Large Ethanol Producer VeraSun Seeks Bankruptcy Protection

By Chris Haak

11.02.2008

VeraSun Energy Corp., one of the largest corn-based ethanol producers in the US, has announced that it is seeking Chapter 11 bankruptcy protection.  The company expects to be able to meet its payroll obligations to employees and to continue purchasing raw materials, etc. from suppliers and otherwise continue operations, and is framing its bankruptcy as “a series of events that led to a contraction in VeraSun’s liquidity, impairing its ability to operate its business and invest in production facilities.”

So what exactly was the series of events that occurred?  Several things, including the dryup of credit markets, a glut of ethanol production that pushed prices down while the price of raw materials (specifically corn) stayed high, and finally, the company thought it was being prudent by locking in corn prices between $6.75 and $7.00 per bushel as corn prices rose this past summer, only to see the price of corn futures subsequently drop to about $4.00 per bushel in recent weeks as commodity prices have come back to earth.

There are many smart people on both sides of the corn-based ethanol debate and whether it’s a worthwhile endeavor in the first place.  Supporters will point out that it reduces petroleum consumption and is generally made from pure domestic materials (corn, farmland, and water).  Opponents will point out that it’s also diverting food away from the food chain, using valuable water resources, and driving up the price of commodities, and therefore food prices in grocery stores.  Also, unless E85 is priced about 25% below gasoline, its lower energy density and resultant higher fuel consumption makes it economically unfeasible.

The “holy grail” of ethanol production would be to switch from corn-based ethanol to so-called cellulosic ethanol, which is created from non-edible plant material such as wood chips or grass (specifically switchgrass, which grows rapidly and is hardy even in poor soil conditions).  However, the economics of alternative fuels such as ethanol – as well as other alternative energy sources, including difficult-to-process crude oil such as in Alberta’s tar sands, become less attractive or even feasible as crude oil prices plummet amidst fears of a global recession.  The tar sands as an energy source is only economically viable with oil well above $70 per barrel because of high extraction costs; when oil is $65 per barrel, it’s literally impossible (at least with current technology) to make money getting oil from the sands.

And that’s therein lies the problem with falling oil prices.  Sure, I’d much rather pay $2.50 per gallon than $4.15 – who wouldn’t?  But the million dollar question is how good US consumers’ memories are when it comes to $4 per gallon fuel prices.  If they remember how expensive it was to fill their full-size pickups in July 2008, and think that oil’s current drop to less than half of what it was earlier this year is not going to be permanent, then we may still reduce our oil consumption because US consumers will buy smaller, more efficient vehicles when possible.  But for all that Ford has said about a permanent shift in the US market, the fact that they are confident enough in the full-size pickup market (and their new 2009 F-150’s prospects, specifically) to add 1,000 jobs at a plant that will build the trucks tells me that they are hoping that US truck buyers have short memories.

Sustained high oil prices would have spurred a lot of innovation in the alternative propulsion arena and ironically made our country less vulnerable to swings in the price of oil as oil moved from our dominant source of transportation energy to just one source among many.  But with the economics of oil becoming more favorable as gasoline prices continue to drop, and in contrast the economics of nearly all alternatives becoming less favorable as gasoline and oil prices fall, we’ll probably see that VeraSun is just the canary in the mineshaft, so to speak, as the first of many alternative energy concerns to run into serious problems.

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