VeraSun Bankruptcy Update – Farmers Punch Back

November 21, 2008 | Roger McEowen

VeraSun filed a motion to establish a procedure to assume or reject executory contracts on November 14, 2008.  The deadline for corn suppliers to object to VeraSun’s motion is November 21, 2008.  Accordingly, a group of approximately 100 farmers did file a motion on November 21 objecting to VeraSun’s motion and requesting the court to establish a time certain for VeraSun to move to either accept or reject executory corn contracts.  A hearing on the matter has been set for December 2 in the United States Bankruptcy Court for the District of Delaware.   

The following is a breakdown of the common questions associated with these most recent developments:

Question: Who is affected by VeraSun’s Motion?

Answer: All farmers and elevators that have entered into corn sale contracts with any VeraSun ethanol plant for delivery of corn in the future.  The Motion also affects the farmers and elevators having contracts to deliver corn to the Janesville and Welcome, MN plants during October, November and December, 2008.  In addition, other contracts for fuel purchases and ethanol sales are also subject to the provisions of the VeraSun Motion.

Question: How are farmers and elevators affected?
Answer: The Motion provides  that VeraSun will evaluate the contracts and determine which contracts are most beneficial to VeraSun to assume and which are most beneficial for them to reject, with any assumption or rejection occurring at the time most convenient for VeraSun (within 120 of the filing of the bankruptcy petition).  Notice of the assumption or rejection will be given to the other party to the contract as well as others listed in the Motion.  What is known for sure is that VeraSun is rejecting corn delivery contracts for corn to be delivered to VeraSun Plants in Janesville, MN and Welcome, MN for October, November and December, 2008.  That rejection is effective effective the date the Motion was filed - November 14, 2008.  Later delivery contracts for Janesville, MN and Welcome, MN will be subject to the same procedures set forth for other farmers and elevators.
Question: Will the VeraSun Motion negatively affect farmers and elevators?
Answer: Since VeraSun has until the date of confirmation of its plan of reorganization to assume or reject contracts, farmers and elevators could be held hostage by VeraSun under these contracts for an extended period of time.  VeraSun will have up to 120 days from October 31, 2008, as its exclusive period to file its plan of reorganization.  The plan confirmation hearing would probably be held about 60 days later, assuming VeraSun utilized the full 120 days to file its reorganization plan.  That would set the confirmation hearing for approximately sometime in late April of 2009.  What’s the potential impact of this time delay?  Consider the following as an example:  If the price of corn increases to the point that the contracts are favorable for VeraSun, they will assume them and the farmer or elevator will only receive the benefit of the contract with VeraSun.  In other words, VeraSun will reap the profit if the price of corn goes up.  Conversely, if the price of corn does not increase to the point that it is in VeraSun’s interest to assume a contract, they will reject the contract.  Unless a farmer or elevator can protect themself on the board of trade, they must keep the corn available to fulfill the contract until it is rejected.  Contract grain suppliers do not have the power to force assumption or rejection of the contracts.
Question: What can farmers and elevators do to protect themselves from this Motion?
Answer: Farmers and elevators can file an objection to the Motion by the bar date, November 21, 2008, and request that the bankruptcy court in Delaware set a date certain by which VeraSun must either accept or reject the contracts so they can properly market their grain and minimize their market exposure.  That’s what has now occurred.
Question: What would have happened if no objection to the VeraSun Motion had been filed?
Answer: The bankruptcy court’s approval of VeraSun’s Motion would arguably bind farmers and elevators to the procedure without any date certain by which the farmers and elevators would know that they would either be free to market their grain or would be bound by the contracts.