Delaware bankruptcy court to limit how much time VeraSun has to make decisions on contracts.

Iowa Secretary of Agriculture Bill Northey also encourages area corn producers to ask questions about their contract.

"We're wanting to make sure farmers talk to those grain merchandisers at VeraSun," Northey said. "Get as much information as they can. We're actually hearing that some of the plants are accepting contracts at face value and farmers are delivering corn and getting checks and getting paid for that gain."

At other places, including Dyersville in eastern Iowa, Northey said plants may not be operating and aren't accepting corn while production is stopped.

"It may change in the next two days, too, in how they handle this," Northey said. "But there is a possibility that, in some cases, contracts that farmers who thought they had their grain sold for, might be pulled from them and that they won't be able to sell that grain. So they need to be in close contact with their attorneys but also with VeraSun to see what the ongoing situation is and whether they'll be able to deliver and whether VeraSun is buying it at various plants."

Northey agrees that growers under contract may be obligated to deliver if VeraSun decides that they want that corn, "but you don't yet know if you'll be obligated to deliver on it or not," he said.

"You'll only find out about that as you get closer to that delivery date," Northey continued. "So, if you've got a contract there, it makes sense to ask VeraSun whether they will accept it or not. You then know if you can go someplace else. If you are free to go someplace else, you can do whatever you want with it, realizing you're not going to get your contract price."

The state's grain indemnity fund is in place to help producers who have already delivered corn to VeraSun, but have not received payment. If the farmer has delivered corn, the grain indemnity fund will pay 90 percent of the farmer's loss up to $150,000.

It, however, does not cover for grain that has been contracted, but not delivered, Northey said.

Despite VeraSun's struggles, Northey remains optimistic in the ethanol industry.

"So much has changed in the last year, it is hard to predict what it is going to look like five years from now," he said. "But I would say, financially, this is a tougher time for the ethanol industry and this has been a tough year. We had higher grain prices, we now see low oil prices, which help out most consumers but also drives down the value of ethanol, so we're seeing kind of tough financial times. But each of these businesses are different."

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WHAT WENT WRONG:

* VeraSun filed for bankruptcy protection Oct. 31 after it bet wrong in the commodities markets. A number of other producers, who hedge commodities to protect themselves from price spikes, are running into the same trap.

VeraSun late Wednesday reported a third-quarter net loss of $476.1 million, or $3.03 per share, compared to a profit of $7.8 million, or 9 cents per share, during the same period last year. Yet revenue increased nearly fivefold to $1.08 billion.

* The company was founded in 2001 and went public in June 2006 amid perfect market conditions. Corn was cheap, gas cost a bundle and refiners were clamoring for more ethanol to use as a cleaner-burning alternative to the additive MTBE.

But skyrocketing corn costs began cutting into profits, and many tried to use hedging to control costs.

After VeraSun locked into prices for its feedstock for the third quarter, corn went into a sharp decline from almost $8 per bushel to a low of less than $5 per bushel in mid-August.

WHAT TO WATCH FOR:

* Growers who supplied VeraSun 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 check 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.

The Farmers Cooperative in Marble Rock already sells corn to VeraSun at market rates rather than through fixed-price contracts, said the co-op's Bob Engels.

But Engels said you had to be a lawyer to understand what you were agreeing to when cashing the checks.

"They can't force you to do business," he said. "I don't care what the endorsement on a check says."

Source: The Associated Press