Recently, E3 Biofuels-Mead LLC filed for bankruptcy protection. The ethanol producer is an eight-month-old, Kansas-based energy firm that patented a closed-loop system for making ethanol without using fossil fuels.

E3's bankruptcy illustrates some industry problems, says Michael Swanson, agricultural economist for Wells Fargo Bank, Minneapolis, MN. “The more complicated you make an investment, the more likely it might be to disappoint you,” he says. “Typical plants are built where corn is cheap; they follow an established model. E3's plant needed more capital relative to other ethanol plants. The more parts to the puzzle, the more likely you'll get it wrong.”

The company, which operates in Mead, NE, and uses cow manure converted to biogas, said it had between $1 million and $100 million in assets and debts when it requested Chapter 11 reorganization.

INCLUDED IN THOSE debts is money owed to farmers who sold grain to the company. When the company filed for Chapter 11, bankruptcy code prohibited any further payments for goods and services provided to the plant, say company officials. That means no immediate payments for farmers.

However, they will get paid, eventually, E3 says. “Anyone who sold grain to the company will receive information about how to file a claim with the court within a few months,” says R.J. Wilson, E3 spokesperson. “We deeply regret any hardship or inconvenience this may have caused our vendors and suppliers that supported us in good faith.”

Bill Whipple, head of Food and Agribusiness for Wells Fargo Securities, LLC, says farmers need to be more cautious with their sales. “Selling to E3 is no different than dropping grain off at a local elevator without knowing what their insurance is like,” he says. “In the grain business, there is never enough insurance to go around. It's a sad day for those farmers.”

However, farmers do need to come to grips with their dependency on the economy, says Swanson. “They need $4 corn to pay rents. They better have a plan B in place with some type of hedge if they're going to make it.”

By filing for Chapter 11, E3 will have the opportunity to reorganize business operations and finances. The filing will also allow the company time to seek additional capital financing necessary to repair the ethanol plant, which was materially damaged during startup.

OFFICIALS AT E3 say that “decreased production levels due to mechanical/equipment failures coupled with the high cost of corn and low price of ethanol made for difficult economics at the plant and have taken a toll on our business.”

According to Whipple, the ethanol industry needs to be slowed. “The industry is a worthwhile sector of the agriculture economy, but you can't just go out and build a new plant with our current supply-demand model,” he says.

There have been many plants that have shelved expansion. There have been others that put new construction on the back burner. And now, there's bankruptcy.

A lot of plants that come on stream in 2008 will suffer great financial stress, says Whipple. “Ethanol has clearly over expanded based on current demand functions. A lot of what ethanol is experiencing is normal supply-demand relations of a new sector,” he says. “It doesn't mean it's not worthwhile or not growing; the capacity is just overdone.

“We love the industry and we love ethanol,” Whipple says. “The marketplace just had too much capacity and this is its way of dealing with it. We need to be more thoughtful about building additional (ethanol) capacity.”