Jan. 9 (Bloomberg) -- VeraSun Energy Corp., the second- largest U.S. ethanol producer, has idled three distilleries as demand falls and prices fail to cover the cost of production.

The company shut output at plants in Bloomingburg, Ohio, Albion, Nebraska, and Linden, Indiana, Mike Lockrem, VeraSun’s spokesman, said today in a telephone interview. Each of the distilleries can produce 110 million gallons annually.

Producers have been struggling to make profits amid fluctuations in corn prices. Pacific Ethanol Inc. today said it will suspend output at its plant in Madera, California. On Jan. 7, Aventine Renewable Holdings Inc. said it halted construction of its refinery in Aurora, Nebraska, for up to 180 days.

“There are very difficult operating conditions out there,” said Joseph Gomes Jr., an analyst at Oppenheimer & Co. Inc. in New York. “If you’re buying corn solely in the spot market, you’re probably break-even at best.”

Corn rose 58 percent from January to July last year, squeezing ethanol producers, before falling to 13 percent below year ago levels today.

VeraSun filed for bankruptcy protection in October, blaming the swings in corn prices. Poet LLC, in Sioux Falls, South Dakota, is the largest ethanol producer by capacity.

“The company decided this is the best course of action while the crush margin is impaired and while interim financing and other contracts are worked through and finalized,” Lockrem said.

The crush margin is the difference between the cost of corn, the primary ingredient for ethanol produced in the U.S., and the selling price of the gasoline additive.

Lockrem said there’s no estimate on when plants would resume operations.

Production may become profitable again later this year as more plants cut output, Gomes said.

Difficult Market

“The question for the publicly traded guys is who can last that long,” he said. “It’s a very difficult market.”

Investors aren’t waiting for the rebound, based on the share price. Pacific Ethanol has declined 92 percent in the past year. Last summer, Microsoft Corp. co-founder Bill Gates sold his stake in the company, public filings showed.

Last month, AltraBiofuels Inc., which counts venture capitalist Vinod Khosla among its investors, shut production at its plants in Cloverdale, Indiana, and Coshocton, Ohio.

Aventine’s shares have plunged 99 percent since June 2006, when the company held its initial public offering. Biofuel Energy Corp., whose biggest owners are hedge funds run by David Einhorn and Daniel Loeb, has lost 96 percent since its stock began trading in June 2007.

“Back then everyone thought this was such a great thing,” Gomes said. “Most of the publicly traded guys went into substantial debt to build these plants and capitalize on the rush. Right now you just have too much supply.”

To contact the reporters on this story: Mario Parker in Chicago at 5927 or mparker22@bloomberg.net.

Last Updated: January 9, 2009 14:29 EST