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
Bill
Sorry for the snark in an earlier post. I am happy to discuss the economic of ethanol. I think they support my contention but I can always stand to learn more. My replies to your last post will be interspersed and preceded by $$$.
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“With oil prices at $60 a barrel, ethanol is economically viable.” Since corn ethanol requires lots of oil, natural gas and electricity to farm, distill and distribute, I don’t see how rising fossil fuel prices leads to corn ethanol viability. If oil goes up, so does the cost, and the price, of corn ethanol.
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Like everybody else, farmers and ethanol producers respond to higher fuel prices by learning how to produce more with less fuel. That is one of the major flaws with Cornell Entomology Professor David Pimentel’s often quoted analysis of ethanol. All his figures are from the 1970s. Today farmers use a lot less diesel to raise an acre of corn than they did 30 or 40 years ago. Each acre yields a lot more bushels of corn. Ethanol plants are still on the steep slope of the learning curve. Each year they become more efficient in their energy use. Some plants are burning waste from the process to reduce their energy costs. The thing is that the market is working here. When ethanol can be produced and sold and delivered for less than the wholesale price of gasoline, it is economically viable. That condition exists now. That condition did not exist several years ago when oil was cheaper.
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“With $2.00 a bushel corn, ethanol can be produced for about $1.00 a gallon.” If by “produced” you mean only the fermenting and distilling, maybe - I don’t know. But there’s more to it than that. First, corn reached $8.00 per bushel and now fetches $4.00. Using $2.00 seems unrealistic. Second, prices other than the price per bushel (e.g., fossil fuels) influence the price of corn ethanol (I know, some of these are “built into” the price per bushel). Third, ethanol is expensive to distribute (see below on infrastructure).
$$$
By produced I mean an ethanol plant can purchase all its inputs including corn, energy, labor and amortization of the loan for construction costs. I used $2.00 a bushel as a base line since for years (decades?) corn prices were $2.00 a bushel or less. If the wholesale price of gasoline gets below $1.00 a gallon, it will probably be uneconomical to make ethanol from corn, even if the price per bushel drops back to $1.65.
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“…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.
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That is true and drove the ethanol industry until 2004 or 2005. When California, Massachusetts, Connecticut and New York banned the use of MTBE, ethanol was the only alternative and ethanol production took off. When the threat of lawsuits for using MTBE caused all gasoline producers to stop using it, there was a big rush to use ethanol, the only EPA approved substitute instead. That is the baseline for ethanol demand. However, ethanol is now produced in quantities that exceed this base demand as more ethanol plants were built due to the high profits that could be made producing ethanol from corn. Between increased Chinese demand for animal feed, increased demand for ethanol feedstock and the speculative bubble, corn prices shot way up. Now that the bubble has popped the market will establish a new equilibrium. As with any sudden change, there is going to be a roller coaster ride of price fluctuations until things even out even if there are are no new big changes in world oil production or demand. There are lags in our capacity to grow corn, make it into ethanol and transport it to your gas station. Each time new capacity is added, it moves the bottleneck someplace else and changes the prices again.
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“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.
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My point is that no matter how much the government trys to interfere, market forces will still prevail. Market forces are like gravity. Government laws and regulations can note make it go away. Why does it always have to be that if we can’t completely replace all gasoline, that it is not worth doing at all? How much corn can we grow? I don’t know. We already grow a lot more than we used to grow just a few years ago. I would actually be quite happy if we got to 10% ethanol in our fuel supply. Ethanol raised the octane rating of gasoline and if all gasoline sold were at least 10% ethanol then it would have an octane rating of at least 95. If Detroit could count on all cars using fuel with higher octane than current premium grade, they could optimize the engines they build. These engines would have more horsepower per cc and get better mileage.
Keep in mind that the tax breaks on ethanol fuel are ONLY for fuel with 10% or greater ethanol. Most of the ethanol that is added to gasoline is mixed at levels lower than that. If the gas pump does not say E10 or E85, there was no gas tax credit subsidy.
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“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.
I include railroad tank cars, tank trucks, storage facilities and the knowledge of how to handle and mix ethanol into our fuel supply in the term “infrastructure”. A few years ago, ethanol was much cheaper in the northern Midwest than it was elsewhere in the country because infrastructure was not in place to deliver the ethanol. Today there is a lot more ethanol being produced in the northern Midwest but because the infrastructure to move it has grown so much, the price difference is not nearly so great. The ethanol industry is still rather young. If it survives another decade, then expect to see pipelines being built. Unlike methanol, ethanol is not very corrosive but it does have requirements that are different from petroleum products in pipelines. Meanwhile, tank cars, tank trucks and barges are flexible enough to deal with the rapidly changing demands brought on by fast growth.
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“…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.
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Countries in the Caribbean Basin Initiative are exempt from the ethanol import tariff for up to 7% of last year’s domestic ethanol production. The last time I looked into it, they were not anywhere near that number. I think that it is a real economic opportunity for somebody.
robotech master
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.
And later:
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.
You have to decide to either argue like a tree hugging environmentalist wack job or like a red neck land raper when you post your arguments.
When you do both in the same post, you come across like some astroturfing troll hired by the oil companies or the KSA to disparage alternate energy.
If you are a hired astroturfing troll, please, at least show us the courtesy of using two different names and two different posts to make your points. To put them in the same post like that makes it look like you think that we are stupid and that is just rude.
You mean the fact that I can see all sides of the argument and thus completely kill every one of your points leaving you no room to retort makes me a troll…
I do like however how you have zero to counter any of the argument presented and the only way as per normal is to dance and sling personal insults…. how very global warming nut job of you.
Hey Mark
No worries about any snark. The comment you were replying to wasn’t the most helpful or thoughtful thing I’ve written. Now to yours:
First. A lot of the recent increase in corn production is the result of farmers reacting to the historically high corn prices by planting corn
instead of wheat, soybeans or something else (i.e., recent corn production increases result from more acreage, not greater efficiency). So, as the supply of wheat, soybeans, ect… decreases, their prices increase - not good. Yes, agricultural productivity and efficiency are
always on the rise. Agreed, ethanol producers will get more efficient in the future. But here’s where I see the law of diminishing returns coming
into play. The easy improvements, the “low hanging fruit”, are achieved early in any production process. For example, Wikipedia states
“Between 1965 and 1970, wheat yields nearly doubled in Pakistan and India…” (Wiki “Norman Borlaug”). I have no idea what Pakistani and Indian wheat yields have done over the past five years, but I bet they
haven’t doubled. This is because as a process becomes more efficient, further gains in efficiency become harder to achieve - either technologically or economically or both. At some point the efficiency gains slow to a crawl. This is a point where substitutes may find market opportunities. This is what I am hoping for. With all the alternative fuels R&D taking place worldwide, with the promise of riches beyond belief to the laboratory that cracks this nut, someone will find a way(s) (algae, genetically modified yeast, bacteria or fungi, bio-mass/waste, ect…) to produce a petroleum substitute that doesn’t compete with food and that can be scaled to an industrial level at competitive prices. Alternatively, electricity may prevail as the preferred transportation medium if storage capacity continues to increase. Again, worldwide, lots of R&D, people and money are chasing this substitute.
Second. With respect to using an historical base line price of $2.00 per bushel, I think the market has changed. The historical price did not factor
in the mandates for ever increasing billions of gallons of corn ethanol. Thus, I’m still not convinced the historical price data is indicative of future prices.
Third. I agree that it’s not necessary to have a 100% substitute before incrementally substituting viable alternatives for gasoline. I hope nothing
I wrote gave you that impression. Then you seem to suggest that the tax incentives are limited to the past and/or certain levels of blending. The
National Corn Growers Association suggests otherwise:
“The Volumetric Ethanol Excise Tax Credit (VEETC) legislation passed in 2004 extends the effective date of the tax credit through 2010. … The VEETC provides other benefits. Because it is assessed on a volume
basis, refiners will no longer be limited to the 5.7/7.7/10-percent blend levels dictated by the Clean Air Act’s oxygen content provisions …” See http://tinyurl.com/5kfbqm.
Fourth. You make a good point about delivery infrastructure increases. It makes sense that additional storage, trucks, rail and barges would be produced to handle the additional ethanol volume (I hadn’t considered
barges - a good choice given Midwest corn, the Mississippi river and south Louisiana refinery capacity). My beef is with the fact that these are
more expensive than existing pipelines and therefore make ethanol more expensive; less economically viable. Whether companies invest in new pipeline infrastructure may depend on further government incentives. It would be a shame to commit hundreds of millions of dollars
to a multi-year project only to find out a few years into it that someone has a quick charging, long rang battery. On the other hand, gasoline is with us for quite some time no matter what.
Finally. I wasn’t aware of the Caribbean Basin Initiative partial tariff exemption. But you are correct, the import tariff is partially waived. Not
only that, but the pre-ethanol can come from any country on earth and only has to be “re-processed” in a CBI nation. Why haven’t these impoverished countries attracted foreign investment to build re-processing plants up to the 7% exemption level? Economics?
Political instability? In any event, if a partial tariff exemption is good, a complete exemption would be better. Forcing Brazilian pre-ethanol to
stop in Jamaica for re-processing before continuing on to the U.S. has got to add costs. Brazil already has the processing facilities (i.e., they don’t have to attract investment for new processing plants). The cynic in me says the U.S. threw a worthless bone to a bunch of poor countries in an effort to appear magnanimous while knowing full well not much would come of it.
The bottom line for me: I don’t think it’s wise for government to encourage huge investments in corn ethanol when it’s not ready, on it’s own economic merit, to compete with gasoline. If it was, all the taxpayer
giveaways wouldn’t be necessary and the industry would have appeared on its own. Now we have yet another special interest lobby that will fight like hell to hold on to the goodies provided by Washington and seek new barriers to entry for future competitive technologies. We’d be better off just using gasoline for our cars and using the resourses put into corn
ethanol for further R&D into it and other emerging petroleum substitutes.
I’m not against ethanol per se; I’m against artificially created “markets”. The government shouldn’t try to pick winners. That’s what the market is for.
Here’s an article from the November 3, 2008 Wall Street Journal entitled:
The Death of Ethanol: One Thing Wall Street Saw Coming
http://tinyurl.com/5ettf7
Bill
Interesting article, particularly the comments. There was one comment from “notatreehugger” that I thought put it pretty well.
dead? gimme a break. just because a bunch of opportunists flooded the market with new plants and made really poor hedging bets on commodities, does not spell death for ethanol. ethanol still has a large place in our energy-independent future. its not the answer to foriegn oil, by itself, but its vital. sorry for the investors who got sucked in.
Before all the Wall Street money went rushing into ethanol investments, corn farmers were the main group of investors building ethanol plants in order to push up the local price of corn by a couple of nickles. All those guys were looking for was that the ethanol plants not lose money so that they could keep buying their corn crops. Back in those days, they absolutely depended on the federal tax breaks and subsidies. Then came >$100 oil and >$4 gasoline.
For some reason we seem to go through boom and bust cycles on new technology. There was the Dot Com boom and the Dot Com bust but the internet still exists and is significantly larger than it was before the boom bust cycle. The same thing happened with radios in the 1920s, automobiles in the early 1900s and railroads in the 19th century.
One thing that makes me really curious is the “ethanol is too corrosive for pipelines” meme. Do you have any idea where that came from? It is flat out not true but there seem to be a lot of people in the comments section of that article repeating it.
One other interesting thing is that at this moment, gasoline is actually cheaper than ethanol according to these web sites:
http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm
http://www.ethanolmarket.com/fuelethanol.html
This is the price range where the tax credits, fuel oxygenate requirements and government regulations keep the ethanol industry in business. How long do you think that wholesale gasoline is going to remain in the $1.45 to $1.60 a gallon range? If it stays there, I am guessing that ethanol goes back to ~$1.30 a gallon and corn will be in the $2 to $3 a bushel price range next year. That is still better than $1.65 a bushel that corn farmers were getting a few years ago.
Of course, a war in the Middle East, another hurricane in the Gulf of Mexico or another Wall Street speculative bubble will change all that pretty quickly.
Hey Mark
One reason we go through boom and bust cycles is that suppliers “overshoot” the real demand. Something new appears like the dot.coms; broadband connectivity; legalized gambling on the Mississippi Gulf coast; wireless telecommunications; or no money down, low interest rate mortgages. Then the suppliers, say real estate developers in Mississippi, all build at once to meet the demand. If the real demand calls for 5,000 hotel rooms and ten developers build 1,000 rooms each, none of them individually are “overbuilding”, but the bust will follow as sure as night follows day. They feel compelled to build because if they don’t someone else will - it’s a boom market! This phenomenon happened in each of the industries listed above, many others and probably happened with corn ethanol - this appears to be “notatreehugger”’s point. Then, after the bust, a few well capitalized suppliers emerge to buy up the prime excess supply assets of the not-so-well capitalized suppliers for pennies on the dollar. So, depending on how things go, VeraSun will either be bought out, emerge from Chapter 11, or convert to Chapter 7, in which case ADM or some other corporation(s) will acquire VeraSun’s best assets on terms so favorable that it makes compelling economic sense. In the long run things usually workout for the best (like the internet, radios, cars and railroads you mentioned). But in the short run it’s painful because the number of suppliers gets culled from many to a relative few.
I have no idea where the “ethanol is corrosive meme” started. I’ve just seen it repeated numerous times in articles. From what I’ve read, ethanol is corrosive to the rubber or plastic seals in pipelines and pumping stations. Also, ethanol, like other alcohols, is hygroscopic and will absorb water. This can cause rust. Apparently this is “only” a problem for existing pipeline distribution (a big problem in my view), but can be remedied at the automobile level by using appropriate materials in the fuel system. But then, I’m not a chemist. I’m just going with what I’ve read.
I don’t know how long gasoline prices will remain at today’s level, but combining OPEC supply cuts with increased demand due to the lower price makes it inevitable that oil and gasoline prices will rise in the future.
But if OPEC members cheat on their production quotas and the experience of $145.00 per barrel has made a lasting impression on consumers around the world, perhaps the price increase will be gradual and not reach new heights. Oil prices are high enough to justify continued R&D into alternatives, but low enough that they won’t hurt the economy enough to cause these projects to be canceled.
Although I enjoyed filling up with $1.99 gas yesterday, I don’t think that prices are going to stay at that level. Even if OPEC does not cut production, diesel is wholesaling for more than $2.00. I suspect that refineries are going to push production towards more diesel and less gasoline. Of course, that is countered by the worsening economy and the fact that almost all new car purchases are replacing low mileage vehicles with higher mileage vehicles.
If the EPA would remove its barriers to CNG conversion that would cause another noticable drop in gasoline consumption.
I think that we are definitely going to be moving to alternate fuels even at prices less than half the record highs of a few months back. The drop in world oil prices has got to make an economic recovery come that much sooner and it will keep the Russians from getting too frisky and invading any more of their neighbors.
In response to John who thinks ethanol is the stupidest idea ever. After spending time in Brazil five years ago and understanding their ethanol solution to fossil fuels as an energy source I was amazed at how stupid we are as Americans are for putting our heads in the Middle Eastern sand when such a viable solution exists. Brazil no longer needs any foreign energy supplies and in turn doesn’t have to spend 10 billion a month to fund an oil war. Who looks stupid now? Ethanol decreases pollution, creates jobs with a US made energy source, decreases our need for relationships with foreign (terrorist supporting) governments. How can that be a bad thing? Oh and on your ADM conspiracy theory, ethanol can be made from cellulose; you know the yard waste that fills 10% of our landfills. How about filling your car with your grass clippings, unless you plan on eating that as well?
One Crazy Greeny!
[...] excessive commodity fluctuations, VeraSun, the state’s largest producer (which recently filed for bankruptcy), is itself eligible to claim a full $1.6 million from just one quarter’s worth of [...]