VeraSun bankruptcy adds uncertainty to corn outlook

by Ron Sterk
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KANSAS CITY — The significant but not necessarily surprising Chapter 11 bankruptcy filing by one of the nation’s largest ethanol producers on Oct. 31 opens a new chapter of uncertainty for the corn market, as well as for farmers making decisions about buying fertilizer and seed this fall and for food processors finalizing 2009 budgets.

VeraSun Energy Corp., based in Sioux Falls, S.D., will continue to operate as it reorganizes and secures financing under the eye of the bankruptcy court. The company suffered large losses after it locked in future corn prices near record highs. After shooting to more than $7.50 a bu in late June, nearby corn prices plunged by 50% by late October and last week were around $4 a bu, still 45% below the June 27 high.

The nation’s three largest ethanol producers — POET L.L.C., also based in Sioux Falls, VeraSun and Archer Daniels Midland Co. — currently have annual ethanol production capacity of 3,957 million gallons, or 36% of total industry capacity of 10,893 million gallons, according to the Renewable Fuels Association (R.F.A.). VeraSun’s capacity of 1,420 million gallons of ethanol annually is about 13% of total industry capacity.

While there is no evidence to suggest VeraSun or any of the other major ethanol producers will cease operations, as has been the case for an increasing but still low percentage of smaller producers, any significant drop in demand for corn to make ethanol would be a shock to the market.

The U.S. Department of Agriculture projects 4,000 million bus of corn will be used by the ethanol industry in 2008-09, or 33% of total 2008 production estimated at 12,033 million bus. Use of corn to make ethanol is second only to domestic feed and residual use of corn, projected at 5,300 million bus, or 44% of production, and far outstrips the use for food and seed at 1,335 million bus, or 11% of the crop, and exports at 1,950 million bus, or 16%. Use of corn for ethanol is the only category expected to increase, significantly, in 2008-09. As of Oct. 28, the U.S.D.A. projected use of corn to make ethanol would increase 33% from 2007-08, while domestic feed use was projected to decline by 12% and corn exports to drop by 20%. Food and seed use of corn was projected to hold about even with that of 2007-08.

Price weakness in corn since the June highs has been attributed to larger-than-expected corn production, reduced feed and export demand, a significant drop in the amount of hedge fund money in the futures market and weakness in the economy in general. Some analysts see the current $4 area as the new "plateau" for corn prices. Whether prices stay above or below that target remains to be seen. But the decline has provided buying opportunities for food processors, with corn milling sources noting cereal manufacturers and other users of corn products recently have covered some or all of their 2009 needs.

While debate continues to rage over the impact the use of corn to make ethanol has had on food prices, it is clear ethanol has provided an expanding outlet for corn with corn use for ethanol growing at an average of 36% annually the past three years. In contrast, feed use and exports have declined while food use has held about even during the same period.

While the sharply lower corn prices are welcomed by food processors and ethanol producers, one result may be reduced corn production in 2009, which could again rally prices, if the ethanol industry continues to grow. Based on the number of plants still under construction or expanding, annual capacity could increase by 2,787 million gallons in coming months.

President-elect Barack Obama, during his campaign, expressed his support for alternative energy, including ethanol. House Agriculture Committee chairman Collin Peterson of Minnesota, said in an interview with Reuters that he supported raising the required 10% ethanol-to-gasoline blend to 15% nationwide, and indicated Mr. Obama would be supportive of the change.

And ADM said it was interested in distressed U.S. ethanol facilities and announced a $500 million joint venture in Brazil to make ethanol from sugar cane, indicating the company’s continued emphasis on renewable fuels.

It would appear the ethanol industry is not headed for an early demise, although further market consolidation may be forthcoming. That means the strong demand for corn for ethanol will continue, more than offsetting reduced demand from exporters and domestic livestock and poultry feeders. Supply, meanwhile, could be restricted if farmers opt to plant other crops next spring because of high production costs for corn.

Both factors indicate limited further downside price potential for corn, although a high degree of uncertainty and price volatility obviously persist.

This article can also be found in the digital edition of Food Business News, November 11, 2008, starting on Page 23. Click here to search that archive.

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