VeraSun, One of USA’s Largest Ethanol Producers, Files Chapter 11
According to a VeraSun press release, a “series of events” had shrunk its liquidity, impairing its ability to invest in production facilities and operate its business. “A dramatic spike in corn costs,” partly due to its hedging arrangements and “worsening capital market conditions and a tightening of trade credit resulted in severe constraints on the company’s liquidity position,” the release said.
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The statement went on to say that the Sioux Falls, S.D.-based company said it planned to maintain operations while the company and 24 of its subsidiaries reorganize. In addition it expects to reach a deal with lenders on additional financing to fund its operations before a hearing Monday. It also expects to get court approval at this hearing to keep paying employees without interruption.
In 2006, VeraSun shares made a stunning debut at more than $30 a share, helping fund the company’s rapid expansion. Its 16 production facilities are scheduled to have production capacity of 1.64 billion gallons of ethanol by the end of this year. VeraSun’s shares lost nearly 16% Friday to close at $0.48.
Unprecedented moves in corn prices and a global credit tightening proved the company’s undoing. A run-up in corn prices earlier this year, in part due to increased demand from ethanol makers, squeezed margins for VeraSun and other ethanol producers.
Corn prices have tumbled to $4.01 a bushel Friday from a record of around $8 a bushel in June. But because of hedges it entered in July, when corn prices were still high, VeraSun wasn’t able to take advantage of this swift descent. Its corn costs averaged between $6.75 and $7 a bushel for the third quarter, it estimated in September, triggering a loss for the period.
“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,” VeraSun Chief Executive Don Endres said in the statement.
Source: Market Watch
Photo courtesy of Danial Y Go via Creative Commons Lisence
The comments on this article reveal a startling level of ignorance and stupidity. Corn production since 2001 has gone from 9 billion bushels to 14 billion, more than compensating for the amount of corn used in ethanol production during that time. Without using corn for ethanol, there would be mountains of corn piled up outside of grain elevators all over the midwest and the price would probably level off around the $2/bushel area (it costs $4/bushel to produce it, by the way). Funny how the media was moaning about ethanol causing corn prices to skyrocket and therefore causing food prices to soar. Now that corn is back to $4/bushel, you don’t read to many stories about food prices declining, do you? That’s because the raw product, in this case corn, accounts for 14 cents on the dollar in food costs. You ignorant fucks who think ethanol is a scam need to eduate yourselves.
Hey Chris,
If the comments are are so ignorant and stupid, why did VeraSun go bankrupt? Answer that.
I’ve been watching the ethanol industry for a few years now, from back when corn was $1.65 a bushel and wholesale ethanol prices were $1.00 to $1.20 a gallon.
Several things have happened over the last few years. Gasoline producers stopped adding MTBE to raise octane and to satesfy EPA oxidant requirements because states and cities promised to sue them for ground water pollution. Since MTBE was something like 3% of the volume of gasoline, the result was that we suddenly had our gasoline supply shrunk by 3%. The only EPA permitted substitute was ethanol. Obviously demand for ethanol to replace MTBE went way up resulting in prices for ethanol going up, resulting in many more ethanol plants being built, resulting in demand for corn going up, resulting in corn prices going up, resulting in more corn being planted.
At the same time that this was happening, the Chinese are improving their standard of living. Many of them are eating meat every day now. That increases the world demand for animal feed and they are importing lots of corn from the US.
On the bright side, the high price of corn means that the US government has been paying out several billion dollars less for corn price subsidies every year for the last few years. Farmers won’t take money to not grow corn on an acre when they can get $4.00 or $5.00 a bushel and raise 100 to 200 bushels of corn per acre.
As long as the wholesale price of ethanol is less than the wholesale price of gasoline, terminal operators will add as much ethanol as they can get, up to 10% allowed by law, to gasoline since they can sell it to you at the same price. Yes, the ethanol does have less energy content than gasoline but it raises the octane rating of the gasoline. E10 has an octane rating of 95. For the last year or so, the unleaded regular gasoline you have been buying has probably exceeded the 87 octane rating you see marked on the pump.
If octane rating greater than 90 becomes the standard, auto makers can increase the compression ratio of their engines, making them more efficient and giving us more horsepower and better mileage. That will reverse the process that happened in the early 1970s when the lead was removed from gasoline resulting in lower octane, lower compression ratio engines to use the low octane unleaded gasoline and the resulting poorer mileage and less horsepower from the low compression ratio engines.
There is nothing immoral about using food crops to make ethanol fuel. We are real good at producing corn. Until a few years ago, we produced massive surpluses of the stuff. I would much rather have more corn based ethanol in my gas tank and less high fructose corn syrup in my food.
Bill
If the comments are are so ignorant and stupid, why did VeraSun go bankrupt? Answer that.
If you read the article you will see that “Corn prices have tumbled to $4.01 a bushel Friday from a record of around $8 a bushel in June. But because of hedges it entered in July, when corn prices were still high, VeraSun wasn’t able to take advantage of this swift descent. Its corn costs averaged between $6.75 and $7 a bushel for the third quarter, it estimated in September, triggering a loss for the period.”
Since you obviously had a problem with reading comprehension, I’ll explain it to you. VeraSun signed contracts back when corn was more expensive committing it to buy corn for $6.75 to $7.00 a bushel. Its competitors who did not sign such contracts and who are able to buy corn at the new lower price are able to produce and sell ethanol for lower prices and still make money.
In an ordinary financial environment, VeraSun would probably have been able to borrow money to make it through this rough patch. However, since the subprime mortgage meltdown in September, all the bankers are hiding in their beds with sheets over their heads and their thumbs in their mouths so VeraSun can’t get a loan. That is why they have filed for Chapter 11 bankruptcy. Chapter 11 means that they believe that the business is basically sound and will eventually return to profitability.
What MARK is basically saying is that the company during the best of times with government funds makes a “profit”… however without more government funding+loans to keep it floating it will go under… because you know bad markets, high corn prices, droughts…. stuff like that only happens once in like 2000 years….
Hey Mark,
The point of my comment was that neither VeraSun, nor any other company, would be in the corn to fuel business but for government distortions of the “market”. Based on economic merit, the business is not “basically sound” and the “profitability” is illusory - a fiction created by government. Robotech is correct - corn to fuel is great as long as taxpayers are forced to insure a profit. So why did VeraSun feel compelled to hedge in the futures market? Because if they bet correctly they make more money and if they lost (as they did) it won’t hurt them. They’ll just file Chapter 11, screw some creditors, continue accepting taxpayer largess, and emerge from bankruptcy with less debt and the same assets. It’s called moral hazard; the same government created phenomenon that was largely responsible for the financial meltdown you referenced - financial institutions took wild risks because they believed that if they lost the government would bail them out.
If the price of gas kept trending up past $4 at its rate up to that point, corn would have been become competitive and then some.
Lots of companies do hedge contracts on commodities that they use in order to minimize disruptions due to price fluctuations. Southwest Airlines, for example, was making profits when other airlines were losing money because they had participated wisely in those hedge markets.
There are all kinds of government distortions in the gasoline market. First off, in the early 1970s, the government required that lead no longer be added to gasoline to raise the octane rating. I think that you would have a hard time rallying enough libertarians to get that rule overturned.
A really large government distortion of the gasoline market was put in place by the Clinton Administration on their way out the door in the year 2000. That was the introduction of regional gasoline formulations. This changed the gasoline market from one nationwide market selling a fungible product to hundreds of small markets. Gasoline producers and distributors have to supply the right kind of gasoline to the designated regions and they have to predict in advance how much of each kind of gas to produce every week. There are something like 200 different blends of gasoline now being sold, although nobody is really sure about the exact number. Gasoline is no longer fungible. If you sell the wrong blend of gasoline in the wrong region you will be fined heavily or sent to jail.
Back before about 2004, ethanol was a boondoggle. The only reason that it was produced or sold was because of government programs. With oil prices at $60 a barrel, ethanol is economically viable. I remember reading that the break even price was something like $32 a barrel oil. With $2.00 a bushel corn, ethanol can be produced for about $1.00 a gallon. With the slower economy, lower gasoline demand and the popping of the commodities speculative bubble, we are going to find new market price points, but as long as ethanol is cheaper than gasoline, terminal operators will continue to buy it and mix it into the fuel that you buy.
Ethanol introduces competition into the transportation fuel market. The higher the price of gasoline, the more demand there is for ethanol. Over the last few years we have added enormously to our infrastructure for making and delivering ethanol. I read one estimate that compared it to the expansion in our capacity to produce airplanes between 1941 and 1945.
Much of that infrastructure can also be used to deliver ethanol produced from sugar cane in the Caribbean to gas stations all over the United States. In the long run, that is where I see ethanol headed, Jamaica, Dominican Republic, El Salvador, Guatamala, Nicaragua producing ethanol and electricity from sugar cane, sending ethanol to us while we send dollars and products to them instead of to the Middle East.
Ok Mark, once more into the breech. First though, I want to say you make good points as opposed to simply raving like a lunatic and I appreciate that. I guess you and I just don’t agree on the economics of corn based ethanol and I freely concede I’m no expert. The quotations are from your most recent comment. Some are incomplete but I’m doing that for brevity, not to quote you out of context.
“With oil prices at $60 a barrel, ethanol is economically viable.” Since corn ethanol requires lots of oil, natural gas and electricity to farm, distill and distribute, I don’t see how rising fossil fuel prices leads to corn ethanol viability. If oil goes up, so does the cost, and the price, of corn ethanol.
“With $2.00 a bushel corn, ethanol can be produced for about $1.00 a gallon.” If by “produced” you mean only the fermenting and distilling, maybe - I don’t know. But there’s more to it than that. First, corn reached $8.00 per bushel and now fetches $4.00. Using $2.00 seems
unrealistic. Second, prices other than the price per bushel (e.g., fossil fuels) influence the price of corn ethanol (I know, some of these are “built into” the price per bushel). Third, ethanol is expensive to distribute (see below on infrastructure).
“…as long as ethanol is cheaper than gasoline, terminal operators will continue to buy it and mix it into the fuel that you buy.” Wholesalers blend ethanol with gasoline to get huge tax credits. Also, as with
regional gasoline formulations, the government mandates blending. Regardless of the price of ethanol, jobbers must blend - they have no choice.
“Ethanol introduces competition into the transportation fuel market.” I’m all in favor of competition, but competition on an unlevel playing field is hardly competition. As you mentioned, there are many distortions in the gasoline market as well. In fact, there is so much interference in the energy sector that it’s difficult to determine the real cost of fuels. But more to your point, corn ethanol volume, in percentage terms, cannot compete with gasoline. We simply can’t grow enough corn.
“The higher the price of gasoline, the more demand there is for ethanol.” Exactly. Supply and demand play a role in corn ethanol pricing just like feedstock, production and distribution costs. Increase demand, the price increases and it becomes a less viable substitute.
“Over the last few years we have added enormously to our infrastructure for making and delivering ethanol.” I’ve not heard of this additional delivery infrastructure. Ethanol is very corrosive and therefore cannot be distributed in existing pipelines. Rather, it must be distributed via rail and
truck - much less efficient, much more costly.
“…ethanol produced from sugar cane in the Caribbean to gas stations all over the United States.” Agreed. Now we just have to remove the protective tariffs that preclude importing ethanol. I’m sure the domestic
farm lobby won’t object. At least using sugar cane as the feedstock makes much more sense.
Yeah dog pile to add into Bill.
I have never seen a true cost/production study on ethanol… every single one either does 1 or all of the following.
Hides government funding which makes it look cheaper then it is.
Hides costs by using things like gas at lower prices.
Hides behind the very unbelievable best case numbers.
I have never seen a broken down start to finish on the numbers to include the outsides sources such as all the gas used to farm, transport, etc, etc the whole process.
Next is the fact that we would need to start farming on millions of acres of land in order to make enough ethanol to really make a difference.
Farming is very very bad for the environment add in that ethanol is worse from a greenhouse gas standpoint then oil by alot its not going to help global warming.
Ethanol for the most part is a dead end tech…. it can’t supply us with the needed supplies to run even our current cars let alone as our pop keeps growing. Instead of wasting money on this worthless tech this money could be shifted to useful things such as solar, hydrogen, nukes, electric engines and better batteries.
And well the argument that makes all these arguments completely moot… oil will never go above the cost of ethanol unless mandated by the government refusing to let oil companies drill and produce it… and we have between 50 and 100 years of oil even if you account for expanding usage. The only way ethanol can complete with oil for prices is if eco-fascist, global warming nut jobs and the rest of the anti-oil morons through the government force the price of oil up.
Even add on to that if we start changing to nukes soon and get decent solar setup the US will add another 50 years to our oil supply by the usage of coal turned into oil.
Anyway you cut it ethanol is just plain stupid. Instead of trying to force dead end tech like ethanol and half finished tech like solar and hydrogen on everyone we should use our oil reserves up and keep energy cheap… this will free up more money for more research which in turn will finish and make workable things like solar powered cars.
Also in the bottom line if we don’t use the oil off shore, countries like china will… they will drill into everything they can reach and by slant drilling they could reach miles into US coastal waters….
Global warming nuts can cry all they want be china and other countries aren’t going to turn away from oil… if the US were to stop using oil guess what its price will go done making it even cheaper for countries like china… china will also demand that they get the “green” techs as well for free… once oil does run out they will switch over however at that point they will be as strong if not stronger then the US.
I could go on and on about the global warming and how retarded these ppl are to believe even if we find and build techs to make things green…. most countries unless their very very cheap(which they won’t be for awhile) will just use the oil that the US stopped using.