One of the ethanol industry’s largest producers – VeraSun – has fallen victim to bankruptcy partly due to bad hedging bets – a method of locking in prices for commodities. Corn is the most commonly used raw material used to make the ethanol and was the object of VeraSun’s poor hedges.
The company locked in corn costs as the price reached almost $8 a bushel after floods threatened crops in the Midwest. By late October, though, corn had tumbled to $3.64 a bushel, a 21-month low, on concerns that economic weakness could hurt demand for food and livestock feed. The problem with a hedge is that you can’t change your mind once you find out you miscalculated supply and demand. You’re stuck with the price.
VeraSun joins Greater Ohio Ethanol, a closely held refiner, and Gateway Ethanol in bankruptcy. Other troubled ethanol makers include Biofuel Energy Corp., which said it had $46 million in combined corn, ethanol and natural gas hedge and mark-to-market losses and might restructure.
The head-long rush to ethanol production was an unsound business move. However, with 21 states capable of entering the boon, and 42 senators’ careers hanging in the balance, ethanol jumped to the forefront of alternative energy solutions – even if it was an unwise solution.
VeraSun has two locations in Indiana – one in Linden and one in Reynolds. The Linden facility is one of the largest in the United States; however, construction on the Reynolds facility was halted due to market conditions. The Reynolds facility is still not complete. VeraSun has also indefinitely delayed the startup of its Janesville, Minnesota, plant.
Corn is king for fattening cattle, thus one downside to the production of ethanol is its propensity to draw corn from its typical use as feed. For every acre of land pulled into production for ethanol fuels, an acre is removed from production for feeding out cattle.
The continued push to produce ethanol will only fuel the competition between those who want corn to feed out meat stock and those who want corn to produce ethanol. And, the ever increasing pressure to produce more ethanol coupled with the uncertainty of grain futures, will certainly push more ethanol plants to follow the path of VeraSun.