Grain suppliers uncertain about VeraSun contracts

By Bryan Sims | January 03, 2009
Web exclusive posted Dec. 12, 2008 at 9:40 a.m. CST

Grain suppliers with corn contracts linked to bankrupt ethanol producer VeraSun Energy Corp. are seeking certainty as to whether their corn contracts will be honored or rejected in the coming months.

At a court hearing on Dec. 1, U.S. Bankruptcy Judge Brendan Shannon granted VeraSun approval to reject certain corn purchase contracts 10 business days before a contracted delivery date.

The decision was better than what VeraSun originally sought, but it put a serious spike in its relationship between its farmers and/or grain elevators, said Joe Peiffer, an attorney with Cedar Rapids, Iowa-based law firm Day, Rettig and Peiffer P.C. The law firm represented approximately 124 corn suppliers assembled by Iowa State Rep. Mark Kuhn, D-Charles City, Iowa. Peiffer's firm represents grain suppliers in Michigan, North Dakota, South Dakota, Nebraska, Minnesota and Iowa.

"Right now, the biggest problem that corn suppliers have is the uncertainty of not knowing will their contract be assumed or will it be objected," Peiffer said. "At this point, it's as though we're playing a game of Texas Hold'em and they get to see the flop before they put their bet in. The corn suppliers are all in right now and they have to be ready, willing and able to perform and VeraSun gets the luxury of waiting. It's frustrating, but bankruptcy law allows it."

According to Ron Litterer, chairman of the National Corn Growers Association, the decision made by the court to allow VeraSun to reject corn contracts was expected, but at least grain suppliers are provided an opportunity to voice their concerns.

"We are happy that the court listened to corn growers' views," Litterer said. "It was doubtful that we could influence the courts to require VeraSun to pay the contracted price for our corn. We believe we did influence other issues of concern to growers."

Legal counsel for an "ad hoc" advisory committee formed by the NCGA, state affiliated organizations and others participated in the court hearing in Wilmington, Del. The NCGA formed the advisory committee in November to ensure that the interests of corn growers in the VeraSun bankruptcy case were fairly represented. Litterer is a member of the advisory committee, which will continue to serve as a voice to the court and VeraSun on the concerns of corn growers. The committee is made up of corn growers from Iowa, Michigan, Nebraska, North Dakota, Ohio and South Dakota.

"As providers of corn to VeraSun, corn growers want fair payment under fair terms for their corn, as well as a positive conclusion that allows VeraSun to stay viable as a long-term customer for our corn," Litterer said. "We believe this is in everyone's best interests."

Corn prices have plunged since many of the grain suppliers entered into their contracts with VeraSun, giving the ethanol producer an incentive to reject their contracts. Peiffer said farmers and/or grain elevators that were hurt by VeraSun's bankruptcy might be wary of selling their corn to other producers, particularly if their contracts are accepted and then the market drastically changes heading into next year. If that happens, they could be required to make up the price disadvantage placed on VeraSun by their failure to honor those contracts.

Judge Shannon refused a request from Peiffer to have Dec. 15 established as the date to reject the contracts. Peiffer said that Judge Shannon indicated he would entertain motions forwarded by individual suppliers who have specific reasons as to why they would need an answer more expeditiously, but the cost of such a filing would deter most suppliers.

"We were hoping that the judge would do it, but given the size of this case and the fact that this case is barely a month old, the judge is not prepared to force his hand at this time," he said.

According to Peiffer, through its attorneys, VeraSun agreed to improve the process for considering the contracts based on suggestions from Kuhn's supplier group. He said VeraSun will appoint a "point person" of its bankruptcy law firm, Skadden, Arps, Slate, Meagher & Flom LLP in Chicago to review the contracts. The law firm would then notify the farmers in writing if their contracts would be accepted or rejected. If rejected, the farmers could market their corn elsewhere.

VeraSun told the court that through Jan. 15 it intends to reject corn contracts for delivery to seven of its eight plants that are on "hot idle" status, meaning they are taking in enough corn to avoid a complete shutdown but are producing minimal ethanol to stay in operation. The plants affected include: Dyersville, Iowa; Albert City, Iowa; Ord, Neb.; Janesville, Minn.; Central City, Neb.; Hankinson, N.D.; and Woodbury, Mich. The company's Welcome, Minn., plant will cancel contracts for deliveries through Jan. 31.

Collectively, the eight plants use approximately 262 million bushels of corn to produce approximately 759 MMgy of ethanol.

Meanwhile, on Dec. 4, the U.S. Bankruptcy Court agreed to let VeraSun borrow $196.6 million of debtor-in-possession (DIP) financing, but under strict conditions. Those conditions grant the lenders, led by AgStar Financial Services, priority over other existing debt. AgStar Financial Services provided a $24.5 million DIP facility, including $15 million that was previously loaned to the company on an interim basis. West LB provided an initial $10 million in DIP financing on an interim basis to fund plant operations in Albion, Neb.; Linden, Ind.; and Bloomingburg, Ohio. In a news release, VeraSun said it intends to secure long-term financing for its ethanol production facility in Marion, S.D.

Previously, VeraSun had confirmed that a third-party has expressed a non-binding letter of interest in buying "substantially all of its assets"; however, at press time no such party had been indentified. If such a deal does in fact happen, the buyer would likely not acquire any "above market" corn contracts, according to Peiffer.

"The question is: will the farmers sell to the ethanol plants even if a new owner comes in when they've been stiffed?" he said. "Right now, the answer is unknown."