By DOUG SCHMITZ
Iowa Correspondent

AMES, Iowa — In what has been dubbed the largest ethanol company liquidation in U.S. history, VeraSun Energy Corp.’s Chapter 11 bankruptcy filing last month is allowing Midwest farmers and grain elevators that have legally binding transactions with the Sioux Falls, S.D.-based biofuel giant to quickly collect on what they have already delivered.

“Farmers and elevators that sign the checks in order to get prompt payment for the corn that VeraSun purchased within 20 days of filing appear to have agreed to continue supplying corn at prevailing market prices,” said Roger McEowen, director of the Iowa State University Center for Agricultural Law and Taxation, and Leonard Dolezal professor in agricultural law.

VeraSun and its 24 subsidiaries filed Chapter 11 on Oct. 31 in the U.S. Bankruptcy Court in Wilmington, Del. VeraSun currently operates 17 ethanol plants in eight states: five in Iowa, three in Nebraska, two each in Indiana, Minnesota and South Dakota and one each in Michigan, North Dakota and Ohio.

According to company officials, the historic filing was precipitated by “a series of events that led to a contraction in VeraSun’s liquidity, impairing its ability to operate its business and invest in production facilities.”

VeraSun also suffered significant losses in the third quarter of 2008 from “a dramatic spike in its corn costs, reflecting in part costs attributable to its corn procurement and hedging arrangements, and historically unfavorable margins,” company officials added.
Under the bankruptcy code, VeraSun, which recorded more than $1.9 billion in debt and nearly $3.5 billion in assets at the time of the filing, would be required to pay farmers and grain elevators for corn delivered before filing.

“VeraSun will treat all suppliers that supplied corn to its plants before October 11, 2008, as unsecured creditors that may share in a dividend at some time, many months in the future,” McEowen said.

In turn, VeraSun has received confirmation from the Delaware Bankruptcy Court that those who supplied corn from Oct. 11-31 would be treated as priority creditors who can be paid in full from VeraSun’s cash, provided they agree to continue supplying corn at prevailing market prices, not contracted prices.

“The bankruptcy code allows a debtor to decide whether to accept or reject contracts like grain supply contracts through the date of confirmation of the plan,” McEowen said. “Thus, if a farmer or elevator has a contract to sell grain to VeraSun for $5.25 per bushel and the prevailing market price increases to $6, VeraSun has the option to enforce the contract by accepting the contract.

“VeraSun appears to have the upper hand, as it can wait until plan confirmation to decide whether to accept or reject corn contracts, while the farmers and elevators that have agreed to sell to VeraSun are required to honor those contracts.”

McEowen added farmers and elevators who received checks from VeraSun for grain delivered between Oct. 11-31 should show the checks to their attorneys to determine what signing the check would contractually obligate them to perform in the future.
“They could be agreeing to deliver corn at the prevailing market price with payment on the most favorable terms provided within the past 12 months,” he said.

Conversely, he said farmers and elevators should honor their contractual commitments to VeraSun.

“VeraSun can enforce the terms of delivery contracts it has,” McEowen said. “Until VeraSun rejects a contract, the farmer or elevator is still bound by the terms of the contract. If the corn is sold elsewhere, and the price increases, VeraSun could require the farmer or elevator to fulfill the contract even if the cost of corn is considerably higher than the farmer or elevator will receive from VeraSun.”

But if VeraSun rejects a corn supply contract, he said the rejection is treated as if VeraSun rejected the contract on the day before it filed bankruptcy.

“The farmer or elevator whose contract is rejected will need to market its corn previously covered by the contract, then it can file a claim in the VeraSun bankruptcy, that will be treated as an unsecured claim that can share in the dividend paid to unsecured creditors many months later,” he said. “There is no guarantee that any payment will be made to unsecured creditors.”

Iowa Agriculture Secretary Bill Northey said VeraSun is working to continue operations and pay its corn suppliers.

“The wide price swings we’ve seen for both corn and soybeans this year have created new risks for both farmers and agribusinesses,” he said.  “As a result, it’s vital (that) farmers are taking the appropriate steps to manage their risk and understand what protections are in place.”

He added that the Iowa Department of Agriculture and Land Stewardship’s Grain Warehouse Bureau is responsible for licensing and inspection of grain dealers, including ethanol plants, in order to protect farmers and others selling grain to these facilities.

On Nov. 3, the U.S. Bankruptcy Court entered an interim order allowing VeraSun and its affiliates to borrow up to $40 million from debtor-in-possession (DIP) facilities and authorized the use of cash collateral to enable VeraSun to operate its business.