Source: University of Illinois Extension

Whether it is a sign of the recessionary times or the volatility in the corn market, VeraSun ethanol plants have bitten thousands of Cornbelt farmers with management decisions following a declaration of bankruptcy. VeraSun was a major corn market for the Midwest, but has now become a major indicator that the glass can be half empty as well as half full.

VeraSun is one of the largest ethanol producers in the nation, with 17 plants in 8 Cornbelt states buying millions of bushels of corn. When the oil, ethanol, and corn market went up, all cylinders were firing. But when the oil and ethanol markets came back down, but corn purchase contracts remained at premium levels, the engine began misfiring and VeraSun locked up with a bankruptcy filing at the end of October. And agricultural law specialist Roger McEowen at Iowa State University expects every farmer dealing with VeraSun to have questions about what comes next. In the December Ag Decision Maker newsletter McEowen says October 11 is an important date in relation to delivery of corn to a VeraSun facility.

If corn was delivered before Oct. 11, the farmer is an unsecured creditor and any payment may be months away. Farmers who delivered corn between Oct. 11 and Oct. 31 will be considered a priority creditor and will get paid. But there is a major catch which is making many farmers unhappy, and even drew the ire of the National Corn Growers Association. By cashing a check, the farmer agrees to accept current market prices for corn, and not the price that was established by the original agreement, which was at a much higher price. Further, the farmer is expected to continue delivering corn to VeraSun at the prevailing market prices.

McEowen urges farmers and elevators which receive a VeraSun check with the endorsement provision to take the check to their attorney for consultation before cashing it. That will allow farmers to obtain legal advice about doing business with a company in the throes of bankruptcy, and the farmer's obligations to deliver grain in the future.

The ag law specialist says the federal bankruptcy code lets VeraSun decide whether to honor grain sale contracts during the time the bankruptcy proceeding is underway. He says that will let VeraSun decide what price to pay, as corn market prices fluctuate. And he adds that farmers and elevators are obligated to deliver corn, but VeraSun is not obligated to buy. McEowen says if a farmer sells the corn elsewhere, and VeraSun demands delivery, then the grain will have to be delivered regardless of the cost of the transaction to retrieve the corn.

One benefit on the side of the farmers and elevators is the ability to establish a time frame for honoring the contracts and the delivery of the corn. If VeraSun rejects the contract, then the farmer or elevator can sell the corn wherever and whenever. However, that rejection also gives the producer the opportunity to file a claim against VeraSun for damages. For example, if the contract with VeraSun was for $6 corn, and the contract was rejected by VeraSun, causing the corn to be sold for $3, then the farmer has a $3 claim against VeraSun, and will get in line with other creditors to divvy up what is left.