VeraSun Bankruptcy Opens Some Opportunities for Corn Suppliers of the Former US Bio Plants

December 15, 2008 | Roger McEowen

 

On December 11, 2008, VeraSun sent letters to its corn suppliers at seven of its eight US Bio Plants offering options regarding their contracts for delivery of corn through January 31, 2009.  The affected plants are those in Albert City, IA, Dyersville, IA, Woodbury, MI, Janesville, MN, Welcome, MN, Ord, NE, Central City, NE and Hankinson, ND.  The plants in Janesville, MN and Welcome, MN are idle and not accepting corn.

In the letters, VeraSun outlines three options for producers:

  1. Corn suppliers can voluntary terminate contracts for delivery of corn through January 31, 2009.
  2. Corn suppliers can extend contracts through December of 2009.  Suppliers choosing this option are allowing VeraSun to decide whether it will be able to accept the corn deliveries.
  3. Contract Rejection.

So, how should a corn supplier view their options?  Let’s try to sort it out.
 

What should a corn supplier consider in evaluating each option?

One benefit of Option 1 is that the contract is terminated.  That means that a corn supplier choosing this option is free to sell the corn to a buyer different than VeraSun whenever the supplier chooses.  In essence, the supplier is totally released from the contract.  This is a very big plus.  But, the selection of Option 1 means that the supplier waives any claims it might have against VeraSun for the termination of the contract.  That is important if VeraSun is able to reorganize and pay a dividend to unsecured creditors or sell its plants and realize enough funds to allow it to pay a dividend to unsecured creditors.  It is impossible to tell at this time whether suppliers choosing this option are forfeiting any recovery they could receive through the VeraSun bankruptcy.

Suppliers that choose Option 2 (extension of contracts through December of 2009) are hoping that VeraSun will be able to honor the contract - that VeraSun may be able to perform at some time in the future.  Don’t bet the farm on this option.  VeraSun will only honor those contracts that it determines to be in its own best interest – i.e., when the market price for corn rises to a level that is equal to or greater than the contract price.  But, if this occurs, the corn supplier could receive the increased price by exercising Option 1 and holding the grain or, having the contract rejected under Option 3 (discussed next).  Thus, Option 2 doesn’t seem to make much sense for corn suppliers.  The big disadvantage of Option 2 is that the supplier is still under contract to supply the grain without any reciprocal obligation on the VeraSun’s part to honor the contract.   Likewise, the supplier’s contracts with VeraSun remain pre-petition contracts.  That means that if VeraSun later chooses to reject the contract, the supplier is left with no more than an unsecured claim against VeraSun.  That’s another big disadvantage of Option 2.  Frankly, it’s hard to see any benefit of Option 2 to suppliers.

As for Option 3, one advantage is that if the contract is rejected, the supplier is allowed to market the corn as soon as the rejection is final – that’s ten business days after the Notice of Rejection is sent to the corn supplier.  Another advantage of Option 3 is that the corn supplier maintains the right to share in the dividend to unsecured creditors, if any, in the VeraSun bankruptcy.  While, the rejection is not effective as soon as the voluntary termination (which is immediate), but ten business days is not too long to wait to potentially preserve a claim against VeraSun’s assets.  The 10-day period will only be significant if the corn market moves significantly higher between the date the Notice of Rejection is served and the date it would be effective.  In this situation, corn prices would have to move high enough to eclipse the contract price – in that event VeraSun could withdraw the rejection, or it could be objected to by another creditor of VeraSun.  

What will occur with respect to contracts extending beyond January 31, 2009, with the US Bio plants?

Contracts for delivery to US Bio plants after January 31, 2009, are still up in the air.  VeraSun has been working with the VeraSun corn suppliers to establish a procedure under which the corn suppliers with delivery contracts to US Bio plants after January 31, 2009, and all other corn suppliers with delivery contracts to other VeraSun plants can submit those contracts to VeraSun requesting VeraSuns response as to whether it will “assume,” “reject” or offer one of the other options currently being offered to the corn suppliers at the US Bio plants discussed above.

Does VeraSun plan to meet with its corn suppliers?

VeraSun has indicated that it intends to set up town hall meetings to discuss the corn supply contracts in the near future.  Unfortunately, no dates or locations for these meetings have been provided at this time.