The bankruptcy of VeraSun was due to liquidity squeeze

The Front Range Energy ethanol plant with its giant corn silos
next to a cornfield in Windsor, Colorado July 7, 2006.
Reuters/Rick Wilking
VeraSun Energy Corp., one of the nation's largest ethanol producers announced late Friday that it is filing for Chapter 11 bankruptcy protection.

The bankruptcy of VeraSun was due to tightening liquidity in the current credit market. Ethanol production has been spurred largely by the Federal Energy Policy Act since 2005. The package has created instant demand for ethanol, so the ethanol producers poured money to finance its expansion in the ethanol industries. But in recent months, ethanol prices have dropped along with oil prices. Meanwhile increasing demand of ethanol pushed up corn prices as raw material of US corn based ethanol production. As a result, that has cut into profit margins of ethanol production.

As corn prices increased but ethanol prices drop, that sent VeraSun and other ethanol producers into panic. In attempting to protect itself from rising corn prices, VeraSun locked in agreements to purchase corn at $6.75 to $7 a bushel in the future contracts. But then the prices on corn futures sank to $4 a bushel. In September, VeraSun said it had lost $63 million to $103 million due to bets on the prices of corn. VeraSun's current liabilities totaled $312 million at the end of the second quarter, and it had $1.4 billion in long-term debt. As the global credit crunch intensified in September, VeraSun was unable to secure the funding it needed to pay interest on its debt, which is due in December.


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Sources :

The Wall Street Journal: VeraSun Seeks Bankruptcy Protection, November 1, 2008, 8:21 A.M. ET

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