Financial Turmoil Snares Ethanol Processors
Two big players could face liquidity concerns amid Wall Street chaos
Bryce Knorr
Published: Sep 17, 2008
Two of the biggest companies in the once high-flying ethanol industry are facing tough financial pressure that caused shares of their stock to plummet this week, as the stock market meltdown continues on Wall Street.
Hedging losses and poor margins are apparently deepening the credit troubles faced by many companies in the U.S. as money dries up because lenders are stepping back from loans to even the best firms.
Stock in VeraSun Energy Corp. fell to all-time lows today, after the firm revealed it expected to lose between $63 million and $103 million in the third quarter. It specifically cited losses from hedging and a corn procurement strategy that mean it will wind up paying between $6.75 and $7 a bushel for corn — far above current market prices. Shareholders also abandoned the stock on news announced Tuesday it was starting a new stock offering for 20 million shares, which would raise an amount roughly equal to the loss.
VeraSun said in July, when futures approached $8 a bushel, it unwound short position used to hedge corn it purchased to cut its margin exposure, effectively pricing the grain in the cash market. Believing prices would rise further, the firm then used "accumulator•bCrLf contracts that required it to buy more corn at above market prices as futures dropped.
Aventine Renewable Energy Holdings also saw its stock punished after reporting it could face liquidity troubles. The firm said it believed existing credit would be enough to complete expansions at its Aurora, Neb., and Mt. Vernon, Ind., plants, "we do not have a meaningful amount of excess liquidity to withstand unanticipated liquidity needs.•bCrLf
As a result, Aventine said it was studying actions, including reducing inventory levels, seeking additional debt and equity financing, and potentially delaying construction or start-up of our the two expansions.
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Tagged: Bushel, ethanol
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