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Published November 21, 2008, 09:00 AM

Farmers caught up in ethanol shakeout

SIOUX FALLS, S.D. (AP) - America's corn farmers, who have become closely tied to the nation's biofuel production, are getting caught up in some of industry's recent fallout.

SIOUX FALLS, S.D. (AP) - America's corn farmers, who have become closely tied to the nation's biofuel production, are getting caught up in some of industry's recent fallout.

Those supplying VeraSun Energy Corp., the nation's second largest ethanol producer, are being told the company doesn't necessarily have to honor its corn contracts under Chapter 11 bankruptcy protection.

VeraSun has the flexibility to reject existing contracts, but farmers and elevator operators remain bound by the terms they agreed to, said Roger McEowen, director of the Iowa State University Center for Agricultural Law and Taxation.

"A lot of farmers may feel that it's not fair, but that's the way the bankruptcy rules are right now," McEowen said Thursday.

McEowen recommended that farmers and elevators consider a bankruptcy lawyer to collectively represent them. They have until Friday to ask a Delaware bankruptcy court to limit how much time VeraSun has to make decisions on contracts.

VeraSun filed for bankruptcy protection Oct. 31 after it bet wrong in the commodities markets. A number of other producers, who hedge commodities to protect themselves from price spikes, are running into the same trap.

VeraSun late Wednesday reported a third-quarter net loss of $476.1 million, or $3.03 per share, compared to a profit of $7.8 million, or 9 cents per share, during the same period last year. Yet revenue increased nearly fivefold to $1.08 billion.

Growers who supplied VeraSun with corn during the 20 days leading up to the bankruptcy filing can get prompt payment in full - but there's a catch.

By endorsing a newly issued check from VeraSun, producers would be agreeing to continue supplying the company not at contracted prices, but at "prevailing market prices in accordance with the most favorable terms and conditions" for the next 12 months, according to court documents.

The Farmers Cooperative in Marble Rock, Iowa, already sells corn to VeraSun at market rates rather than through fixed-price contracts, said the co-op's Bob Engels.

But Engels said you had to be a lawyer to understand what you were agreeing to when cashing the checks.

"They can't force you to do business," he said. "I don't care what the endorsement on a check says."

Engels said many farmers in the region have come to rely on VeraSun's business.

"They're trying to work through it, and we're trying to work with them," Engels said.

Growers that supply VeraSun's idled plants in Janesville, Minn., and Welcome, Minn., are in limbo. Anyone who delivered corn to the company before Oct. 11 and has not yet been paid is considered an unsecured creditor.

Verasun would not talk Thursday about how the corn contracts were being handled.

Chief Executive Don Endres said in VeraSun's earnings release Wednesday that the company is working to secure financing to maintain operations "during these unprecedented, difficult market conditions."

McEowen said VeraSun's plant in Woodbury, Mich., is no longer accepting corn and would shut down after it uses its supply. He said he has also learned that two of VeraSun's Iowa plants would soon shut their doors.

VeraSun confirmed in a letter to farmers and elevator operators earlier this week that it was closing, indefinitely, at least one plant in Dyersville, Iowa.

"It does not appear that it's going to get better anytime soon," he said.

Demand for gas and oil might be slipping, but discretionary blending with biofuels kicked off November at a new record, said trader and analyst Stephen Schork.

The U.S. Department of Energy raised its growth forecasts for biofuel use in the transportation sector for the third quarter of 2008 out through 2009.

VeraSun, founded in 2001, went public in June 2006 amid perfect market conditions. Corn was cheap, gas cost a bundle and refiners were clamoring for more ethanol to use as a cleaner-burning alternative to the additive MTBE.

But skyrocketing corn costs began cutting into profits, and many tried to use hedging to control costs.

After VeraSun locked into prices for its feedstock for the third quarter, corn went into a sharp decline from almost $8 per bushel to a low of less than $5 per bushel in mid-August.

When freezing credit markets left the odds of finding buyer for the company highly unlikely, VeraSun sought bankruptcy protection.