Verasun's Screw Up

According to this report from Forbes it appears that VeraSun Energy (VSE) managed to lock in a significant amount of corn contracts at near the peak of the recent corn run up. In the mean time, ethanol prices have fallen in lock step with falling corn prices.

So VeraSun got upside down between their feedstock costs and the prices it could get for the end product. Analysts are now forecasting a 44¢ per share loss for the 3rd quarter.

I have considered the VSE management to be pretty sharp in controlling its costs to maintain profitability in difficult conditions. The ethanol crush spread has stayed positive throughout the recent commodity gyrations as long as the feed stock and ethanol were purchased and sold in the same time frame.

It appears company management screwed this one up royally. Now they are trying to sell 20 million shares into the market to raise some capital. It may take the company some time to recover from this one. My mistake for owning a small position in VSE.

Note: I have a long position in VSE.

Comments

[john s. gordon:]

corn futures speculators score again.
> jack

2008 Sep 18 08:16 AM

[Bill6:]

Siemwhere a while back I read in SeekingAlpha that VeraSun did not hedge. That's why I bought the stock. Thanks guys!

2008 Sep 18 08:32 AM

[IsThisRight:]

Tim, VSE management was rated "to be sharp in a difficult operating environment" because they had overbought corn and decided to sell the surplus at a high price. The very next quarter, they stand to loose 3-5X what they had earned before. Does it not feel like betting at a casino?

Like you, I had judged their 'operating' skills in merging two companies, building bulk supply to be able to optimize distribution thru unit trains, and becoming efficient with low volume production (355 million gallons per quarter).

Hopefully, they will step away from the casino table, rather than raising the ante by more bets- by their own filings, 4Q will also be similar impacted.

It will take sometime to work thru this as they have just added $.70/gallon to the cost of their plants( $100M lost over 1.4B gallon production). At 10% interest, this is a 7c cost to every gallon of ethanol that they sell until they can repay this debt.

I think that they have just made themselves a take-over candidate. May be someone will value their plants at $2.50 per gallon? ADM, or an oil company like BP to the rescue?

2008 Sep 18 09:36 AM

[rhj123:]

I bought VSE last year, and did place a stop-loss on it. It fell in only a few days and has never returned. My stop-loss saved me. Ethanol is not a winning product, too many negatives. If the government stepped out, it would vanish....

2008 Sep 18 11:55 AM

[Alok Swain:]

The comments below are wrt "Is This Right"
I'm not sure if the statement is accurate "$.70/gallon to the cost of their plants( $100M lost over 1.4B gallon production). At 10% interest, this is a 7c cost to every gallon of ethanol that they sell until they can repay this debt."
I think $100M/1400Mgallon works to a $0.07 cent loss not $0.70 cent loss per gallon.
But you overall idea is sound.

2008 Sep 24 06:09 PM

[Alok Swain:]

I'm long VSE too (Disclosure)

2008 Sep 24 06:10 PM

[wild boy:]

who is the risk manager genious at the head office.....heard it was an ex cargill stiff......error or design?

2008 Oct 30 12:45 PM

[wild boy:]

who was watching risk management for these supposed strong management team....

2008 Oct 30 12:46 PM

[wild boy:]

who was watching risk management ...

2008 Oct 30 12:46 PM