ANALYSIS-Ethanol slump blindsides U.S. corn growers

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)