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What happens now with VeraSun corn contracts?

Agriculture.com Staff 12/10/2008 @ 9:52am

Now, some farmers holding contracts in question may be wondering what their options are moving forward. Iowa State University ag law specialist Roger McEowen says the potential contract rejections could have a couple effects on farmers supplying corn to the troubled ethanol giant.

"Assume that a VeraSun corn supplier has a contract for February delivery to a VeraSun plant at $6.00 per bushel and chooses to sell the corn at the current price offered by the elevator of $3.00 per bushel," McEowen says. "If the prices stay low, VeraSun will most probably reject the contract and the corn supplier will not suffer any ill consequences."

But, if the price of corn "flips" and the February contract, for example, goes to $7.00 per bushel, "VeraSun would have the option to assume the contract and if the corn supplier did not have corn to fill the contract, the corn supplier would have to pay VeraSun the difference of $1.00 per bushel -- the difference between the market price and the contract price," McEowen says. "The VeraSun corn supplier would effectively receive only $2.00 per bushel instead of $3.00 per bushel he thought he would receive."

Whether VeraSun honors corn contracts depends largely on what the company's legal counsel determines to be workable. Company officials say, according to McEowen, that determination was to be made earlier this week.

"VeraSun's counsel is working with counsel for the VeraSun corn suppliers to establish a workable form for corn suppliers to use to submit copies of their contracts to VeraSun's counsel in Chicago to request a prompt determination by VeraSun as to whether it will assume the contract, reject the contract, offer new terms or indicate that it is undecided," McEowen says. "If the contracts are rejected, then a notice of rejection will be filed with the bankruptcy court and if no objections to the notice of rejection are filed, the contracts will be rejected effective 10 business days after the notice of rejection is filed with the bankruptcy court in Delaware."

Even if corn prices flip and farmers find themselves holding contracts for which they'll owe VeraSun, under the current circumstances, the farmer can protect himself with a corn call using March or May options, Cargill senior grain merchandiser Ray Jenkins tells Agriculture Online. Especially at today's prices, such an option would provide protection at a small price.

"They are trading for a whopping one cent right now," Jenkins says of the March or May options for $6.00 to $7.00 corn calls.

But, if you're a corn supplier to a VeraSun ethanol facility and your contract is rejected, you'll need to file a "proof of claim" with the bankruptcy court, McEowen says.

"It will be paid on a pro rata basis with all other unsecured claims, provided that all claims with higher priority are first paid in full," he adds.

Last week, the U.S. Bankruptcy Court allowed VeraSun the capital to keep some ethanol facilities in operation, as well as gave permission to reject some corn contracts (READ MORE).

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