Humans have known for thousands of years that a good or bad crop can mean bounty or death by starvation. One of the many downsides to relying on crops for a feedstock for anything is the volatility that goes with the price. In old days, people hedged against a bad crop by finding ways to preserve food for the lean times. Today when it looks like prices are heading up, big companies lock in prices at what they think will be a low level. Unfortunately, that can come back to bite you when prices go down and you're stuck paying a higher than market price for raw materials.
Such is the case for ethanol producer VeraSun which declared bankruptcy on Friday due to falling corn and ethanol prices. When it looked like a bad crop was likely to send corn prices through the roof, VeraSun committed to paying $8 per bushel for corn. Recently, corn has been selling at less than half that price and ethanol prices have plummeted at the same time. That left VeraSun holding contracts on some very expensive corn and not being able to sell the product at a high enough price to be profitable. The second-largest ethanol producer apparently lost up to $103 million on its price hedging and already has debts of over $1 billion.

[Source: Bloomberg]

Share This Photo X