Verasun Energy: Thin Margin Co's Are One Bad Economic Turn Away from Disaster

As I hypothesized on Thursday, VeraSun Energy (VSE) has filed for Chapter 11 bankruptcy. The cause can be condensed to two sentences from the press release:

The Company suffered significant losses in the third quarter of 2008 from a dramatic spike in its corn costs, reflecting in part costs attributable to its corn procurement and hedging arrangements, and historically unfavorable margins. Beginning in the third quarter, worsening capital market conditions and a tightening of trade credit resulted in severe constraints on the Company’s liquidity position.

The main culprit was its badly managed corn hedging followed by the inability to raise capital to bail itself out.

The current financial climate makes one forget how completely different the world was 6 short months ago. Commodity prices were zooming up. Oil was on its way to $150 with most predicting $200 by now. If the predictions of the spring and early summer had been accurate, VeraSun would have been generating huge profits in the 3rd quarter rather than being pushed into bankruptcy. The lesson here is that thin margin businesses are one bad economic turn away from disaster.

Chapter 11 means the company will stay in business and restructure its debt to get back on its feet financially. Common share holders will probably get squat. My site’s Opportunities Portfolio started October 2008 with a 2% position in VSE which is now effectively zip.

Longer term this should help VeraSun as a company to structure itself for success in a tight margin environment. I will be watching to see where the company goes from here.

Disclosure: Long VSE

Comments

[john s. gordon:]

shows you how unregulated speculation in commodities using 30/1 leverage can destroy a perfectly good company.

speculators tried to destroy the airline companies too.
> jack

2008 Nov 02 08:44 AM

[Bill6:]

Don Endres should be fired. The timing of this filing is suspicious. (Why one day before the Presidential election?)

2008 Nov 02 10:48 AM

[danno:]

Let's hope Verasun and it's grain-based fuel breatheren die a quick and painful death. What a scam way to filch the taxpayer, damage the environment, hurt the poor, and farmers that need grains as feed (poultry) and not address our energy needs all at the same time. Give me the stake, I'll drive it through the hearts of these vampires with gusto!

2008 Nov 02 02:39 PM

[Tim Plaehn:]

Danno, farmers have done very well with ethanol and many if not most of the ethanol plants in the midwest are owned by farmer co-ops. Obviously you have never been to a farm. Try it sometime and talk to a farmer.

2008 Nov 02 06:16 PM

[VintonCounty:]

To Tim Plaehn: I think Danno is irritated by the tyranny inherent in the ethanol program. The Constitution forbids Congress from requiring me to use a particular gasoline recipe, but that doesn't stop the criminals in Congress. Verasun and its owners were benefiting from crime. Verasun's bankruptcy shows there is occasional justice.

2008 Nov 02 09:43 PM

[Farmer Tom:]

Not to be unkind but to blame this fiasco on a commodity market collapse is far too generous. If one wishes to speculate on price direction of a commodity they don't require 16 plants and two billion dollars worth of stainless and concrete. To lift hedges on corn without corresponding sales on ethanol was to roll the dice on the whole venture........it backfired but the truth is the dice should never have been rolled in the first place. There have been rumours in the industry for some time that this was a company narrowly focused on getting big and not one that properly addressed its commodity price risk. Their profits through the boom in 2006 were far from extraordinary. I guess the good news for farmers is that at least now that they are built it is likely that these plants will continue to operate.....just with a different name on the door.

2008 Nov 02 09:55 PM

[danno:]

Have been on a farm. Ethanol is corporate farm welfare, it's feeding the ADM/Cargill/Bunge/Mons... pigs trough. It's bad for energy, terrible for the environment, and a huge waste of taxpayer dollars. Yes I have been on a farm, i even studied agricultural economics. I'm irritated the grain-based ethanol and palm-oil fuels even are allowed to exist. Only for blatant protectionism, high-end farmers, the agro-industrial complex, and a means to destroy the environment. If we really want to get serious about energy, then we should flush this crap down the toilet. Or even import ethanol from Brazil (our ally) at 40% lower cost, save tax payers money. Then we can kill all the sugar and corn subsidies and spend the money on something useful. Talk about giving consumers a tax break, too and maybe we can even get the candy industry to move back to the US that we chased away with this silly protectionism.

2008 Nov 03 11:14 PM

[Farmer Bob:]

Danno, you seem quite bitter, and I am wondering why. Ethanol may not be the perfect alternative fuel, but it is certainly a step in the right direction. I am a Farmer, and Investor in 2 ethanol plants (not Vera-Sun) and I hope your attitude towards ethanol is limited to some narrow minded low population group. The oil companies have fought ethanol every step of the way and I wonder why? Ethanol can only help extend the reign of Big Oil a little longer. There is much more to the ethanol industry than you are seeing, do a little more research. Speculators who drive the market prices of commodities way outside of the normal supply and demand forces, do cause problems, big problems, and where do their profits end up?

Prior to the market collapse it was hard to get anyone to admit speculators were driving the market up, as soon as they all pulled out, it seemed like a common known fact.

Transparency in the market may help, who are these big speculators?

Do they feel any remorse when an ethanol plant closes in a small Midwestern town,and jobs are lost?

2008 Nov 04 12:58 AM

[wheels14:]

Dear Vinton county,

(The Constitution forbids Congress from requiring me to use a particular gasoline recipe,)

Remember when the government told the refineries to stop using Led in gasoline? The EPA tells every refiner how to make gasoline based on weather, humidity, and air polution levels.

2008 Nov 04 03:03 PM