After a year peppered with construction slowdowns, bio-refinery idlings, and more than a dozen bankruptcy filings in the corn ethanol industry, we have an early indicator of how it will shape up post-shakeout — with significantly less cozy alliances between grain growers and ethanol producers.
The U.S. Bankruptcy Court handling ethanol giant VeraSun Energy’s (s vse) restructuring gave final approval this week for $196.6 million in loans (about $7 million more than the company said it needed to make payroll) that will allow it to continue operations. VeraSun also said the approved debtor-in-possession, or DIP, financing will come from lenders that made loans to the company before it filed for Chapter 11 in October — an arrangement that gives them priority over all other claims.
For VeraSun, which produces 13 percent of U.S. ethanol, acquisition remains a possible exit. Industry observers widely agree consolidation is on the horizon, and VeraSun announced last week it had received an “indication of interest” from an unnamed third party for “substantially all of its assets,” listed as worth some $3.45 billion in its bankruptcy filing. Around the same time, leading ethanol producer Poet said it had begun buyout talks with several companies, also unnamed. But whether a VeraSun buyout is in the works, on hold, or out of the question, this week’s financing plan puts suppliers with hefty contracts at the back of the line. Corn growers, unsurprisingly, opposed the bankruptcy court’s decision this week to let VeraSun reject contracts for hundreds of millions of corn bushels.
Tension between growers and biofuel companies resulting from this turn of events could reverberate throughout the industry. “This really has a lot of farmers upset,” Mike Wolverton, a grain market economist at Kansas State University told Reuters. “What it is doing is creating a climate of distrust among farmers with ethanol plants because VeraSun is not the only organization that manufactures ethanol that is having difficulties right now.”
As we’ve noted before, the food-fuel debate and volatile oil and corn prices loom large in the corn ethanol industry’s current troubles (cellulosic ethanol is another story). Crude oil prices dropped below $40 dollars a barrel today, their lowest in nearly four years, and gas prices have plunged enough to make ethanol blends an undue expense for some retailers. The credit crunch made all of this worse for ethanol producers that might otherwise have been able to skate by with investment capital.