Valero pays premium to corn suppliers with VeraSun contracts

By Ryan C. Christiansen | June 03, 2009
In late April, Valero Energy Corp. announced to corn suppliers that if they had contracted to deliver to the bankrupt VeraSun Energy Corp. ethanol plants that Valero had purchased,
Valero would honor a percentage of the contract price over the spot price.

According to Bill Day, director of media relations for Valero, the company offered to pay suppliers spot price plus 40 percent of the amount above spot price specified in their previous VeraSun contract. In addition, suppliers whose contracts were set below current market prices were allowed out of their contracts. The South Dakota Corn Growers
Association announced it was encouraged by Valero's move.

"The SDCGA sees this as an act of goodwill on Valero's part, [which] is a step in the right direction for Valero to build trust with feedstock suppliers," association president Bill Chase said. "Offering an option for producers implies Valero understands the importance production agriculture will have in the success and viability of their ethanol facilities."

Earlier in April, Valero acquired eight former VeraSun properties, including facilities in Aurora, S.D.; Albert City, Fort Dodge, Charles City, and Hartley, Iowa; Welcome, Minn.; Albion, Neb.; and a development site in Reynolds, Ind. Together, the plants have a 780 MMgy production capacity.

VeraSun's Chapter 11 bankruptcy filing on Oct. 31, 2008, raised numerous questions for farmers and grain elevators that had legal relationships with VeraSun, according to Roger McEowen, director for the Center for Agricultural Law and Taxation at Iowa State University. McEowen said the bankruptcy code allows a debtor to decide whether to accept or reject grain supply contracts through the date of confirmation of the bankruptcy plan. The ethanol producer 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 the producer are required to honor those contracts until the producer decides whether to accept them.

"Farmers are coming to the realization that when they sell in contractual settings like this, there is a risk that whoever your buyer is could have financial troubles before you get paid," McEowen said. "Probably the biggest issue that we found [was] farmers just didn't know what an executory contract was. They didn't understand how the debtor could walk away and they couldn't sell their grain on the market until the debtor tells them how the contract is going to be treated. That's the way the bankruptcy code works. It really hit home when the VeraSun bankruptcy was filed, simply because of how big a player they were in the market."

Monte Shaw, executive director for the Iowa Renewable Fuels Association, said while Valero has not yet joined the IRFA to represent the interests of Valero's four Iowa ethanol plants, "it's probably a pretty good-faith effort on their part" to reach out to suppliers who had contracts with VeraSun. "There probably are not too many of those contracts still out there that were in those extreme positions," he said, "[but] from an ethanol producer standpoint, you have to have good relationships to get the corn to operate these things. We understand it's a two-way street and you need reliable suppliers."