Farmers left in lurch on grain-ethanol contracts
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By ART HOVEY / Lincoln Journal Star
It’s the middle of corn harvest and many farmers who already are running late getting the crop out of the field are facing a new type of stress.
What do you do about your contract to deliver corn to an ethanol plant that’s suddenly operating under a financial cloud?
The question has taken on special significance for Tina Barrett, executive director of Nebraska Farm Business Inc. in Lincoln. Her parents are among those hauling corn to a Central City ethanol outlet that was part of a VeraSun bankruptcy announcement Friday.
“They just delivered grain last week the day before the bankruptcy,” Barrett said Monday. And they’re scheduled to take in more.
Barrett has yet to hear any outpouring of concern from farmers who belong to the bookkeeping and management analysis business where she presides. But that could be a matter of time.
VeraSun, which also operates plants at Ord and Albion and 13 others in the United States, carried forward with its Chapter 11 filing Monday in a Delaware court. The nation’s second largest ethanol producer sought $190 million to meet payroll and other obligations and listed $3.45 billion in assets and $1.91 billion in debt, according to the Associated Press.
Also Monday:
* The grain director of the Nebraska Public Service Commission said he has started fielding calls from worried grain producers.
* The Nebraska Farm Bureau Federation, concerned about ethanol instability, weighed in with its advice to corn growers.
Barrett said her parents haven’t made much of a contingency plan yet, except to wait as long as possible to haul more corn and still act before their contract expiration date.
One of the troubling details for many Nebraska farmers is that their contracts carry a per-bushel price of $6 or more. Even if they risked being sued by taking their corn to a cash buyer instead, the most they’re likely to get in a time of much weaker corn prices is in the $3.60-$3.75 range.
The Advanced BioEnergy plant at Fairmont is another example of a faltering ethanol economy in the state. The Minneapolis-based company, which also owns two plants in South Dakota, defaulted on a $10 million loan last month and announced a shake-up in management ranks.
John Fecht, grain director for the Nebraska Public Service Commission, said one cause for worry is that state law does not require ethanol plants to carry the bond protection that grain elevators must carry to cover possible insolvency.
If grain producers know an ethanol plant is on shaky ground, Fecht said, “I would request that they pay for each load.”
He phrased what he sees as the proper precaution: “I deliver, you pay me. I deliver another load. You pay me again.”
The state’s largest farm organization is concerned enough about ethanol instability brought on by a combination of high corn prices, high energy costs for plant operation, and other factors to weigh in with its advice.
Keith Olsen, Grant farmer and president of the Nebraska Farm Bureau Federation, said a wire transfer of money is one way to get paid quickly and reliably. Olsen also warned that bankruptcy does not automatically relieve farmers of the obligation to honor contracts.
Even farmers’ most determined efforts to learn their payment status may not achieve certainty, he said.
“That’s when they need to talk to a lawyer and find out what their options are, because I think it really boils down to a legal question.”
Recent events don’t mean the entire ethanol industry is moving into meltdown mode, according to Olsen. “I feel pretty confident that there are buyers out there willing to take over ethanol plants that do get in trouble. I don’t think this is, in any way, saying that ethanol is bad.”
If farmers did pull back on corn deliveries to struggling ethanol plants, legally or not, might that assure the plants’ demise?
Olsen called that a good question.
Steve Mossman, a Lincoln attorney with a substantial agricultural practice, said breaching a contract is usually not a good idea.
“If you don’t honor a contract, you’re going to get sued,” Mossman said. “And the measure of the damage is the difference between what it costs the facility, the ethanol plant or anything else, and what you sold it for.”
On the other hand, if a grain buyer stops paying its bills, farmers typically find themselves at a disadvantage in collecting as a result of court intervention.
“Typically, just a contract obligation would be non-secured, low-priority debt,” the Lincoln attorney said, “and those would certainly be last in line.”
Jeff Kistner of Elkhorn, a former banker and now a financial adviser to ethanol plants, said there could be more bankruptcies ahead. In some cases, the deciding factor might be which plants chose what he described as “the traditional lending model” that predominated up to 2006.
After that, the common financing strategy evolved toward “the New York or Wall Street type lending projects” and more outside debt.
On a brighter note, Kistner pointed that a federal ethanol mandate is still dictating more development of grain-based fuels. Much of the marketing challenge is in getting ethanol distributed throughout the country under circumstances in which there are no ethanol pipelines.
“I don’t believe we’re over-saturated, over-supplied,” he said. “You just have a lack of infrastructure getting into certain markets.”
In a prepared statement, Robert Dinneen, president of the national Renewable Fuels Association, said a move to increase ethanol blends from 10 percent to 15 percent would help restore stability.
Ethanol will weather the storm, Dinneen said, “and re-emerge as the critical component of a more stable energy, economic and environmental future it has always been.”
Reach Art Hovey at 523-4949 or at ahovey@journalstar.com
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Corn ethanol as fuel is a zero sum game and the science has been there from the start. Take away the subsidies and ethanol as fuel will disappear overnight.
Contrast that to the ethanol as beverage industry which has turned a profit and paid in huge tax revenues to this country for over 200 years.
Put that stuff in a freshly charred oak barrel and call me in 8 years. "