Canton: A mile down an unpaved road on the outskirts of Canton, Illinois, a shuttered ethanol plant stands.
Corn farmers in the area chipped in $5,000 (Dh18,300) to $300,000 (Dh1.1 million) each, some even mortgaged their farms, to form the Central Illinois Energy Cooperative.
They broke ground when they opened the refinery in 2006, hoping that ethanol would fetch higher prices for their corn and more jobs for Canton. The town had been in trouble since 1983, when International Harvester closed its plough factory.
Poor replacement
But the ethanol plant was a poor replacement, Central Illinois Energy, the corporation that built it, went bankrupt in December 2007 without having produced a drop of fuel, hurt by construction delays and $40 million (Dh147 million)) in cost over-runs. The 260 farmers in the co-op lost every dime.
Some of them blame the closure on a poker-loving, libertarian maths expert named Andy Redleaf, whose Minneapolis-based hedge fund firm, Whitebox Advisors, now controls the plant.
With $2.7 billion (Dh9.9 billion) in assets, Whitebox is one of a small group of bottom-fishing hedge funds looking to profit from the ethanol collapse.
They're sifting through the wreckage of a high-flying industry that started falling to earth on June 20, 2006.
That day, the price of ethanol, the main ingredient in moonshine whiskey, peaked at $4.23 (Dh15.50) a gallon on the Chicago Board of Trade, buoyed by a strong economy and former President George W. Bush's pledge to replace 75 per cent of the oil the US imports from the Middle East with ethanol by 2025.
Distillers erected dozens of the plants across the Great Plains, backed by some very smart money. Microsoft co-founder Bill Gates invested $84 million (Dh308.5 million) in Pacific Ethanol, based in Sacramento. Hedge fund managers David Einhorn and Daniel Loeb backed Denver-based BioFuel Energy.
Financial crisis
Then the financial crisis hit. Demand waned, and supply surged. BioFuel has made money in just two quarters since going public in June 2007. By Dec-ember 2008, the price of ethanol had collapsed to $1.40 (Dh5.14) a gallon. Pacific Ethanol's plants went bankrupt.
"There was too much built too quickly, with too much leverage," says Neil Koehler, the company's chief executive officer.
Redleaf, 52, is an unlikely ethanol speculator. He rails against government bailouts on his blog and in his frequent letters to investors.
Ethanol is an easy target for conservatives like Redleaf. The government gives refiners a 45-cent tax credit on every gallon they blend with gasoline and levies a 54-cent-a-gallon protective tariff on competing fuel made from Brazilian sugar cane. In return, it requires oil refiners to mix more ethanol into their gasoline each year. This year, the quota is 12 billion gallons.
Whitebox's involvement in the ethanol plant started when it bought a fraction of an $87.5 million syndicated loan that Credit Suisse Group arranged for the farmers' cooperative in April 2006.
It was part of a bigger play. Redleaf also bought $28.4 million of bonds issued by Illillois-based Aventine Renewable Energy Holdings, when it emerged from bankruptcy in March, a right he had as a holder of Aventine's original debt.
And he owned bonds issued by bankrupt Sioux Falls, It had also bought shares in VeraSun Energy, which raised $420 million in a 2006 public offering and operated 16 ethanol plants in eight states before it went under.
Another hedge fund firm, New York-based Brigade Capital Management, also bought debt of Aventine and VeraSun.
Unlike those companies, Central Illinois Energy, or CIE, didn't have any shares to short. When the bonds crashed, Redleaf could have taken the loss and moved on. Instead, he took control of the plant in bankruptcy.
That's a source of bitterness for Canton. Before CIE went bust, the farmers sought a new loan from Whitebox.
"Whitebox proposed a bridge loan, which was not workable because of onerous terms," said Jay Sutor, a farmer-investor.
The interest rate on the loan was about 20 per cent, and Whitebox, already a small holder of the plant's equity, was to get 25 per cent more as a fee, Sutor said. The farmers balked.
Whitebox also used its equity ownership to block the sale of the plant to other buyers, which could have salvaged some of the farmers' investment, said Dennis Streitmatter, an investor and CIE board member.
"It took a 100 per cent vote to do anything," said Streitmatter. "And they always voted against it."
Whitebox Chief Operating Officer Jonathan Wood said he knew of no offers to buy the CIE before it went bankrupt.
Redleaf says Whitebox spent $30 million to finish the plant, much more than the farmers invested, and he made a sincere effort to save it.
"You can look at what was spent," he said. "Most of the money wasn't spent by the community."
Whitebox has sold several private-equity investments to return money to investors who redeemed their Whitebox stake after the 2008 crash. In April, the firm agreed to sell a dozen grain elevators to Toronto-based Ceres Global for $74 million (Dh272 million) in cash and stock. Whitebox made money on the sale, Wood said. Even so, Redleaf says he's finished with running private companies.
Paper shuffling
"We prefer shuffling paper to making widgets," he added. Redleaf says he has put the Canton plant up for sale and will avoid private-equity deals in the future.
But Redleaf hasn't escaped Canton yet. The Illinois Environmental Protection Agency, in March, asked the state attorney general to force CIE and a nearby grain handling facility to clean up a discharge of black sludge that killed turtles in a nearby pond.
Pipeline
The closed plant contains 2.3 million gallons of toxic soup from the ethanol-making process, according to Canton City Attorney Chrissie Peterson. The city has plugged a pipe leading from the plant to make sure none of the material makes its way into the town's water-treatment facility.
Wood says Whitebox is cooperating with the Illinois EPA. "There were high hopes for the ethanol plant," Peterson says.
"It has left a bitter taste."