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What went wrong at VeraSun?

As one of the nation's largest ethanol makers struggles to survive by seeking to reorganize under Chapter 11 bankruptcy, farmers are wondering what went wrong at VeraSun Energy Corporation.

Neither the company's CEO, Don Endres, nor other company officers were available for comment Monday, but one farmer and ethanol competitor sees some factors that may have been unique to VeraSun, while other forces that hurt the company also threaten the entire industry.

"They grew really, really fast, especially in the last two years," Belmond, Iowa farmer Dave Nelson, who is also board chairman of Midwest Grain processors, told Agriculture Online. "Two-thirds of their plants came on line in the last two years."

According to papers filed in bankruptcy court by VeraSun Chief Financial Officer Danny Herron, the company spent more than $1 billion to buy two ethanol companies since 2007. In August of that year it bought ASA Opco Holdings LLC, with ethanol plants in Linden, Indiana, Albion, Nebraska and Bloomingburg, Ohio, for $405.6 million. In April of this year, it completed its aquisition of US BioEnergy Corporation for $756.9 million. US BioEnergy has plants in Iowa, Nebraska, North Dakota, South Dakota, Michigan and Minnesota.

Along with that expansion, VeraSun acquired additional debt -- some $233 million from ASA Opco Holdings and $525 million from U.S. BioEnergy, according to bankruptcy documents.

That's just the first problem, Nelson said. VeraSun had two others that most of the industry has faced, Nelson believes.

The second problem, was hedging losses associated with high corn futures prices last summer.

VeraSun, a publicly-owned company whose stock ceased trading on the New York Stock Exchange Monday, reported those losses to the Securities and Exchange Commission in September. VeraSun estimated third-quarter losses at between $63 million and $103 million. That occurred after lifting futures hedges in July when corn prices were approaching $8 a bushel. The company also contracted to buy corn from farmers at prices that are now well above market levels.

"We all got in trouble with hedging. When the corn market dropped two and a half bucks in three weeks, limit down, you're going to be in trouble," Nelson said.

The third problem, endemic to the industry, is overexpansion and associated lower prices for ethanol.

The industry is already somewhere between 12 billion and 13 billion gallons of capacity, which is well over the federal mandate of 9 billion gallons the oil industry is required to use this year under the Renewable Fuels Standard.

"We knew it was coming," Nelson said. "I kind of raised a red flag a year ago. We're just building too fast. We have two billion gallons of excess capacity."

With all that extra ethanol sloshing through the system, there's little incentive to pay a lot for it. And the oil companies haven't been.

"Ethanol should never have been a dollar under unleaded gasoline. We were under for most of this last year by 80 cents to a dollar," Nelson said. That's a factor in ExxonMobil's record profits this year, Nelson contends.

Even though corn prices have fallen, lower ethanol prices mean that most ethanol plants are operating with zero or negative margins, Nelson said.

He expects that more plants may file for bankruptcy. Many are already not operating at full capacity.

"The only thing you can do is tighten your belt and manage the business. A year to 18 months from now we should be digging ourselves out of this," he said.

As one of the nation's largest ethanol makers struggles to survive by seeking to reorganize under Chapter 11 bankruptcy, farmers are wondering what went wrong at VeraSun Energy Corporation.

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