A year ago they were building ethanol plants left and right in Iowa. Now VeraSun Energy is closing them down—at least the one in Dyersville in northeast Iowa.

On November 20 VeraSun officials verified that the firm has closed the newly-built Dyersville facility indefinitely. The company earlier in the week in an email sent to farmers and elevators who deliver corn to the plant, said it was closing the plant. VeraSun also is seeking approval from bankruptcy court to void forward contracts the firm has made to buy corn from farmers and elevators.

The company, which is headquartered in South Dakota and is currently in bankruptcy, says the Dyersville plant is closed for both corn deliveries and corn purchasing until further notice. The email also says that the company is negotiating for additional funding that should be available next month.

Bigger loss than earlier reported

VeraSun filed for Chapter 11 bankruptcy on October 31. On November 19 it released its earnings statement which showed it had a net loss of more than $476 million in the last quarter, ending September 30. That was a much bigger loss than the company previously estimated.

VeraSun operates ethanol plants in five states. It has 14 plants in total, five of them in Iowa. VeraSun's Iowa plants are in Ft. Dodge, Charles City, Albert City, Hartley and Dyersville. VeraSun is Iowa's largest ethanol producer.

The company buys about 200 million bushels of corn per year for its Iowa plants, about 8% of annual Iowa corn production. At today's price, that would represent a value of $756 million produced by Iowa farmers.

Huge losses in futures market

VeraSun suffered huge losses in the corn futures market beginning last summer, when its short positions were undermined by a run-up in corn prices to a record $8 per bushel. Faced with huge calls for collateral or margin money, VeraSun chose instead to exit those short contracts and enter into other contracts for corn that were between $6 and $7 per bushel. Many of those contracts were with Iowa farmers and elevators.
Corn prices have since dropped to below $4 per bushel, and ethanol prices have fallen from an average of $2.90 per gallon last summer to $1.70 per gallon this month.

On November 19, in its report filed with the federal Securities and Exchange Commission, VeraSun reported a net loss of $476 million for the quarter ended September 30. Its precarious financial condition is reflected in those numbers. VeraSun reported current assets of $421.5 million and current liabilities—those due within 12 months—of $1.8 billion. That company also had just $9.2 million in cash on hand September 30, compared with $110.9 million in cash on the same date in 2007.

Oil price drags down ethanol price

The ethanol market is taking a hit from low oil prices. In the SEC filing, VeraSun said it continues to suffer operating losses primarily due to the relative prices of ethanol and corn. Ethanol prices have declined to levels not seen in more than three years, which is good news for motorists but not for ethanol producers.

The decline in the price of crude oil has taken the price of ethanol down with it. Oil prices have fallen 66% since reaching a record $147 a barrel in mid-July.

VeraSun wants to nullify corn contacts

Since filing for bankruptcy on October 31, VeraSun hadn't specified what it would do about forward contracts, which are legal agreements to buy corn from farmers and elevators in future months at specified prices. However, VeraSun is now seeking to nullify the deals on buying corn.

The bankruptcy filing would make such action legal, to help VeraSun get back on its feet financially, but the bankruptcy judge would have to approve VeraSun's request before the company can proceed with such a policy.

Farmers stand to lose a lot of money

What's bothersome to farmers is that VeraSun has asked the bankruptcy judge to allow the company to do this—to void corn contracts on 10-day notice, an action farmers say would deny them not only lucrative revenues negotiated when corn prices were higher, but also the ability to sell the corn to other buyers.

Iowa Secretary of Agriculture Bill Northey says if the judge approves the VeraSun request, it would "deprive farmers of the opportunity to take advantage of any improvements in the corn markets while their grain was tied up with VeraSun, and yet VeraSun would have the option to void contracts at its pleasure."