Verasun outlook not so sunny as ethanol plant plants shelved

Giant US ethanol producer Verasun Energy has had to shelve work on an almost-complete biorefinery this week after filing for Chapter 11 bankruptcy last Friday.

The company, which went into protection after high corn prices and credit scarcity choked off its cashflow, made the decision after funding for the plant fell through.

The fate of its 110 million gallon per year ethanol biorefinery in Janesville, Minnesota, is now unclear after the lender failed to finance further construction. Verasun is trying to find additional funding to complete the plant, which was scheduled to begin operating before the end of this year.

The company, which had entered into a $125m (£78m) revolving credit facility with UBS Investment Bank in July, informed the market of its problems as early as September 16 in an 8K filing with the SEC.

It disclosed that it had abandoned its short financial positions, traditionally used to hedge physical purchases of corn, after corn prices rose dramatically from May to July. It followed market predictions that corn prices would continue to rise, entering into a range of "accumulator" contracts that forced it to buy corn at high prices as the market declined.

Susan Preston, general partner at the CalCEF Clean Energy Angel fund, said that Verasun's predicament was not surprising, adding that she has been sceptical of biofuel production that involved foodstocks for some time, instead preferring biofuels based on non-foodstock sources, such as grasses and algae, and cellulosic production.

"You don't have the volatility of futures markets, where there's an independent value for the crop outside the utilisation for biofuel," she said of non-feedstock biofuels, adding that the processes for developing them were looking increasingly viable. "We're starting to go through growth process of one generation [of biofuel production] being replaced by another. It's a natural process in any type of market."

Verasun first traded on the NYSE in June 2006. Its share price halved between October 30, the day before the bankruptcy filing, and the close of trading on November 3. Company representatives refused to comment further on the Chapter 11 filing yesterday.