By Karl Plume
CHICAGO, Nov 20 (Reuters) - Shrinking ethanol profits and a
deepening recession that helped topple biofuels giant VeraSun
into bankruptcy last month will force U.S. farmers to be far
more skeptical of their corn buyers in the future.
Farmers welcomed the rapid expansion of ethanol producers
whose deep pockets helped propel price of corn to record
highs.
But the financial woes of some ethanol makers are spilling
into rural America, souring the once cozy relationship between
farmers and companies that purchase corn and process it into
fuel.
"You have to look at who you are selling to and what sort
of financial situation they're in. That's not something that
we're necessarily used to doing in agriculture. We tend to do a
lot on a handshake and over the phone," said Iowa State
University agricultural economist Chad Hart.
South Dakota-based VeraSun, the second largest U.S. ethanol
producer, filed for bankruptcy protection last month, citing a
liquidity crisis as bad bets on corn, natural gas and ethanol
prices hurt its ability to pay debt.
The company has been unable to honor some corn delivery
contracts booked near this summer's record-high prices, so
farmers holding those contracts now must resell the corn on the
open market for significantly less money. Some may face
six-figure losses.
Calls to VeraSun seeking comment were not returned.
"Producers were counting on the high prices they locked in
this summer and now, with the bankruptcy declaration, they're
seeing those contracts evaporate into thin air," Hart said.
"These farmers went in thinking they'd already sold corn at
$7 a bushel. They probably made other input or supply buying
decisions that they maybe wouldn't have made knowing they
weren't going to get that $7 a bushel," he added.
Corn futures prices have tumbled about 50 percent
from an all-time high of $7.65 a bushel this summer to less
than $4 a bushel.
While ethanol makers welcomed the decline in corn costs,
their profits are dismal as the price of ethanol also plunged
along with other energy markets.
Still, ethanol makers are expected to consume about a third
of the more than 12 billion bushel U.S. corn crop this year.
FARMERS ADJUST
VeraSun's troubles and the financial woes of other ethanol
producers has reminded farmers that economic turmoil plaguing
financial markets is far reaching.
Bob Dineen, head of the Renewable Fuels Association, said
this week he expects industry consolidation in 2009 as ethanol
profit margins tighten and demand drops.
Several industry analysts predicted more bankruptcies in
the sector. Several ethanol makers have shelved plans to build
new plants.
In the meantime, many farmers are putting most of their
unsold corn in storage and appear resigned to wait for a
clearer picture of the market and higher corn prices.
"Farmer holding is as tight as I have ever seen it. They're
taking it to town and the elevators are piling it up, but
nobody's selling it," said John Conway, a corn and soybean
farmer in Wellman, Iowa.
"All elevators are aware of how recently ethanol plants
have gone online and the later that plant went online the more
subject it is to extra scrutiny by anybody selling to it. The
ownership the plant is also a factor," he said.
Many older ethanol plants already paid off much or all of
their debt when profits were better two or three years ago,
before corn and fuel input costs soared. Those plants may
weather the credit crunch better than newer, more leveraged
facilities, economists said.
Several states have indemnity fund safety nets for farmers
burned by the financial woes of grain buyers, including Iowa,
Illinois, Indiana, Ohio, Michigan, and North Dakota.
Farmers that do not qualify can file a claim with the court
and hope to recover some of their losses if VeraSun emerges
from bankruptcy, economists said.
(Reporting by Karl Plume; Editing by David Gregorio)
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