Granite Falls Energy, LLC - Annual Report: 2020 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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⌧Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

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For the fiscal year ended October 31, 2020

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OR

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◻Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

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For the transition period from               to               .

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COMMISSION FILE NUMBER 000-51277

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GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

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15045 Highway 23 SE, Granite Falls, MN 56241-0216

(Address of principal executive offices)

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(320) 564-3100

(Registrant’s telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act: None

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Securities registered pursuant to Section 12(g) of the Act: Membership Units

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ◻ Yes ⌧ No

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Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ⌧ No

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ⌧  Yes    ◻  No

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ⌧  Yes    ◻  No

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company” in Rule 12b-2 of the Exchange Act:

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ◻  Yes    ⌧  No

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The aggregate market value of the 20,094 membership units held by non-affiliates of the registrant (computed by reference to the most recent offering price of $1,000 per unit of membership units) was $20,094,000 as of April 30, 2020. The membership units are not listed on an exchange or otherwise publicly traded. Additionally, the membership units are subject to significant restrictions on transfer under the registrant’s operating and member control agreement. The value of the membership units for this purpose has been based solely upon the initial offering price of the membership units. In determining this value, the registrant has assumed that all of its governors, chief executive officer, chief financial officer and beneficial owners of 5% or more of its outstanding membership units are affiliates, but this assumption shall not apply to or be conclusive for any other purpose.

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As of February 16, 2021, there were 30,606 membership units outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

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The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report (October 31, 2020). This proxy statement is referred to in this report as the 2021 Proxy Statement.

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INDEX

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CAUTION REGARDING FORWARD LOOKING STATEMENTS

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This annual report contains historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties, including, but not limited to the following:

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Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in Part I, Item 1A. “Risk Factors” of this Form 10-K.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future.  We cannot guarantee future results, levels of activity, performance or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.  You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended October 31 and the associated quarters of those fiscal years.

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INDUSTRY AND MARKET DATA

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Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry, the market for our products and competition is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the U.S. ethanol industry, as well as other publicly available information from governmental agencies or publications. Although we believe these sources are reliable, we have not independently verified the information.

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AVAILABLE INFORMATION

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Our principal executive offices are located at 15045 Highway 23 SE, Granite Falls, Minnesota 56241, and our telephone number is 320-564-3100. We make available free of charge on or through our Internet website, www.granitefallsenergy.com, all of our reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).  The Securities and Exchange Commission also maintains an Internet site (http://www.sec.gov) through which the public can access our reports.  We will provide electronic or paper copies of these documents free of charge upon request.

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PART I

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When we use the terms “Granite Falls Energy” or “GFE” or similar words in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our operations at our ethanol production facility located in Granite Falls, Minnesota.  When we use the terms “Heron Lake BioEnergy”, “Heron Lake”, or “HLBE” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company, LLC, through which, HLBE holds a 100% interest in Agrinatural Gas, LLC. When we use the terms the “Company,” “we,” “us,” “our” or similar words in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our consolidated wholly- and majority-owned subsidiaries.  

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ITEM 1.BUSINESS

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Overview

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Granite Falls Energy, LLC is a Minnesota limited liability company formed on December 29, 2000 for the purpose of constructing, owning and operating a fuel-grade ethanol plant located in Granite Falls, Minnesota.  

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In July 2013, we acquired controlling interest in Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”), which owns an ethanol plant located near Heron Lake, Minnesota. As of October 31, 2020, we control approximately 50.7% of HLBE’s outstanding membership units through our wholly owned subsidiary, Project Viking, L.L.C. As a result of our majority ownership, we have the right to appoint five (5) of the nine (9) governors to HLBE’s board of governors under its member control agreement.

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On November 1, 2016, we subscribed to purchase 1,500 capital units of Ring-neck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $7,500,000 and paid a subscription deposit of $750,000.  On August 2, 2017, GFE borrowed $7.5 million under its credit facility with Project Hawkeye, LLC (“Project Hawkeye”), an affiliate of Fagen, Inc., which is a member of GFE, and paid $6,750,000 to Ringneck as payment of the remaining balance of GFE’s subscription. On June 10, 2019, we subscribed to purchase an additional 100 capital units of Ringneck at a price of $5,000 per unit for a total of $500,000. Details regarding our subscription for investment in Ringneck are provided below in the section titled “Investments.”  Details of the Project Hawkeye credit facility are provided below in the section below entitled “ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Indebtedness - Granite Falls Energy - GFE’s Other Credit Arrangement.”

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On June 29, 2018, we subscribed to purchase 20 preferred membership units of Harvestone Group, LLC (“Harvestone”) at a price of $100,000 per unit for a total of $2,000,000. We paid the $2,000,000 in connection with our subscription, which is reflected in our investing cash flows. Harvestone is a Delaware limited liability company that provides ethanol marketing, logistics, and trading services. Harvestone’s headquarters are located in Franklin, Tennessee.

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Harvestone is owned by several other ethanol producers and other private investors and expects that its primary business will be marketing and trading for member and non-member ethanol producers. GFE’s investment was initially sufficient to grant it the right to appoint one advisor to the advisory committee to the managers of Harvestone. In October 2019, Harvestone and its members amended the Limited Liability Company Agreement of Harvestone, which resulted in the removal of GFE’s right to appoint an advisor to the advisory committee to the managers of Harvestone. Details regarding our subscription for investment in Harvestone are provided below in the section titled “Investments.”

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Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S. However, as markets allow, our products can be, and have been, sold in the export markets.  Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers’ grains and sales of corn oil at GFE’s ethanol plant and HLBE’s ethanol plant.  

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The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout 2019 and 2020 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels. These conditions were exacerbated by the COVID-19 pandemic and its ramifications. Due to the market risks and uncertainties related to the COVID-19 pandemic, HLBE extended its regularly scheduled idle of ethanol production operations to cover the period beginning on or about March 30, 2020 through approximately May 31, 2020, and GFE extended its regularly scheduled idle of ethanol production operations to cover the period beginning on or about April 3, 2020 through approximately May 18, 2020. Additionally, in July 2020, HLBE experienced major issues with its boiler, which negatively impacted production. HLBE ordered a temporary boiler, which allowed operations to continue in August 2020 until January 2021, when HLBE’s new boiler was placed in service. Market conditions, coupled with the idle of our plants, resulted in lower production, negative operating margins, significantly lower cash flow from operations and substantial net losses. We expect to have sufficient cash generated by continuing operations and availability on our credit facilities and other loans to fund our operations.  However, should unfavorable operating conditions continue in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional debt or equity funding or further idle ethanol production altogether.

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HLBE was out of compliance with its debt covenats at its fiscal year end.  Although the lender waived this event, additional noncompliance and forecasted probable future noncompliance has resulted in the reclassification of approximately $10,300,000 of long term debt as current maturities.  To stay in business, HLBE will need to obtain either additional equity or debt financing.   There is a risk that CoBank, as the administrative agent for our lender Compeer, may seek to enforce its security interests and take control of HLBE’s assets.  If that were to happen, HLBE may be faced with the prospects of either ceasing operations or seeking Chapter 11 “reorganization” bankruptcy protection.

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Our Facilities

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Our business consists primarily of producing ethanol and its related co-products, including wet, modified and dried distillers’ grains, as well as corn oil. Our ethanol production operations are carried out at our ethanol plant located in Granite Falls, Minnesota and at the ethanol plant operated by HLBE located near Heron Lake, Minnesota.

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The GFE plant has an annual nameplate production capacity of approximately 63 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve-month rolling sum basis. The HLBE plant has an approximate annual nameplate production capacity of approximately 65 million gallons of denatured ethanol, but is currently permitted to produce up to approximately 72.3 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis.  We intend to continue working toward increasing production at both the GFE and HLBE plants to take advantage of the additional production allowed pursuant to our permits as long as we believe it is profitable to do so.

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HLBE is also the sole owner Agrinatural Gas, LLC (“Agrinatural”), through its wholly owned subsidiary, HLBE Pipeline Company, LLC. Agrinatural is a natural gas pipeline company that was formed to construct, own, and operate the natural gas pipeline that provides natural gas to HLBE’s ethanol production facility and other customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.  Agrinatural owns approximately 190 miles of natural gas pipeline and provides natural gas to HLBE’s ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company. Agrinatural’s revenues are generated through natural gas distribution fees and sales. HLBE is its largest customer by volume and revenue. On October 18, 2019, HLBE Pipeline Company, LLC

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entered into an agreement to purchase RES’s 27% non-controlling interest in Agrinatural, which became effective on December 11, 2019. Prior to December 11, 2019, Rural Energy Solutions, LLC (“RES”) owned a 27% non-controlling interest in Agrinatural.

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Operating Segments

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Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, in applying the criteria set forth in ASC 280, the Company determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at GFE’s ethanol plant and HLBE’s plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

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Additionally, we also realize relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE’s wholly owned subsidiary.  Before and after accounting for intercompany eliminations, these revenues from Agrinatural represent less than 1% of our consolidated gross revenues and have little to no impact on the overall performance of the Company.  Therefore, our management does not separately review Agrinatural’s revenues, cost of sales or other operating performance information.  Rather, management reviews Agrinatural’s natural gas pipeline financial data on a consolidated basis with our ethanol production operating segment. Additionally, management believes that the presentation of separate operating performance information for Agrinatural’s natural gas pipeline operations would not provide meaningful information to a reader of the Company’s financial statements and would not achieve the basic principles and objectives of ASC 280.

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We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and its co-products, which include distillers’ grains and non-edible corn oil.

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Financial Information

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Please refer to “ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” for information about our revenue, profit and loss measurements, and total assets and liabilities and “ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” for our consolidated financial statements and supplementary data.

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Principal Products

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The principal products from ethanol production at GFE’s plant and HLBE’s plant, and from which we derive nearly all our revenue, are fuel-grade ethanol, distillers’ grains, and non-edible corn oil.  In addition, HLBE’s plant also has miscellaneous other revenue generated by sales of corn syrup, a by-product of the ethanol production process, and revenues from Agrinatural’s natural gas pipeline operations.  We did not introduce any new products or services as part of our ethanol production segment during our fiscal year ended October 31, 2020.  

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The table below shows the approximate percentage of our total revenue which is attributable to each of our principal products for each of the last two fiscal years.

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Ethanol

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Ethanol is a type of alcohol produced in the U.S. principally from corn.  Ethanol is ethyl alcohol, a fuel component made primarily from corn in the U.S. but can also be produced from various other grains. Ethanol is primarily used as:

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Ethanol produced in the U.S. is primarily used for blending with unleaded gasoline and other fuel products as an octane enhancer or fuel additive.  Ethanol is most commonly sold as E10 (10% ethanol and 90% gasoline), which is the blend of ethanol approved by the U.S. Environmental Protection Agency (“EPA”) for use in all American automobiles. Increasingly, ethanol is also available as E85, a higher percentage ethanol blend (85% ethanol and 15% gasoline) approved by the EPA for use in flexible fuel vehicles. Additionally, ethanol is available as E15 (15% ethanol and 85% gasoline), which is approved by the EPA for use in model year 2001 and newer cars, light-duty trucks, medium-duty passenger vehicles, and all flex-fuel vehicles.

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Distillers’ Grains

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The principal co-product of the ethanol production process is distillers’ grains, a high protein and high-energy animal feed ingredient primarily marketed to the dairy and beef industries.  Dry mill ethanol processing creates three primary forms of distillers’ grains: wet distillers’ grains, modified wet distillers’ grains, and dried distillers’ grains with solubles.  Most of the distillers’ grains that we sell are in the form of dried distillers’ grains and modified/wet distillers’ grains.  Modified/wet distillers’ grains are processed corn mash that has been dried to approximately 50% moisture and has a shelf life of approximately 7 days. Modified/wet distillers’ grains are often sold to nearby markets.  Dried distillers’ grains with solubles are corn mash that has been dried to approximately 10% to 12% moisture.  It has an almost indefinite shelf life and may be sold and shipped to any market and fed to almost all types of livestock.

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Corn Oil

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We also extract non-edible crude corn oil during the thin stillage evaporation process immediately prior to production of distillers’ grains.  The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. Corn oil is used primarily as a biodiesel feedstock and as a supplement for animal feed.

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Principal Product Markets

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As described below in “Distribution of Principal Products”, we market and distribute all of GFE’s and HLBE’s ethanol, distillers’ grains, and corn oil through professional third party marketers.  Our marketers make all decisions with regard to where our products are marketed and we have little control over the marketing decisions they make.  

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Our ethanol, distillers’ grains and corn oil are primarily sold in the domestic market; however, as markets allow, our products can be, and have been, sold in the export markets. We expect our ethanol and distillers’ grains marketers to explore all markets for our products, including export markets. We believe that there is some potential for increased international sales of our products. Nevertheless, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect a majority of our products to continue to be marketed and sold domestically.

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Ethanol Markets

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The success of our sales efforts in the ethanol markets will depend primarily upon the efforts of Eco-Energy, Inc. (“Eco-Energy”), which buys and markets our ethanol. There are local, regional, national, and international markets for ethanol.  The principal markets for our ethanol are petroleum terminals in the continental U.S.  The principal purchasers of ethanol are generally wholesale gasoline distributors or blenders.

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We believe that local markets will be limited and must typically be evaluated on a case-by-case basis.  Although local markets may be the easiest to service, they may be oversold because of the number of ethanol producers near our plants, which may depress the price of ethanol in those markets.

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Typically, a regional market is one that is outside of the local market, yet within the neighboring states.  Some regional markets include large cities that are subject to anti-smog measures in either carbon monoxide or ozone non-attainment areas, or that have implemented oxygenated gasoline programs, such as Chicago, St. Louis, Denver, and Minneapolis.  We consider our primary regional market to be large cities within a 450-mile radius of our ethanol plants.  In the national ethanol market, the highest demand by volume is primarily in the southern U.S. and the east and west coast regions.

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We expect a majority of our ethanol to continue to be marketed and sold domestically. Over our past fiscal year, exports of ethanol have increased slightly, with Canada receiving the largest percentage of ethanol produced in the United States and Brazil in second place. India, Korea, Netherlands, Colombia, Mexico, and Philippines were also top destinations. Ethanol export demand is more unpredictable than domestic demand and tends to fluctuate over time as it is subject to monetary and political forces in other nations. For example, a strong U.S. dollar is a force that may negatively impact ethanol exports from the United States.  Additionally, the imposition of tariffs and duties on ethanol imported from the U.S., as well as increased production of ethanol and similar fuels in other countries, can also negatively impact domestic export demand.

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Due to the ongoing COVID-19 pandemic demand for transportation fuels including the fuel ethanol we manufacture substantially decreased in 2020.  Lockdowns, closures, and other social distancing measures imposed in response to the pandemic caused many individuals to work from home, forego travel, and otherwise reduce fuel consumption. Between March and November 2020, the ethanol industry experienced an estimated production decline of 2 billion gallons. Economists estimated the ethanol industry suffered $8 billion in losses in 2020 due, in large part, to the effects of the pandemic. We were not immune from these conditions and experienced decrease demand and high inventory levels of ethanol. In 2020, we experienced a 26.4% decrease in the volume of ethanol sold, year-over-year.  We expect ethanol demand to increase in 2021, however there is no guarantee this will occur.

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Exports to China have been negligible during fiscal years 2020 and 2019. This reduction is due to China’s increase of the tariff on ethanol imported from the U.S. to 45% as of April 2, 2018, compared to the previous 30% tariff imposed in 2017, and the subsequent increase of the 45% tariff to 70% as of July 6, 2018. It is unclear when the tariffs will be reduced, if ever, and therefore, this tariff is likely to continue to have a negative impact on the export market demand and prices for ethanol produced in the United States.  

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On January 15, 2020, President Trump signed a “phase one” trade agreement with China. The agreement includes a commitment by China to purchase agricultural products over the course of two years, including ethanol. While this agreement appeared positive for the industry, exports to China remained negligible during fiscal year 2020. There is no guarantee that the agreement will be fully implemented, nor is there a guarantee that exports to China return to pre-tariff levels.  Joe Biden became the President on January 20, 2021.  He is believed to be evaluating whether and how to continue various tariffs including those levied against certain Chinese imports to the United States.  Although U.S. trade policy towards China may change, we cannot now predict whether or how China may consider changing its tariffs against our products.

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In December 2020, Brazil’s import quota on imported ethanol expired. As a result, imports of U.S. ethanol are subject to a 20% tariff. Under the original, expired import quota, the 20% tariff on U.S. ethanol imports was levied only after the import level exceeded 150 million liters, or 39.6 million gallons per quarter. The import quota was initially set to expire in September 2019. In September 2019, Brazil raised the import quota to 187.5 million liters, or 49.5 million gallons, per quarter, before the imports become subject to the 20% tariff. U.S. exports to Brazil have decreased from our 2019 fiscal year to our 2020 fiscal year. The tariff has had and likely will continue to have a negative impact on the export market demand and prices for ethanol produced in the United States.

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We transport our ethanol primarily by rail.  In addition to rail, we service certain regional markets by truck from time to time.  We believe that regional pricing tends to follow national pricing less the freight difference.

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Distillers’ Grains Markets

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We sell distillers’ grains as animal feed for beef and dairy cattle, poultry, and hogs. Most of the distillers’ grains that we sell are in the form of dried distillers’ grains.  Currently, the U.S. ethanol industry exports a significant amount of dried distillers’ grains, which may increase as worldwide acceptance grows. According to the U.S. Grains Council, total

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U.S. distiller’s grains exports through October 2020 increased compared to distiller’s grains exports for the same period last year. Top export markets include Mexico, Vietnam, Korea, Indonesia, Turkey, Thailand, and the European Union and United Kingdom.

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Historically, the United States ethanol industry exported a significant amount of distillers’ grains to China and Vietnam. However, during 2016, China began an anti-dumping and countervailing duty investigation related to distillers’ grains imported from the U.S. which contributed to a decline in distillers’ grains shipped to China during 2016. In January 2017, the Chinese issued final tariffs on U.S. distillers’ grains. The Chinese distillers’ grains anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. The imposition of these duties has resulted in a significant decline in demand from this top importer requiring U.S. producers to seek out alternative markets. While exports to China increased during fiscal year 2020 compared to fiscal year 2019, exports to China remain substantially below the pre-tariff export levels. There is no guarantee that distillers’ grains exports to China will return to pre-tariff levels.

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On January 15, 2020, President Trump signed a “phase one” trade agreement with China. The agreement includes a commitment by China to purchase agricultural products over two years, including distillers’ grains. The agreement will also provide U.S. manufacturers of DDGS with a streamlined process for registration and licensing in order to facilitate U.S. exports to China. While this agreement appears positive for the industry, there is no guarantee that the agreement will be fully implemented, nor is there a guarantee that exports to China return to pre-tariff levels.

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We also sell modified wet distillers’ grains, which typically have a shelf life of a maximum of seven days.  This provides for a much smaller, more local market and makes the timing of its sale critical. Further, because of its moisture content, the modified wet distillers’ grains are heavier and more difficult to handle. The customer must be close enough to justify the additional handling and shipping costs. As a result, modified wet distillers’ grains are principally sold only to local feedlots and livestock operations.

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Various factors affect the price of distillers’ grain, including, among others, the price of corn, soybean meal and other alternative feed products, the performance or value of distillers’ grains in a particular feed market, and the supply and demand within the market.  Like other commodities, the price of distillers’ grains can fluctuate significantly.

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Corn Oil Markets

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Our corn oil is primarily sold to diesel manufacturers and, to a lesser extent, feed lot and poultry markets. We generally transport our corn oil by truck to users located primarily in the upper Midwest.

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Distribution of Principal Products

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GFE’s ethanol plant is located near Granite Falls, Minnesota, in Chippewa County.  It is served by the TC&W Railway which provides connection to the Canadian Pacific and Burlington Northern Santa Fe Railroads. The completion of our rail loop during our 2012 fiscal year enables us to load unit trains.  Our site is in close proximity to major highways that connect to major population centers such as Minneapolis, Minnesota; Chicago, Illinois; and Detroit, Michigan.

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HLBE’s ethanol plant is located near Heron Lake, Minnesota. It is served by the Union Pacific Railroad. HLBE’s site is also in close proximity to major highways that connect to major population centers such as Minneapolis, Minnesota; Chicago, Illinois; and Detroit, Michigan.

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Ethanol Distribution

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Eco-Energy is the ethanol marketer for both the GFE plant and HLBE plant. Pursuant to our marketing agreements, Eco-Energy purchases and markets the entire ethanol output of GFE’s and HLBE’s ethanol plants.  Under GFE’s ethanol marketing agreement, GFE is responsible for securing all of the rail cars necessary for the transport of ethanol by rail except for 59 rail cars leased to GFE by Eco-Energy. Under HLBE’s ethanol marketing agreement, Eco-Energy arranges for the transportation of HLBE’s ethanol. GFE and HLBE pay Eco-Energy a marketing fee per gallon of ethanol sold, as well as a fixed lease fee for rail cars leased from Eco-Energy. The marketing fee and timing of payments by Eco-Energy were negotiated based on prevailing market-rate conditions for comparable ethanol marketing services.

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The term of our agreements with Eco-Energy originally expired on December 31, 2020.  The term of our agreements with Eco-Energy agreements were automatically extended for one year, pursuant to a provision in the agreements which provide for automatic renewals for additional consecutive terms of one year unless either party provides written notice to the other party at least 90 days prior to the end of the then-current term.  

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Distillers’ Grains Distribution

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RPMG, Inc. (“RPMG”) is the distillers’ grains marketer for our Granite Falls plant.  Pursuant to GFE’s distillers’ grains marketing agreement, RPMG markets all the distillers’ grains produced at the Granite Falls plant. The contract commenced on February 1, 2011, with an initial term of one year, and will continue in effect until terminated by either party at its unqualified option, by providing written notice of not less than 90 days to the other party.

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Gavilon Ingredients, LLC (“Gavilon”) is the distillers’ grains marketer for HLBE. Under HLBE’s distillers’ grains marketing agreement, Gavilon purchases all of the distillers’ grains produced at our Heron Lake ethanol plant in exchange for a service fee. The contract commenced on November 1, 2013 with an initial term of six months, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 60 days to the other party.

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Corn Oil Distribution

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RPMG is also the corn oil marketer for both the GFE plant and the HLBE plant.  Currently, RPMG markets our corn oil, which is used primarily as a biodiesel feedstock and as a supplement for animal feed.  We pay RPMG a commission based on each pound of corn oil sold by RPMG under these marketing agreements. The contract for GFE commenced on April 29, 2010, and the contract for HLBE commenced on November 1, 2013. Both contracts have an initial term of one year, and will continue in effect until terminated by either party at its unqualified option, by providing written notice of not less than 90 days to the other party.

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Dependence on One or a Few Major Customers

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As discussed above, we have exclusive ethanol marketing agreements with Eco-Energy. Additionally, we have agreements with RPMG and Gavilon to market all of the distillers’ grains produced at GFE’s plant and HLBE’s plant, respectively, and with RPMG to market all of the corn oil produced at our plants. We rely on Eco-Energy, RPMG and Gavilon for the sale and distribution of all of our products; therefore, we are highly dependent on Eco-Energy, RPMG and Gavilon for the successful marketing of our products. Any loss of these companies as our marketing agents for our ethanol, distillers’ grains, or corn oil could have a negative impact on our revenues.

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Seasonality of Ethanol Sales

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We experience some seasonality of demand for our ethanol. Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand.  As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving.  In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

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Pricing of Corn and Ethanol

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We expect that ethanol sales will represent our primary revenue source and corn will represent our primary component of cost of goods sold.  Therefore, changes in the price at which we can sell the ethanol we produce and the price at which we buy corn for our ethanol plants present significant operational risks inherent in our business. Trends in ethanol prices and corn prices are subject to a number of factors and are difficult to predict.

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The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. With the volatility of the weather and commodity markets, we cannot predict the future price of corn. Historically, ethanol prices have tended to correlate with corn prices, wholesale gasoline prices, with demand for and the price of ethanol increasing as supplies of petroleum decreased or appeared to be threatened, crude oil prices increased and wholesale gasoline prices increased. However, the prices of both ethanol and corn do not always follow historical trends.  

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Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance.  If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plants.  Corn prices have trended higher during December 2020 and January 2021, in part due to large purchases by China in the world and U.S. marketplaces. Because the market price of ethanol is not directly related to corn prices, we, like most ethanol producers, are not able to compensate for increases in the cost of corn through adjustments in our prices for our ethanol although we do tend to see increases in the prices of our distillers’ grains during times of higher corn prices. Given that ethanol sales comprise a majority of our revenues, our inability to adjust our ethanol prices can result in a negative impact on our profitability during periods of high corn prices.

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Ethanol prices were lower during fiscal year 2020 compared to fiscal year 2019.  Ethanol prices were lower during the fiscal year ended October 31, 2020 due primarily to effects of the COVID-19 pandemic, which resulted in reduced demand and high inventory levels.  Management expects additional volatility for the price of ethanol in 2021.  According to EIA forecasts, ethanol production is projected to increase slightly in 2021, and demand is also expected to increase slightly. However, there is no guarantee that either of these forecasts will occur. While exports improved slightly in 2020, tariffs and international competition continued to adversely affect the export market, and there is no guarantee that the export market will improve in 2021. U.S. gas demand decreased significantly year over year in 2020, due primarily to the COVID-19 pandemic.  Ethanol consumption is projected to increase slightly in 2021; however, there is no guarantee that this projection will be accurate. A continued or further decrease in demand for either gasoline or ethanol blends would adversely impact the price of ethanol, which could result in a material adverse effect on our business, results of operations and financial condition.

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Sources and Availability of Raw Materials

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The primary raw materials used in the production of ethanol at our plants are corn and natural gas. Our plants also require significant and uninterrupted amounts of electricity and water.  

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Corn

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Ethanol production requires substantial amounts of corn. The cost of corn represented approximately 71.6% and 73.4% of our cost of goods sold for the years ended October 31, 2020 and 2019, respectively. At GFE’s current production rate of approximately 56.2 million gallons of undenatured ethanol per year, the GFE plant requires approximately 19.1 million bushels of corn per year. The HLBE ethanol plant requires approximately 16.3 million bushels of corn per year to operate at its current production rate of approximately 47.9 million gallons of undenatured ethanol per year.  

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GFE had an exclusive corn storage and grain handling agreement with Farmers Cooperative Elevator (“FCE”), a member of GFE. Under the agreement, GFE had agreed to purchase all of the corn needed for the operation of the plant from FCE. The price of the corn purchased was the bid price FCE establishes for the plant plus a set fee per bushel.

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On February 27, 2017, GFE and FCE executed an amendment to the corn storage and grain handling agreement.  Pursuant to the terms of the amendment, GFE and FCE agreed to amend the corn storage and grain handling agreement to accelerate the termination date of the agreement to midnight August 31, 2017.  In exchange for the early termination, GFE paid an early termination fee to FCE of approximately $255,000 in August 2017. Prior to the amendment, the termination date of the corn storage and grain handling agreement was set to expire on November 2017.

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On June 1, 2017, GFE began posting bids for the purchase of corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Granite Falls, Minnesota.  On September 1, 2017, GFE began accepting delivery of corn at its Granite Falls plant.  Typically, HLBE purchases its corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota. Neither GFE’s nor HLBE’s members are obligated to deliver corn to the Granite Falls plant or Heron Lake plant.  

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GFE and HLBE generally purchase corn through spot cash, fixed-price forward, basis only, and futures only contracts. Our fixed-price forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered.  These forward contracts are at fixed prices indexed to Chicago Board of Trade (“CBOT”) prices. Our plants corn requirements can be contracted in advance under fixed-price forward contracts or options. The parameters of these contracts are based on the local supply and demand situation and the seasonality of the price. For delayed pricing contracts, producers will deliver corn to either the GFE or HLBE plant, but the pricing for that corn and the related payment

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will occur at a later date. We may also purchase a portion of our corn on a spot basis. For our spot purchases, GFE and HLBE post daily corn bids so that corn producers can sell to directly to our plants on a spot basis.  

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In addition, both plants’ facilities have sufficient corn storage capacity, with the capability to store approximately 8 days of corn supply at HLBE and approximately 18 days of corn supply at the GFE plant.  

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We compete with ethanol producers in close proximity for the supplies of corn we will require to operate our plants.  There are 8 ethanol plants within an approximate 50 mile radius of HLBE’s plant and 5 ethanol plants within an approximate 50 mile radius of the GFE plant. The existence of other ethanol plants, particularly those in close proximity to our plants, increase the demand for corn and may result in higher costs for supplies of corn. We also compete with other users of corn, including ethanol producers regionally and nationally, producers of food and food ingredients for human consumption (such as high fructose corn syrup, starches, and sweeteners), producers of animal feed and industrial users.

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Since corn is the primary raw material we use to produce our products, the availability and cost of corn can have a significant impact on the profitability of our operations. Corn prices were slightly lower during our 2020 fiscal year, as compared to our 2019 fiscal year. If we or the industry experience unfavorable conditions during our 2021 fiscal year, the price we pay for corn and the availability of corn near our plants could be negatively impacted. If we experience a localized shortage of corn, we may be forced to purchase corn from producers who are farther away from our ethanol plants which can increase our transportation costs.

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Utilities

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Natural Gas

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Natural gas is a significant input to our manufacturing process. The cost of natural gas represented approximately 5.2% and 5.6% of our cost of sales for the years ended October 31, 2020 and 2019, respectively.

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We do not anticipate any problems securing the natural gas we require to continue to operate our plants at capacity during our 2021 fiscal year or beyond.  At GFE’s plant, we pay Center Point Energy/Minnegasco a per unit fee to move the natural gas through the pipeline, and we have guaranteed to move a minimum of 1,500,000 MMBTU annually through December 31, 2025, which is the ending date of the agreement.  GFE also has an agreement with Kinetic Energy Group.  On our behalf, Kinetic Energy Group procures contracts with various natural gas vendors to supply the natural gas necessary to operate the GFE plant.  We determined that sourcing our natural gas from a variety of vendors is more cost-efficient than using an exclusive supplier.

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HLBE has a facilities agreement with Northern Border Pipeline Company, which allows HLBE to access an existing interstate natural gas pipeline located approximately 16 miles north from its plant.  HLBE has entered into a firm natural gas transportation agreement with its indirectly wholly owned subsidiary, Agrinatural.  Under the terms of the firm natural gas transportation agreement, Agrinatural will provide natural gas to the HLBE plant with a specified price per MMBTU for a term ending on October 31, 2021, with an automatic renewal option for an additional five year period.  HLBE also has a base agreement for the sale and purchase of natural gas with Constellation NewEnergy—Gas Division, LLC (“Constellation”). HLBE buys all of its natural gas from Constellation and this agreement runs through March 31, 2022.

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The prices for and availability of natural gas are subject to volatile market conditions.  These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters, overall economic conditions and foreign and domestic governmental regulations and relations.  Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, dried distillers’ grains for our customers.  Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition.

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Electricity

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Our plants require a continuous supply of electricity.  We have agreements in place to supply electricity to our plants. Our GFE plant obtains electricity from Minnesota Valley Light and Power Cooperative, and our HLBE plant obtains

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electricity from Federated Rural Electric. We do not anticipate any problems securing the electricity that we require to continue to operate our plants at capacity during our 2021 fiscal year or beyond.

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Water

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We do not anticipate any problems securing the water that we require to continue to operate our plants at capacity during our 2021 fiscal year or beyond. GFE obtains the water necessary to operate its plant from the Minnesota River with an adjustable gravity-flow intake system.

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HLBE obtains its water pursuant to an industrial water supply agreement with the City of Heron Lake and Jackson County, Minnesota.

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Risk Management and Hedging

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The profitability of our operations is highly dependent on the impact of market fluctuations associated with commodity prices.  We use various derivative instruments as part of an overall strategy to manage market risk and to reduce the risk that our ethanol production will become unprofitable when market prices among our principal commodities and products do not correlate.  

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In order to mitigate our commodity and product price risks, we enter into hedging transactions, including forward corn, ethanol, distillers’ grains and natural gas contracts, in an attempt to partially offset the effects of price volatility for corn and ethanol.  However, we are not always presented with an opportunity to lock in a favorable margin and our plant’s profitability may be negatively impacted during periods of high grain prices. We also enter into over-the-counter and exchange-traded futures, swaps and option contracts for corn, ethanol and distillers’ grains, designed to limit our exposure to increases in the price of corn and manage ethanol price fluctuations.  

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Although we believe that our hedging strategies can reduce the risk of price fluctuations, the financial statement impact of these activities depends upon, among other things, the prices involved and our ability to physically receive or deliver the commodities involved.  Our hedging activities could cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.  As corn and ethanol prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.

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Hedging arrangements expose us to the risk of financial loss in situations where the counterparty to the hedging contract defaults or, in the case of exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold.  There are also situations where the hedging transactions themselves may result in losses, as when a position is purchased in a declining market or a position is sold in a rising market. Hedging losses may be offset by a decreased cash price for corn and natural gas and an increased cash price for ethanol and distillers’ grains.

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We have established a risk management committee which assists the board and our risk management manager to, among other things, establish appropriate policies and strategies for hedging and enterprise risk. We continually monitor and manage our commodity risk exposure and our hedging transactions as part of our overall risk management policy.  As a result, we may vary the amount of hedging or other risk mitigation strategies we undertake, and we may choose not to engage in hedging transactions.  Our ability to hedge is always subject to our liquidity and available capital.

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Process Improvement

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We are continually working to develop new methods of operating the ethanol plants more efficiently.  We continue to conduct process improvement activities in order to realize these efficiency improvements.

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Patents, Trademarks, Licenses, Franchises and Concessions

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We do not currently hold any patents, trademarks, franchises, or concessions.  We were granted a license by ICM, Inc. (“ICM”) to use certain ethanol production technology necessary to operate our ethanol plants.  The cost of the license granted by ICM was included in the amount we paid to Fagen, Inc. to design and build our ethanol plants.

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Competition

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Ethanol Competition

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Domestic Competition

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We sell our ethanol in a highly competitive market.  Ethanol is a commodity product where competition in the industry is predominantly based on price. On a national scale, we are in direct competition with numerous other ethanol producers.  According to the Renewable Fuels Association (“RFA”), there are approximately 210 biorefineries with a total nameplate capacity of approximately 17.6 billion gallons of ethanol per year, with an additional plant under expansion or construction with capacity to produce an additional 16 million gallons.  

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The following table identifies the top five largest ethanol producers in the U.S. along with their production capacities.

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Source: Renewable Fuels Association

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Each of the large ethanol producers above are capable of producing significantly more ethanol than we produce. These producers and other large producers are, among other things, capable of producing a significantly greater amount of ethanol or have multiple ethanol plants that may help them achieve certain benefits that we could not achieve with one ethanol plant. This could put us at a competitive disadvantage to other ethanol producers.

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Larger ethanol producers may have an advantage over us from economies of scale and stronger negotiating positions with purchasers.  Large producers own multiple ethanol plants and may have flexibility to run certain facilities while shutting or slowing down production at their other facilities. This added flexibility may allow these producers to compete more effectively, especially during periods when operating margins are unfavorable in the ethanol industry. Some large producers own ethanol plants in geographically diverse areas of the U.S. and as result, may be able to more effectively spread the risk they encounter related to feedstock prices. Some of our competitors are owned subsidiaries of larger oil companies, such as Valero Renewable Fuels and Flint Hills Resources. Because their parent oil companies are required to blend a certain amount of ethanol each year, these competitors may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, new products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us and harm our business.

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Local Competition

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A majority of the U.S. ethanol plants, and therefore, the greatest number of gallons of ethanol production capacity, are concentrated in the corn-producing states of Iowa, Nebraska, Illinois, Indiana, Minnesota, South Dakota, Ohio, Wisconsin, Kansas, and North Dakota.  According to the RFA, Minnesota is one of the top producers of ethanol in the U.S. with 19 ethanol plants producing an aggregate of approximately 1.4 billion gallons of ethanol per year. Therefore, we face increased regional and local competition because of the location of our ethanol plant.  

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Eco-Energy markets out ethanol primarily on a regional and national basis. We compete with other ethanol producers both for markets in Minnesota and markets in other states. We believe that we are able to reach the best available markets through the use of our experienced marketer and by the rail delivery methods we use. We believe that we can compete favorably with other ethanol producers due to our proximity to ample grain, natural gas, electricity and water supplies at favorable prices.

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International Competition

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In addition to intense competition with domestic producers of ethanol, we have faced increased competition from ethanol produced in foreign countries. Depending on feedstock prices, ethanol imported from foreign countries may be less expensive than domestically-produced ethanol.  However, foreign demand, transportation costs and infrastructure constraints may temper the market impact on the United States. Ethanol imports have been lower in recent years and ethanol exports have been higher. However, if demand for imported ethanol were to increase again, demand for domestic ethanol may be reduced, which could lead to lower domestic prices and lower operating margins. Large international companies with much greater resources than ours have developed, or are developing, increased foreign ethanol production capacities. Many international suppliers produce ethanol primarily from inputs other than corn, such as sugar cane, and have cost structures that may be substantially lower than U.S. based ethanol producers including us. Many of these international suppliers are companies with much greater resources than us with greater production capacities.

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Alternative Fuels and Other Fuel Additives Competition

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Alternative fuels and alternative ethanol production methods are continually under development. New ethanol products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us and harm our business.

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We anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock that is being explored is cellulose. Cellulose is found in wood chips, corn stalks and rice straw, amongst other common plants. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol.

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A few companies have completed commercial scale cellulosic ethanol plants. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

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In addition to competing with ethanol producers, we also compete with producers of other gasoline oxygenates.  Many gasoline oxygenates are produced by other companies, including oil companies.  The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of ethanol. Historically, as a gasoline oxygenate, ethanol primarily competed with two gasoline oxygenates, both of which are ether-based: MTBE (methyl tertiary butyl ether) and ETBE (ethyl tertiary butyl ether).  While ethanol has displaced these two gasoline oxygenates, the development of ethers intended for use as oxygenates is continuing and we will compete with producers of any future ethers used as oxygenates.

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A number of automotive, industrial and power generation manufacturers are developing alternative fuels and clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas. While there are currently a limited number of vehicle recharging stations, there has been increased focus on developing these recharging stations to make electric car technology more feasible and widely available in the future. Additional competition from these other sources of alternative energy, particularly in the automobile market, could reduce the demand for ethanol, which would negatively impact our profitability.

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Distillers’ Grains Competition

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The amount of distillers’ grains produced annually in North America has increased significantly as the number of ethanol plants increased.  We compete with other producers of distillers’ grains products both locally and nationally, with more intense competition for sales of distillers’ grains among ethanol producers in close proximity to our ethanol plant.  These competitors may be more likely to sell to the same markets that we target for our distillers’ grains.

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Distillers’ grains are primarily used as an animal feed, competing with other feed formulations using corn and soybean meal. As a result, we believe that distillers’ grains prices are positively impacted by increases in corn and soybean prices. In fiscal year 2020, the U.S. ethanol industry increased exports of distillers’ grains. However, exports of distillers’ grains fell in 2019 as compared to 2018, and the 2020 export levels remain below pre-2018 levels. The decline in exports

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increases the domestic supply of distillers’ grains, which has a corresponding negative impact on the price of distillers’ grains as compared to a comparable volume of corn.  Continued decreases in distillers’ grains exports could result in increased competition among ethanol producers for sales of distillers’ grains and could negatively impact distillers’ grains prices in the U.S.

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Corn Oil Competition

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We compete with many ethanol producers for the sale of corn oil. Many ethanol producers have installed the equipment necessary to separate corn oil from the distillers’ grains they produce which has increased competition for corn oil sales and has resulted in lower market corn oil prices.

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Government Ethanol Supports

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The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the federal Renewable Fuels Standard (the “RFS”). The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage.

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Under the RFS, the EPA is supposed to pass an annual rule that establishes the number of gallons of different types of renewable fuels that must be used in the U.S. by refineries, blenders, distributors and importers which is called the renewable volume obligations (“RVOs”). The EPA has the authority to waive the mandates in whole or in part if one of two conditions is met: 1) there is inadequate domestic renewable fuel supply, or 2) implementation of the mandate requirement severely harms the economy or environment of a state, region or the United States.

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The RFS sets the statutory RVO for corn-based ethanol at 15 billion gallons beginning in 2016 and each year thereafter through 2022. In May 2020, the EPA delivered its proposed rule to the White House Office of Management and Budget (“OMB”) to set 2021 RVOs. OMB is required to review the proposed rule before releasing it for public comment. The proposed 2021 RVOs are still undergoing OMB review, and therefore, the proposed rule has neither been released for public comment or finalized. As a result, the statutory November 30 deadline was not met. The EPA Administrator has stated that the COVID-19 pandemic resulted in significant delays and that the EPA is analyzing various factors in setting 2021 RVOs in light of the pandemic.

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On December 19, 2019, the EPA announced the final 2020 RVOs, setting the RVOs for conventional ethanol at 15.0 billion gallons, advanced biofuels at 5.09 billion gallons and cellulosic ethanol at 0.59 billion gallons, for overall RVOs of 20.09 billion gallons for 2020. Although this final rule achieves the statutory RVO for conventional corn-based ethanol, it reduces the overall RVOs below the overall statutory level of 30 billion gallons.

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The following chart illustrates the potential U.S. ethanol demand based on the schedule of minimum usage established by the RFS program through the year 2022 (in billions of gallons):

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Ethanol production capacity exceeded the EPA’s 2018 and 2019 RVOs that could be satisfied by corn-based ethanol.  According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. In October 2018, the Office of Management and Budget announced that the 20% thresholds “have been met or are expected to be met in the near future.” In May 2019, the EPA delivered a proposed RFS “reset” rule to the Office of Management and Budget. If the statutory RVOs are reduced as a result of reset, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

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Beginning in January 2016, various ethanol and agricultural industry groups petitioned a federal appeals court to hear a legal challenge to of the EPA’s decision to reduce the total renewable fuel volume requirements for 2014-2016 through use of its “inadequate domestic supply” waiver authority.  On July 28, 2017, the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the petitioners, concluding that the EPA erred in its exercise of “inadequate domestic supply” waiver authority by considering demand-side constraints. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016, and remanded to the EPA to address the 2016 total renewable fuels volume requirements. In December 2019, the EPA announced that it is deferring action on this issue until an anticipated date in early 2020. While management believes the decision should benefit the ethanol industry overall by clarifying the EPA's waiver analysis is limited to consideration of supply-side factors only, no direct impact on the Company is expected from the decision.

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Management anticipates that there will be further legal challenges to the EPA's reduction in the volume requirements, including the final rules for 2019 and 2020. However, if the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

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Beyond the federal mandates, there are limited domestic markets for ethanol.  Further, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress.  If such efforts are successful in further reducing or repealing the blending requirements of the RFS, a significant decrease in ethanol demand may result and could have a material adverse effect on our results of operations, cash flows and financial condition, unless additional demand from exports or discretionary or E85 blending develops.

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Most ethanol that is used in the U.S. is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the U.S. is approximately 140 billion gallons per year. Assuming that all gasoline in the U.S. is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 14.3 billion gallons per year.  This is commonly referred to as the “blend wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the U.S. and it discounts the possibility of additional ethanol used in higher percentage blends such as E15 and E85. These higher percentage blends may lead to additional ethanol demand if they become more widely available and accepted by the market.

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There is growing availability of E85 for use in flexible fuel vehicles, however it is limited due to lacking infrastructure. In addition, the industry has been working to introduce E15 to the retail market since the EPA approved its use vehicles model year 2001 and newer. However, widespread adoption of E15 has been hampered by regulatory and infrastructure hurdles in many states, as well as consumer acceptance. Additionally, sales of E15 may be limited because: (i) it is not approved for use in all vehicles; (ii) the EPA requires a label that management believes may discourage consumers from using E15; and (iii) retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may have been required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions. This prevented E15 from being used during certain times of the year in various states. However, on May 30, 2019, the EPA issued a final rule which allows E15 to be sold year-round. In June 2019, the American Fuel and Petrochemical Manufacturers association filed a lawsuit in the U.S. Court of Appeals for the District of Columbia challenging the final rule. Additionally, in August 2019, the Small Retailers Coalition filed a lawsuit in the U.S. Court of Appeals for the District of Columbia seeking review of the final rule. These legal challenges remain pending, and there is no guarantee that the final rule will be upheld. Legal challenges could create uncertainty for retailers desiring to implement or expand sales of E15. Additionally, although the year-round E15 rule is now final, there is no guarantee that retailers will implement the sale of year-round E15, nor is there a guarantee that the rule will result in an increase of ethanol sales.

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Obligated parties use renewable identification numbers (“RINs”) to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. Under the RFS, small refineries may petition for and be granted temporary exemptions from the RVOs if they can demonstrate that compliance with the RVOs would cause disproportionate economic hardship. On December 17, 2020, the EPA released data on the number of waivers filed, which indicated that, as of December 17, 2020, 14 petitions for waivers for the 2020 compliance year have been received. For the 2019 compliance year, 32 petitions have been received. To date, all of the petitions received for both compliance years 2020 and 2019 remain pending. Further, some petitions remain pending from previous compliance years. Additionally, 44 petitions have been received by the EPA for the 2018 compliance year. To date, 31 petitions have been approved, which have exempted approximately 1.43 billion RINs, which is approximately 13.42 billion gallons of gasoline and diesel, from meeting the RFS blending targets. It is expected that additional petitions for waivers for the 2020 compliance year will be received by the EPA. It is also expected that the EPA will approve a significant number of these waiver petitions, thereby exempting a substantial number of gallons of gasoline and diesel from meeting the RFS blending targets. These exemptions decrease demand for our products, which negatively impacts ethanol prices and our profitability.

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On May 29, 2018, the National Corn Growers Association, National Farmers Union, and the RFA filed a petition with the U.S. Court of Appeals for the 10th Circuit challenging the EPA’s grant of waivers to three specific refineries.  The petitioners are asking the U.S. Court of Appeals for the 10th Circuit to reject the waivers granted to three refineries located in Wynnewood, Oklahoma, Cheyenne, Wyoming, and Woods Cross, Utah as an abuse of EPA authority. These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate RVOs under the RFS.  In January 2020, the court struck down the exemptions as improperly issued by the EPA. The court interpreted the RFS statute to provide that refineries are only eligible for relief if they have received uninterrupted, continuous extensions of the exemptions. Consistent with the ruling, the EPA denied certain small refinery exemption petitions filed by oil refineries in 2020 seeking retroactive relief from their ethanol use requirements for prior years. However, HollyFrontier and Wynnewood Refining filed a petition in the U.S. Supreme Court in September 2020 seeking review of the January 2020 ruling. In January 2021, the Supreme Court agreed to hear the appeal. Oral arguments are expected to be scheduled in spring of 2021. The Supreme Court’s decision could result in the overturning of the EPA’s denial of certain small refinery exemption petitions. Such a decision could have sweeping negative effects on the ethanol industry and our profitability.

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An EPA final rule released in December 2019 provides that EPA will project exempt volumes based on a three-year average of the relief recommended by the Department of Energy (“DOE”) for years 2016-2018, rather than based on actual exemptions granted. For the 2016 compliance year, the EPA said the DOE’s recommended relief was approximately 440 million RINs. The EPA, however, actually granted waivers for approximately 790 million RINs. Similarly, the DOE’s 2017 compliance year recommendation was 1.02 billion RINs, as compared to the approximately 1.82 billion RINs granted waivers by the EPA. For the 2018 compliance year, the DOE recommended the EPA approve waivers for 840 million RINs, as compared to the approximately 1.43 billion RINs granted waivers by the EPA. The EPA’s final rule also announced its general policy approach with respect to small refinery waivers on a go-forward basis as consistent with DOE’s recommendations, where appropriate. The final rule fell short of the relief that was urged by ethanol producers. As a result, management expects that small refinery exemptions will continue to have a negative effect on demand for our products, ethanol prices, and our profitability.  

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Compliance with Environmental Laws and Other Regulatory Matters

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Our business subjects us to various federal, state, and local environmental laws and regulations, including: those relating to discharges into the air, water, and ground; the generation, storage, handling, use, transportation, and disposal of hazardous materials; and the health and safety of our employees. These laws and regulations require us to obtain and comply with numerous permits to construct and operate our ethanol plants, including water, air, and other environmental permits.  The costs associated with obtaining these permits and meeting the conditions of these permits have increased our costs of construction and production.  

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Additionally, compliance with environmental laws and permit conditions in the future could require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment, as well as significant management time and expense.  A violation of these laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations, and/or plant shutdown, any of which could have a material adverse effect on our operations. Although violations and environmental non-compliance still remain

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a possibility following our conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

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Our plants’ air permits require certain on-going performance testing to be completed periodically to ensure compliance with minor source emission limits. On May 12, 2017, HLBE submitted a letter to the Minnesota Pollution Control Agency (“MPCA”) regarding the certain non-compliant results from on-going performance testing required under its air permit. Since reporting to MPCA, The Company cooperated with MPCA’s review of the non-compliant tests and maintained open communication with MPCA staff to resolve the matter. On October 17, 2017, HLBE entered into a stipulation agreement with MPCA relating to the non-compliant test results. Under the stipulation agreement, HLBE agreed to pay a civil penalty of $63,500, which was paid in October 2017.

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In the fiscal year ended October 31, 2020, GFE and HLBE incurred costs and expenses of approximately $200,000 and $156,000, respectively, complying with environmental laws.  Although we have been successful in obtaining all of the permits currently required to operate our plants, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations. For the fiscal year ended October 31, 2019, GFE and HLBE incurred costs and expenses of approximately $163,000 and $88,000 respectively.

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On January 13, 2015 and March 30, 2015, HLBE and GFE, respectively, submitted efficient producer petitions to the EPA.  The EPA awarded efficient producer pathway approval to HLBE and GFE on March 12, 2015 and May 13, 2015, respectively.  In the approval determinations, the EPA’s analysis indicated that HLBE achieved at least a 20.1% reduction and GFE achieved a 26.0% reduction in greenhouse gas (“GHG”) emissions for their non-grandfathered volumes compared to the baseline lifecycle GHG emissions.

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Pursuant to the award approval, HLBE and GFE are only authorized to generate RINs for each plant’s non-grandfathered volumes if each plant can demonstrate that all ethanol produced at the plant during an averaging period (defined as the prior 365 days or the number of days since the date EPA efficient producer pathway approval) meets the 20% GHG reduction requirement. To make these demonstrations, HLBE and GFE must develop compliance plans and keep certain records as specified in the approvals. Additionally, the EPA approvals require that HLBE and GFE register with the EPA as a renewable fuel producer for the non-grandfathered volumes.  Although we believe GFE and HLBE will be able to maintain continuous compliance with the 20% reduction in GHG emissions requirement, there is no guarantee that we will do so.  If GFE or HLBE do not maintain continuous compliance with the 20% reduction in GHG emissions requirement, we will not be able issue RINs for the non-grandfathered volumes of ethanol produced at the plants.  As a result, we may be forced to rely on exports sales for these non-grandfathered volumes ethanol, which could adversely affect our operating margins, which, in turn could adversely affect our results of operations, cash flows and financial condition.

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The California Air Resources Board, or CARB, has adopted a Low Carbon Fuel Standard, or LCFS, requiring a 10% reduction in average carbon intensity of gasoline and diesel transportation fuels from 2010 to 2020.  After a series of rulings that temporarily prevented CARB from enforcing these regulations, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the United States Supreme Court declined to hear the appeal of the federal appellate court ruling and CARB recently re-adopted the LCFS with some slight modifications. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably. 

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Exports to China have been negligible since the imposition of a 70% tariff in July 2018. It is unclear when the tariffs will be reduced, if ever, and therefore, this tariff is likely to continue to have a negative impact on the export market demand and prices for ethanol produced in the United States. Additionally, in December 2020, Brazil’s import quota exempting certain volumes of U.S. ethanol imports from a 20% tariff expired, which resulted in all imports of U.S. ethanol becoming subject to the 20% tariff. The import quota had already resulted in decreases of ethanol exported to Brazil, and the expiration of the import quota will likely result in further decreases. The tariff and/or import quota has had and likely will continue to have a negative impact on the export market demand and prices for ethanol produced in the United States.

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Employees

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We compete with ethanol producers in close proximity for the personnel we will require to operate our plants.  The existence and development of other ethanol plants will increase competition for qualified managers, engineers, operators and other personnel.  We also compete for personnel with businesses other than ethanol producers and with businesses located within the Granite Falls and Heron Lake, Minnesota communities.

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As of the date of this report, we have 82 full-time employees at our two consolidated ethanol plants, of which 42 are employed at the GFE plant and 40 are employed at the HLBE plant.  Of our total employees, 17 are involved primarily in management and administration with 10 employees at the GFE plant and 7 at the HLBE plant. The remaining employees are involved primarily in plant operations.  We do not currently anticipate any significant change in the number of employees at our plants.

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On July 31, 2013, GFE entered into a management services agreement with HLBE.  Pursuant to the management services agreement, GFE provides its chief executive officer, chief financial officer, and commodity risk manager to act in those positions as part-time officers and managers of HLBE. Each person providing management services to HLBE under the management services agreement is subject to oversight by the HLBE board of governors.  However, GFE’s chief executive officer is solely responsible for hiring and firing persons providing management services under the management services agreement.

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The term of the management services agreement automatically renews for successive one-year terms until either party gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

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GFE is responsible for and agreed to directly pay salary, wages, and/or benefits to the persons providing management services under the management services agreement.  Under the terms of the management services agreement, HLBE pays GFE 50% of the total salary, bonuses and other expenses and costs (including all benefits and tax contributions) incurred by GFE for the three management positions, paid on an estimated monthly basis with a “true-up” following the close of our fiscal year.

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Financial Information about Geographic Areas

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All of our operations are domiciled in the U.S. All of the products sold to our customers for fiscal years 2020 and 2019 were produced in the U.S. and all of our long-lived assets are domiciled in the U.S.  We have engaged third-party professional marketers who decide where our products are marketed and we have no control over the marketing decisions made by our third-party professional marketers. These third-party marketers may decide to sell our products in countries other than the U.S.  However, we anticipate that our products will primarily be sold in the United States.  

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Investments

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On November 1, 2016, we subscribed to purchase 1,500 capital units of Ring-neck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $7,500,000.  We paid a down payment of $750,000 in connection with our subscription, and signed a promissory note for $6,750,000 for the remaining balance of the subscription. By letter dated July 12, 2017, GFE was notified of Ringneck’s acceptance of GFE’s subscription and that payment of the balance of GFE’s subscription due under the promissory note was due no later than August 2, 2017.  On August 2, 2017, GFE borrowed $7.5 million under its credit facility with Project Hawkeye, LLC (“Project Hawkeye”), an affiliate of Fagen, Inc., which is a member of GFE, and paid the remaining balance due on GFE’s subscription of $6,750,000 to Ringneck. Details of the Project Hawkeye credit facility are provided below in the section below entitled “PART II - ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Arrangements.” On June 10, 2019, we subscribed to purchase an additional 100 capital units of Ringneck at a price of $5,000 per unit for a total of $500,000.

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Ringneck is a South Dakota limited liability company that has constructed an 80 million gallon per year ethanol manufacturing plant in outside of Onida, South Dakota in Sully County. Construction has reached substantial completion and the plant commenced operations in June 2019. GFE’s investment is sufficient to grant it the right to appoint one director to the board of directors of Ringneck, and GFE has appointed Steve Christensen, its CEO, to serve as its appointed director. The units we acquired in Ringneck are subject to restrictions on transfer; therefore, this should not be considered

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a liquid investment.  It may take a significant amount of time before we realize a return on our investment, if we realize a return on the investment at all.

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Ringneck offered its units pursuant to a private placement memorandum. Additionally, because Ringneck is not conducting a federally-registered offering, we do not expect that information about Ringneck will be available via the SEC’s EDGAR filing system. Therefore, it may be difficult for our investors to obtain information about Ringneck.

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In connection with our subscription, GFE entered into a credit facility with Project Hawkeye pursuant to which GFE borrowed $7.5 million to finance the investment in Ringneck. Details of the Project Hawkeye credit facility are provided below in the section below entitled “PART II - ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Arrangements.”

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On June 29, 2018, we subscribed to purchase 20 preferred membership units of Harvestone Group, LLC (“Harvestone”) at a price of $100,000 per unit for a total of $2,000,000. We paid the $2,000,000 in connection with our subscription, which is reflected in our investing cash flows. Harvestone is a Delaware limited liability company that provides ethanol marketing, logistics, and trading services. Harvestone’s headquarters are located in Franklin, Tennessee. Harvestone is owned by several other ethanol producers and other private investors and expects that its primary business will be marketing and trading for member and non-member ethanol producers. Marketing and trading operations commenced in January 2019. GFE’s investment was initially sufficient to grant it the right to appoint one advisor to the advisory committee to the managers of Harvestone, and GFE had appointed Erik Baukol, its Risk Manager, to serve as its appointed advisor. In October 2019, Harvestone and its members amended the Limited Liability Company Agreement of Harvestone, which resulted in the removal of GFE’s right to appoint an advisor to the advisory committee to the managers of Harvestone.

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The units we acquired in Harvestone are subject to restrictions on transfer; therefore, this should not be considered a liquid investment. It may take a significant amount of time before we realize a return on our investment, if we realize a return on the investment at all. Because Harvestone is not conducting a federally-registered offering, nor is it a registered reporting company with the SEC, we do not expect that information about Harvestone will be available via the SEC’s EDGAR filing system. Therefore, it may be difficult for our investors to obtain information about Harvestone.

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ITEM 1A.RISK FACTORS

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You should carefully read and consider the risks and uncertainties below and the other information contained in this report.  The risks and uncertainties described below are not the only ones we may face.  The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.  If any of the following risks actually occur, our results of operations, cash flows and the value of our units could be negatively impacted.

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Risks Relating to Our Business

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Our business is not significantly diversified, and we may not be able to adapt to changing market conditions or endure any decline in the ethanol industry.

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Our success depends on our ability to efficiently produce and sell ethanol, and, to a lesser extent, distillers’ grains and corn oil. We do not have any other lines of business or other sources of revenue if we are unable to operate our ethanol plants and manufacture ethanol and its related co-products.  Further, all of our investments are in companies involved in the ethanol industry. Our majority owned subsidiary, HLBE, operates a natural gas pipeline through Agrinatural, its majority owned subsidiary.  Before and after accounting for intercompany eliminations, revenues from Agrinatural’s represent less than 1% of our consolidated revenues. Therefore, Agrinatural does not produce significant revenue to rely upon if we are unable to produce and sell ethanol and its co-products, or if the market for those products declines. As result, if economic or political factors adversely affect the market for ethanol and its co-products, we have no other line of business to fall back on.  Our lack of diversification means that we may not be able to adapt to changing market conditions, changes in regulation, increased competition or any significant decline in the ethanol industry.  Our business would also be significantly harmed if the ethanol plants could not operate at full capacity for any extended period of time.

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Our profitability depends upon purchasing corn at lower prices and selling ethanol at higher prices and because the difference between ethanol and corn prices can vary significantly, our financial results may also fluctuate significantly.

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The results of our ethanol production business are highly impacted by commodity prices. The substantial majority of our revenues are derived from the sale of ethanol. Our results of operations and financial condition are significantly affected by the cost and supply of corn and natural gas as our gross profit relating to the sale of ethanol is principally dependent on the difference between the price we receive for the ethanol we produce and the cost of corn and natural gas that we must purchase. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control, such as weather, domestic and global demand, shortages, export prices, and various governmental policies in the U.S. and around the world.

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As a result of price volatility for these commodities, our operating results may fluctuate substantially. Increases in corn or natural gas prices or decreases in ethanol, distillers’ grains and corn oil prices may make it unprofitable to operate our plants. No assurance can be given that we will be able to purchase corn and natural gas at, or near, current prices and that we will be able to sell ethanol, distillers’ grains and corn oil at, or near, current prices. Consequently, our results of operations and financial position may be adversely affected by increases in the price of corn or natural gas or decreases in the price of ethanol, distillers’ grains and corn oil.

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We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions also involve risks to our business.  If we were to experience relatively higher corn and natural gas costs compared to the selling prices of our products for an extended period of time, the value of our units may be reduced.

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Sustained negative operating margins may require some ethanol producers to temporarily limit or cease production.

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Our ability and the ability of other ethanol producers to operate profitably is largely determined by the spread between the price paid for corn and the price received for ethanol.  If this spread is narrow or is negative for a sustained period, some ethanol producers may elect to temporarily limit or cease production until their possibility for profitability returns.  Although we currently have no plans to limit or cease ethanol production, we may be required to do so if we experience a period of sustained negative operating margins.  In such an event, we would still incur certain fixed costs, which would impact our financial performance.

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Volatility in oil and gas prices may materially affect ethanol pricing and demand.

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Ethanol has historically traded at a discount to gasoline.  When ethanol trades at a discount to gasoline it encourages discretionary blending, thereby increasing the demand for ethanol beyond required blending rates. Conversely, when ethanol trades at a premium to gasoline, there is a disincentive for discretionary blending and ethanol demand is negatively impacted.  Consequently, ethanol pricing and demand may also be volatile, which makes it difficult to manage profit margins and which could result in a material adverse effect on our business, results of operations and financial condition.

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If the supply of ethanol exceeds the demand for ethanol, the price we receive for our ethanol and distillers’ grains may decrease.

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Domestic ethanol production capacity has increased substantially over the past decade.  However, demand for ethanol may not increase as quickly as expected or to a level that exceeds supply, or at all. Excess ethanol production capacity may result from decreases in the demand for ethanol or increased domestic production or imported supply. There are many factors affecting demand for ethanol, including regulatory developments and reduced gasoline consumption as a result of increased prices for gasoline or crude oil. Higher gasoline prices could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage, or higher prices could spur technological advances, such as the commercialization of engines utilizing hydrogen fuel-cells, which could supplant gasoline-powered engines. There are a number of governmental initiatives designed to reduce gasoline consumption, including tax credits for hybrid vehicles and consumer education programs.

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Because ethanol production produces distillers’ grains as a co-product, increased ethanol production will also lead to increased production of distillers’ grains. An increase in the supply of distillers’ grains, without corresponding increases in demand, could lead to lower prices or an inability to sell our distillers’ grains production. A decline in the

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price of distillers’ grains or the distillers’ grains market generally could have a material adverse effect on our business, results of operations and financial condition.

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Management expects additional volatility for the price of ethanol in 2021.  Ethanol production and demand are expected to increase slightly in 2021, but there is no guarantee that either projection will be accurate.  While exports rose slightly in 2020, due to tariffs and international competition, exports have fallen overall in recent years, and it appears unlikely that the export market will improve in 2021.  U.S. gas demand decreased substantially year over year in 2020, due primarily to the COVID-19 pandemic. A continued or further decrease in demand for either gasoline or ethanol blends would adversely impact the price of ethanol, which could result in a material adverse effect on our business, results of operations and financial condition.

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The price of distillers’ grains is affected by the price of other commodity products, such as soybeans, and decreases in the price of these commodities could decrease the price of distillers’ grains.

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Distillers’ grains compete with other protein-based animal feed products. The price of distillers’ grains may decrease when the price of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which they are derived. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers’ grains. The price of distillers’ grains is not tied to production costs. However, decreases in the price of distillers’ grains would result in less revenue from the sale of distillers’ grains and could result in lower profit margins.

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Historically, sales prices for distillers’ grains have been correlated with prices of corn. However, recently, the price increase for this co-product has lagged behind increases in corn prices. In addition, our distillers’ grains co-product competes with products made from other feedstocks, the cost of which may not have risen as corn prices have risen. Consequently, the price we may receive for distillers’ grains may not rise as corn prices rise, thereby lowering our cost recovery percentage relative to corn.

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The prices of ethanol and distillers’ grains may decline as a result of trade barriers imposed by foreign countries with respect to ethanol and distillers’ grains originating in the U.S. and negatively affect our profitability.

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An increasing amount of our industry’s products are being exported.  The U.S. ethanol industry was supported during our 2020 fiscal year with exports of ethanol which increased demand for our ethanol. However, export levels still remain lower than previous years’ levels, and there is no guarantee that export levels will improve or remain steady. If producers and exporters of ethanol and distillers’ grains are subjected to trade barriers when selling products to foreign customers, such as the tariffs and quotas currently in effect, there may be a reduction in the price of these products in the U.S.  Declines in the price we receive for our products will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably.

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If U.S. producers cannot satisfy import requirements imposed by countries importing distillers’ grains, export demand could be significantly reduced as a result. If export demand of distillers’ grains is significantly reduced as a result, the price of distillers’ grains in the U.S. would likely continue to decline which would have a negative effect on our revenue and could impact our ability to profitably operate which could in turn reduce the value of our units.

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We face intense competition that may result in reductions in the price we receive for our ethanol, increases in the prices we pay for our corn, or lower gross profits.

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Competition in the ethanol industry is intense. We face formidable competition in every aspect of our business from both larger and smaller producers of ethanol and distillers’ grains. Some larger producers of ethanol, such as Archer Daniels Midland, POET Biorefining, Cargill, Inc., Valero Energy Corporation, and Green Plains, Inc. have substantially greater financial, operational, procurement, marketing, distribution and technical resources than we have. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could affect our financial performance.

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Additionally, smaller competitors, such as farmer-owned cooperatives and independent companies owned by farmers and investors, have business advantages, such as the ability to more favorably procure corn by operating smaller plants that may not affect the local price of corn as much as a larger-scale plant like ours or requiring their farmer-owners to sell them corn as a requirement of ownership. Because Minnesota is one of the top producers of ethanol in the U.S., we

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face increased competition because of the location of our ethanol plants. Competing ethanol producers may introduce competitive pricing pressures that may adversely affect our sales levels and margins or our ability to procure corn at favorable prices. As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

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Until recently, oil companies, petrochemical refiners and gasoline retailers have not been engaged in ethanol production to a large extent. These companies, however, form the primary distribution networks for marketing ethanol through blended gasoline. During the past few years, several large oil companies have begun to penetrate the ethanol production market. If these companies increase their ethanol plant ownership or other oil companies seek to engage in direct ethanol production, such as Valero Renewable Fuels and Flint Hills Resources which are subsidiaries of larger oil companies, there may be a decrease in the demand for ethanol from smaller independent ethanol producers like us which could result in an adverse effect on our operations, cash flows and financial condition.

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We also face increasing competition from international ethanol suppliers. Most international ethanol producers have cost structures that can be substantially lower than ours and therefore can sell their ethanol for substantially less than we can.

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Competing ethanol producers may introduce competitive pricing pressures that may adversely affect our sales levels and margins or our ability to procure corn at favorable prices. As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

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We engage in hedging transactions which involve risks that could harm our business.

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We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments.  The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices, as well as low ethanol prices.

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Operational difficulties at our plants could negatively impact our sales volumes and could cause us to incur substantial losses.

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We have experienced operational difficulties at our plants in the past that have resulted in scheduled and unscheduled downtime or reductions in the number of gallons of ethanol we produce. Some of the difficulties we have experienced relate to production problems, repairs required to our plants’ equipment and equipment maintenance, the installation of new equipment and related testing, and our efforts to improve and test our air emissions. Our revenues are driven in large part by the number of gallons of ethanol and the number of tons of distillers’ grains we produce. If our ethanol plants do not efficiently produce our products in high volumes, our business, results of operations, and financial condition may be materially adversely affected.

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Our operations are also subject to operational hazards inherent in our industry and to manufacturing in general, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The occurrence of any of these operational hazards may materially adversely affect our business, results of operations and financial condition. Further, our insurance may not be adequate to fully cover the potential operational hazards described above or we may not be able to renew this insurance on commercially reasonable terms or at all.

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Our operations and financial performance could be adversely affected by infrastructure disruptions and lack of adequate transportation and storage infrastructure in certain areas.

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We ship our ethanol to our customers primarily by the railroad adjacent to our plant sites. We also have the potential to receive inbound corn via the railroad. Our customers require appropriate transportation and storage capacity to take delivery of the products we produce. Without the appropriate flow of natural gas to our plants, we may not be able

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to run at desired production levels or at all. Therefore, our business is dependent on the continuing availability of rail, highway and related infrastructure. Any disruptions in this infrastructure network, whether caused by labor difficulties, earthquakes, storms, other natural disasters, human error or malfeasance or other reasons, could have a material adverse effect on our business. We rely upon third-parties to maintain the rail lines from our plants to the national rail network, and any failure on their part to maintain the lines could impede our delivery of products, impose additional costs on us and could have a material adverse effect on our business, results of operations and financial condition.

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In addition, lack of this infrastructure prevents the use of ethanol in certain areas where there might otherwise be demand and results in excess ethanol supply in areas with more established ethanol infrastructure, depressing ethanol prices in those areas. In order for the ethanol industry to grow and expand into additional markets and for our ethanol to be sold in these new markets, there must be substantial development of infrastructure including:

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The substantial investments that will be required for these infrastructure changes and expansions may not be made on a timely basis, if at all, and decisions regarding these infrastructure improvements are outside of our control. Significant delay or failure to improve the infrastructure that facilitates the distribution could curtail more widespread ethanol demand or reduce prices for our products in certain areas, which would have a material adverse effect on our business, results of operations or financial condition.

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Rail logistical problems may result in delays in shipments of our products which could negatively impact our financial performance.

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There has been an increase in rail traffic congestion throughout the U.S. primarily due to the increase in cargo trains carrying shale oil. From time to time, periodic high demand and unusually adverse weather conditions may cause rail congestion resulting in rail delays and rail logistical problems. Although we have not been materially affected by prior rail congestion period, future periods of congestion may affect our ability to operate our plants at full capacity due to ethanol storage capacity constraints, which in turn could have a negative effect on our financial performance.

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Our business, and our industry as a whole, could be adversely affected by an outbreak of disease, epidemic or pandemic, such as the global COVID-19 pandemic, or similar public threat, or fear of such an event.  

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The global outbreak of the COVID-19 pandemic has had a negative impact on our revenues and operating results, which could worsen and/or continue for a significant period of time. This outbreak has resulted in disruptions and damage to our business, caused by the negative impact to our ability to obtain cost effective raw materials, supplies and component parts necessary to operate our ethanol, distillers’ grains, corn oil, or natural gas business, the negative impact on our ability to operate our facility should COVID-19 spread more broadly within Minnesota or the Midwest, thereby creating an increased risk of exposure to our workforce which cannot operate our facility remotely, and the negative impact to our ability to market and sell our products to markets which have slowed or shut down altogether. It is likely that effect such as these will continue to negatively impact our revenues, operating results, and business as a whole. Mitigation efforts have not and will not completely prevent our business from being adversely affected, and the longer the pandemic impacts supply and demand and the more broadly the pandemic spreads, it is more likely that the impact on our business, revenues and operating results will become increasingly negative.

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We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably.

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Our success depends in part on our ability to attract and retain competent personnel. For our ethanol plants, we must hire qualified managers, operations personnel, accounting staff and others, which can be challenging in a rural community.   Further, our current employees may decide to end their employment with us.  Competition for employees in the ethanol industry is intense, and we may not be able to attract and retain qualified personnel.

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We are highly dependent on our management team to operate our ethanol plants.  We may not be able to replace these individuals should they decide to cease their employment with us, or if they become unavailable for any other reason.  Any loss of these officers and key employees may prevent us from operating the ethanol plants profitably and could decrease the value of our units.

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Technology in our industry evolves rapidly, potentially causing our plants to become obsolete, and we must continue to enhance the technology of our plants or our business may suffer.

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We expect that technological advances in the processes and procedures for processing ethanol will continue to occur. It is possible that those advances could make the processes and procedures that we utilize at our ethanol plants less efficient or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than we are able. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than those of our competitors, which could cause our ethanol plants to become uncompetitive.

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Failures of our information technology infrastructure could have a material adverse effect on operations.  

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We utilize various software applications and other information technology that are critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected.      

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A cyber attack or other information security breach could have a material adverse effect on our operations and result in financial losses.

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We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact.  If we are unable to prevent cyber attacks and other information security breaches, we may encounter significant disruptions in our operations which could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.

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Competition from the advancement of alternative fuels may lessen the demand for ethanol.

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Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.

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Our sales will decline, and our business will be materially harmed if our third party marketers do not effectively market or sell the ethanol, distillers’ grains and corn oil we produce or if there is a significant reduction or delay in orders from our marketers.

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We have entered into agreements with a third parties to market our supply of ethanol, distillers’ grains and corn oil. Our marketers are independent businesses that we do not control. We cannot be certain that our marketers will market

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or sell our ethanol, distillers’ grains and corn oil effectively. Our agreements with our marketers do not contain requirements that a certain percentage of sales are of our products, nor do the agreements restrict the marketer’s ability to choose alternative sources for ethanol, distillers’ grains or corn oil.

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Our success in achieving revenue from the sale of ethanol, distillers’ grains and corn oil will depend upon the continued viability and financial stability of our marketers. Our marketers may choose to devote their efforts to other producers or reduce or fail to devote the necessary resources to provide effective sales and marketing support of our products. We believe that our financial success will continue to depend in large part upon the success of our marketers in operating their businesses.

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If our marketers breach their contracts or do not have the ability, for financial or other reasons, to market all of the ethanol we produce or to market the co-products produced at our plants, we may not have any readily available alternative means to sell our products. Our lack of a sales force and reliance on these third parties to sell and market most of our products may place us at a competitive disadvantage. Our failure to sell all of our ethanol and co-products may result in lower revenues and reduced profitability.

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We are exposed to credit risk resulting from non-payment by significant customers.

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We have a concentration of credit risk because GFE sells all of the ethanol, distillers’ grains, and corn oil produced to two customers and HLBE sells all of its ethanol, distillers’ grains, and corn oil produced to three customers. Although we typically receive payments timely and within the terms of our marketing agreements with these customers, we continually monitor this credit risk exposure. These customers accounted for approximately 100.0% of GFE’s revenue for the years ended October 31, 2020 and 2019, and approximately 96.7% and 96.8% of GFE’s outstanding accounts receivable balance at October 31, 2020 and 2019, respectively.  At HLBE, these customers accounted for approximately 96.4% and 97.5% of HLBE’s revenue for the years ended October 31, 2020 and 2019, respectively, and approximately 81.2% and 98.1% of HLBE’s outstanding accounts receivable balance at October 31, 2020 and 2019, respectively.  The inability of a third party to pay our accounts receivable may cause us to experience losses and may adversely affect our liquidity and our ability to make our payments when due.

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Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines and/or takes more energy to produce than it contributes may affect the demand for ethanol.

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Certain individuals believe that the use of ethanol will have a negative impact on gasoline prices at the pump. Some also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in conventional automobiles.  If consumers choose not to buy ethanol based on these beliefs, it would affect the demand for the ethanol we produce which could negatively affect our profitability and financial condition.

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Risks Related to Regulation and Governmental Action

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Our failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

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We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground. Certain aspects of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities including the Minnesota Pollution Control Agency. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits. We could also incur substantial costs and experience increased operating expenses as a result of operational changes to comply with environmental laws, regulations and permits. We have previously incurred substantial costs relating to our air emissions permit and expect additional costs relating to this permit in the future.

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Our plants’ air permits require certain on-going performance testing to be completed periodically to ensure compliance with minor source emission limits. On May 12, 2017, HLBE submitted a letter to the MPCA regarding the

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results of certain non-compliant tests. On October 17, 2017, HLBE entered into a stipulation agreement with the MPCA relating to these non-compliant tests.  Under the stipulation agreement, HLBE agreed to pay a civil penalty of $63,500, which was paid in October 2017. 

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Further, environmental laws and regulations are subject to substantial change. We cannot predict what material impact, if any, these changes in laws or regulations might have on our business. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could require additional capital expenditures, increase our operating costs or otherwise adversely affect our business. These changes may also relax requirements that could prove beneficial to our competitors and thus adversely affect our business. In addition, regulations of the EPA and the MPCA depend heavily on administrative interpretations. We cannot assure you that future interpretations made by regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations.  Failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

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Because federal and state regulation heavily influence the supply of and demand for ethanol, changes in government regulation that adversely affect demand or supply will have a material adverse effect on our business.

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Various federal and state laws, regulations and programs impact the supply of and demand for ethanol.  We believe the most important of these is the RFS, which sets minimum national volume standards for use of cellulosic, biomass-based diesel and total advanced renewable fuels. The RFS helps support a market for ethanol that might disappear without this incentive. In the case of the RFS, while it creates a demand for ethanol, the existence of specific categories of renewable fuels also creates a demand for these types of renewable fuels and will likely provide an incentive for companies to further develop these products to capitalize on that demand. In these circumstances, the RFS may also reduce demand for ethanol in favor of the renewable fuels for which specific categories exist.

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By statute, the RFS requires that 16.55 billion gallons be sold or dispensed in 2013, increasing to 36.0 billion gallons by 2022, but caps the amount of corn-based ethanol that can be used to meet the renewable fuels blending requirements at 15.0 billion gallons for 2015 and thereafter. The final 2021 RVOs have not yet been released. On December 19, 2019, the EPA announced final RVO requirements for the RFS for calendar year 2020. The corn-based biofuel requirement was set at 15.0 billion gallons, equating to the statutory requirement level as originally set by Congress when the RFS was enacted. However, the overall RVOs were set at 20.09 billion gallons for 2020, more than 20% below the overall statutory level of 30 billion gallons, due to decreases in the RVOs for cellulosic ethanol and advanced biofuels.  The 2019 and 2018 standards were also more than 20% below the overall statutory level.

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According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. In October 2018, the Office of Management and Budget announced that the 20% thresholds “have been met or are expected to be met in the near future.” In May 2019, the EPA delivered a proposed RFS “reset” rule to the Office of Management and Budget. If the statutory RVOs are reduced as a result of reset, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance. Current ethanol production capacity exceeds the 2020 RVO standard which can be satisfied by corn-based ethanol. Reduction of blending requirements could reduce the demand for and price of ethanol. If demand for ethanol decreases, it could materially adversely affect our business, results of operations and financial condition.

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Additionally, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. Successful reduction or repeal of the blending requirements of the RFS could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

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Under the RFS, small refineries may petition for and be granted temporary exemptions from the RVOs if they can demonstrate that compliance with the RVOs would cause disproportionate economic hardship. On December 17, 2020, the EPA released data on the number of waivers filed, which indicated that, as of December 17, 2020, 14 petitions for waivers for the 2020 compliance year have been received. For the 2019 compliance year, 32 petitions have been received. To date, all of the petitions received for both compliance years 2020 and 2019 remain pending. Further, some petitions remain pending from previous compliance years. Additionally, 44 petitions have been received by the EPA for the 2018 compliance year. To date, 31 petitions have been approved, which have exempted approximately 1.43 billion RINs, which is approximately 13.42 billion gallons of gasoline and diesel, from meeting the RFS blending targets. It is expected that

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additional petitions for waivers for the 2020 compliance year will be received by the EPA. It is also expected that the EPA will approve a significant number of these waiver petitions, thereby exempting a substantial number of gallons of gasoline and diesel from meeting the RFS blending targets. These exemptions decrease demand for our products, which negatively impacts ethanol prices and our profitability.

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On May 29, 2018, the National Corn Growers Association, National Farmers Union, and the RFA filed a petition with the U.S. Court of Appeals for the 10th Circuit challenging the EPA’s grant of waivers to three specific refineries.  The petitioners are asking the U.S. Court of Appeals for the 10th Circuit to reject the waivers granted to three refineries located in Wynnewood, Oklahoma, Cheyenne, Wyoming, and Woods Cross, Utah as an abuse of EPA authority. These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate RVOs under the RFS.  In January 2020, the court struck down the exemptions as improperly issued by the EPA. The court interpreted the RFS statute to provide that refineries are only eligible for relief if they have received uninterrupted, continuous extensions of the exemptions. Consistent with the ruling, the EPA denied certain small refinery exemption petitions filed by oil refineries in 2020 seeking retroactive relief from their ethanol use requirements for prior years. However, HollyFrontier and Wynnewood Refining filed a petition in the U.S. Supreme Court in September 2020 seeking review of the January 2020 ruling. In January 2021, the Supreme Court agreed to hear the appeal. Oral arguments are expected to be scheduled in spring of 2021. The Supreme Court’s decision could result in the overturning of the EPA’s denial of certain small refinery exemption petitions. Such a decision could have sweeping negative effects on the ethanol industry and our profitability.

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An EPA final rule released in December 2019 provides that EPA will project exempt volumes based on a three-year average of the relief recommended by the Department of Energy (“DOE”) for years 2016-2018, rather than based on actual exemptions granted. For the 2016 compliance year, the EPA said the DOE’s recommended relief was approximately 440 million RINs. The EPA, however, actually granted waivers for approximately 790 million RINs. Similarly, the DOE’s 2017 compliance year recommendation was 1.02 billion RINs, as compared to the approximately 1.82 billion RINs granted waivers by the EPA. For the 2018 compliance year, the DOE recommended the EPA approve waivers for 840 million RINs, as compared to the approximately 1.43 billion RINs granted waivers by the EPA. The EPA’s final rule also announced its general policy approach with respect to small refinery waivers on a go-forward basis as consistent with DOE’s recommendations, where appropriate. This final rule fell short of the relief that was urged by ethanol producers. As a result, management expects that small refinery exemptions will continue to have a negative effect on demand for our products, ethanol prices, and our profitability.  

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The EPA imposed E10 “blend wall” if not overcome will have an adverse effect on demand for ethanol.

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We believe that the E10 “blend wall” is one of the most critical governmental policies currently facing the ethanol industry. The “blend wall” issue arises because of several conflicting requirements. First, the renewable fuels standards dictate a continuing increase in the amount of ethanol blended into the national gasoline supply. Second, the EPA mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. The EPA policy of 10% and the RFS increasing blend rate are at odds, which is sometimes referred to as the “blend wall.” While the issue is being considered by the EPA, there have been no regulatory changes that would reconcile the conflicting requirements. In 2011, the EPA allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. As a result, the approval of E15 may not significantly increase demand for ethanol.

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In addition, different gasoline blendstocks may have been required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions. This prevented E15 from being used during certain times of the year in various states. However, on May 30, 2019, the EPA issued a final rule which allows E15 to be sold year-round. In June 2019, the American Fuel and Petrochemical Manufacturers association filed a lawsuit in the U.S. Court of Appeals for the District of Columbia challenging the final rule. Additionally, in August 2019, the Small Retailers Coalition filed a lawsuit in the U.S. Court of Appeals for the District of Columbia seeking review of the final rule. There is no guarantee that the final rule will be upheld. Legal challenges could create uncertainty for retailers desiring to implement or expand sales of E15. Additionally, although the year-round E15 rule is now final, there is no guarantee that retailers will implement the sale of year-round E15, nor is there a guarantee that the rule will result in an increase of ethanol sales.

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The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability.

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California passed a Low Carbon Fuels Standard (“LCFS”) which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.

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Meeting the requirements of evolving environmental, health and safety laws and regulations, and in particular those related to climate change, could adversely affect our financial performance.

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When the EPA released its final regulations on RFS, these regulations grandfathered our plants at their current production capacity for the generation of RINs for compliance with RFS. Any expansion of our plants beyond the grandfathered volumes must meet a threshold of a 20% reduction in GHG emissions from a 2005 baseline measurement for the ethanol to be eligible to generate RINS for compliance with the RFS mandate.

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In 2015, our plants were awarded “efficient producer” status under the pathway petition program for the non-grandfathered volumes of ethanol produced at our plants. Pursuant to the award approval, HLBE and GFE are only authorized to generate RINs for each plant’s non-grandfathered volumes if each plant can demonstrate that all ethanol produced at the plant during an averaging period (defined as the prior 365 days or the number of days since the date EPA efficient producer pathway approval) meets the 20% GHG reduction requirement.

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Although we believe GFE and HLBE will be able to maintain continuous compliance with the 20% reduction in GHG emissions requirement as presently operated, there is no guarantee that we will not have to install carbon dioxide mitigation equipment or take other steps unknown to us at this time in order to comply with the efficient producer requirements or other future law or regulation.  Continued compliance with the efficient producer GHG reduction requirements or compliance with future law or regulation of carbon dioxide, could be costly and may prevent us from operating our plants as profitably, which may have an adverse impact on our operations, cash flows and financial position.

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If we fail to comply with the 20% reduction in GHG emissions requirement, we will not be able to generate RINs for our non-grandfathered volumes of ethanol, which could adversely affect our operating margins.

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We expect that nearly all of the anticipated demand for our ethanol production will be by customers obligated to comply with the RFS. The EPA's approval of our efficient producer petitions requires that the plant demonstrates continuous compliance with the 20% reduction in GHG emissions for all volumes of ethanol produced, not just non-grandfathered volumes of ethanol. If we cannot show continuous compliance with the requirement for all volumes of ethanol, we will not be able issue RINs for the non-grandfathered volumes of ethanol produced. If our ethanol production does not meet the requirements for RIN generation as administered by the EPA, we may be required to sell those gallons of ethanol without RINs at lower prices in the domestic market to compensate for the lack of RINs or sell these gallons of ethanol in the export market where RINs are not required, which could adversely affect our results of operations, cash flows and financial condition.

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Risks Related to the Units

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There is no public market for our units and no public market is expected to develop.

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There is no established public trading market for our units, and we do not expect one to develop in the foreseeable future.  We have established through FNC Ag Stock, LLC, a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members.  The Unit Trading Bulletin Board has been designed to comply with federal tax laws and IRS regulations establishing a “qualified matching service,” as well as state and federal securities laws.  The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached.

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There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units. All transactions must comply with the Unit Trading Bulletin Board Rules, our member control agreement, and are subject to approval by our board of governors.  As a result, units held by our members may not be easily resold and members may be required to hold their units indefinitely. Even if members are able to resell our units, the price may be less than the members’ investment in the units or may otherwise be unattractive to the member.

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There are significant restrictions on the transfer of our units.

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To protect our status as a partnership for tax purposes and to assure that no public trading market in our units develops, our units are subject to significant restrictions on transfer and transfers are subject to approval by our board of governors. All transfers of units must comply with the transfer provisions of our member control agreement and the unit transfer policy adopted by our board of governors. Our board of governors will not approve transfers which could cause us to lose our tax status or violate federal or state securities laws. As a result of the provisions of our member control agreement, members may not be able to transfer their units and may be required to assume the risks of the investment for an indefinite period of time.

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There is no assurance that we will be able to make distributions to our unit holders, which means that holders could receive little or no return on their investment.

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Distributions of our net cash flow may be made at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and restrictions imposed by lender under our credit facilities. Our credit facilities currently limit our ability to make distributions to our members. If our financial performance and loan covenants permit, we expect to make cash distributions at times and in amounts that will permit our members to make income tax payments, along with distributions in excess of these amounts. However, our board may elect to retain cash for operating purposes, debt retirement, plant improvements or expansion. Although we have made distributions in the past, there is no guarantee that we will be in a financial position to pay distributions in the future, that the terms of our credit facility will allow us to make distributions to our members, or that distributions, if any, will be at times or in amounts to permit our members to make income tax payments. Consequently, members may receive little or no return on their investment in the units.

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Risks Related to Tax Issues in a Limited Liability Company

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EACH UNIT HOLDER SHOULD CONSULT THE INVESTOR’S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES OF AN INVESTMENT IN GRANITE FALLS ENERGY, LLC AND ITS IMPACT ON THE INVESTOR’S TAX REPORTING OBLIGATIONS AND LIABILITY.

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If we are not taxed as a partnership, we will pay taxes on all of our net income and you will be taxed on any earnings we distribute, and this will reduce the amount of cash available for distributions to holders of our units.

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We consider Granite Falls Energy, LLC to be a partnership for federal income tax purposes. This means that we will not pay any federal income tax, and our members will pay tax on their share of our net income. If we are unable to maintain our partnership tax treatment or qualify for partnership taxation for whatever reason, then we may be taxed as a corporation. We cannot assure you that we will be able to maintain our partnership tax classification. For example, there might be changes in the law or our company that would cause us to be reclassified as a corporation. As a corporation, we would be taxed on our taxable income at rates of up to 35% for federal income tax purposes (21% beginning after December 31, 2017). Further, distributions would be treated as ordinary dividend income to our unit holders to the extent of our earnings and profits. These distributions would not be deductible by us, thus resulting in double taxation of our earnings and profits. This would also reduce the amount of cash we may have available for distributions.

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Your tax liability from your allocated share of our taxable income may exceed any cash distributions you receive, which means that you may have to satisfy this tax liability with your personal funds.

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As a partnership for federal income tax purposes, all of our profits and losses “pass-through” to our unit holders. You must pay tax on your allocated share of our taxable income every year. You may incur tax liabilities from allocations of taxable income for a particular year or in the aggregate that exceed any cash distributions you receive in that year or in

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the aggregate. This may occur because of various factors, including but not limited to, accounting methodology, the specific tax rates you face, and payment obligations and other debt covenants that restrict our ability to pay cash distributions. If this occurs, you may have to pay income tax on your allocated share of our taxable income with your own personal funds.

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You may not be able to fully deduct your share of our losses or your interest expense.

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It is likely that your interest in us will be treated as a “passive activity” for federal income tax purposes. In the case of unit holders who are individuals or personal services corporations, this means that a unit holder’s share of any loss incurred by us will be deductible only against the holder’s income or gains from other passive activities, e.g., S corporations and partnerships that conduct a business in which the holder is not a material participant. Some closely held C corporations have more favorable passive loss limitations. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. Upon disposition of a taxpayer’s entire interest in a passive activity to an unrelated person in a taxable transaction, suspended losses with respect to that activity may then be deducted.

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Interest paid on any borrowings incurred to purchase units may not be deductible in whole or in part because the interest must be aggregated with other items of income and loss that the unit holder has independently experienced from passive activities and subjected to limitations on passive activity losses.

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Deductibility of capital losses that we incur and pass through to you or that you incur upon disposition of units may be limited. Capital losses are deductible only to the extent of capital gains plus, in the case of non-corporate taxpayers, the excess may be used to offset a portion of ordinary income. If a non-corporate taxpayer cannot fully utilize a capital loss because of this limitation, the unused loss may be carried forward and used in future years subject to the same limitations in the future years.

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Although we expect that a number of our members may qualify for the Qualified Business Income Deduction (“QBID”), you may not qualify for the QBID.

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Your ownership of our units may qualify you for the QBID. Pursuant to the Tax Cuts and Jobs Act of 2017, the QBID allows for a deduction of up to 20% of the qualified business income (“QBI”) of an owner of a pass-through entity. QBI generally includes the net amount of qualified income, gain, deduction, and loss from a domestic trade or business in which the taxpayer is an owner. The calculation of the QBID depends on a variety of factors, with the most significant factor being the taxpayer’s taxable income. For married persons filing jointly with taxable income equal to or less than the threshold amount, which is subject to adjustment for inflation, of $315,000 ($157,500 for taxpayers filing single), a taxpayer’s QBID is the lesser of: (1) 20% of the taxpayer’s QBI, or (2) 20% of the taxpayer’s taxable income less their net capital gains. For married persons filing jointly with taxable income exceeding the above-referenced threshold amounts, the QBID is subject to further limitations, such as limitations based on the amount of W-2 wages paid with respect to that entity or business, the unadjusted basis of qualified property in the business, and the type of trade or business. Because the impact of this deduction is dependent upon your particular tax situation, you should consult your own tax advisor on your eligibility for the QBID. There is no guarantee that you will qualify for the QBID.

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Preparation of your tax returns may be complicated and expensive.

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The tax treatment of limited liability companies and the rules regarding partnership allocations are complex. We will file a partnership income tax return and will furnish each unit holder with a Schedule K-1 that sets forth our determination of that unit holder’s allocable share of income, gains, losses and deductions. In addition to U.S. federal income taxes, unit holders will likely be subject to other taxes, such as state and local taxes, that are imposed by various jurisdictions. It is the responsibility of each unit holder to file all applicable federal, state and local tax returns and pay all applicable taxes. You may wish to engage a tax professional to assist you in preparing your tax returns and this could be costly to you.

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Any audit of our tax returns resulting in adjustments could result in additional tax liability to you.

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The IRS may audit our tax returns and may disagree with the positions that we take on our returns or any Schedule K-1. If any of the information on our partnership tax return or a Schedule K-1 is successfully challenged by the IRS, the character and amount of items of income, gains, losses, deductions or credits in a manner allocable to some or all our unit holders may change in a manner that adversely affects those unit holders. This could result in adjustments on unit

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holders’ tax returns and in additional tax liabilities, penalties and interest to you. An audit of our tax returns could lead to separate audits of your personal tax returns, especially if adjustments are required.

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ITEM 1B.UNRESOLVED STAFF COMMENTS

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None.

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ITEM 2. PROPERTIES.

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Our Granite Falls ethanol plant is located approximately three miles east of Granite Falls, Minnesota in Chippewa County at the junction of Highways 212 and 23.  The plant’s address is 15045 Highway 23 SE, Granite Falls, Minnesota. The ethanol plant sits on approximately 200 acres. This site includes an administrative building which serves as our headquarters.  The site also includes corn, ethanol, and distillers’ grains handling facilities.  All of our tangible and intangible property, real and personal, serves as the collateral for our credit facilities with AgCountry Farm Credit Services, PCA (“AgCountry”).

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HLBE’s ethanol plant is sited on approximately 216 acres of land located near Heron Lake, Minnesota.  The site includes corn, coal, ethanol, and distillers’ grains storage and handling facilities. Located on these 216 acres is an administration building that serves as HLBE’s headquarters.  The plant’s address is 91246 390th Avenue, Heron Lake, Minnesota 56137-3175. All of HLBE’s real property is subject to mortgages in favor of its senior lender, Compeer Financial (formerly known as AgStar Financial Services, FCLA) as security for loan obligations.

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HLBE’s wholly owned subsidiary’s, Agrinatural, property consists of 190 miles of distribution main pipelines and service pipelines, together with the associated easement and land rights, a town border station, meters and regulators, office and other equipment and construction in process. All of Agrinatural’s real property and assets are subject to mortgages in favor of HLBE as security for loan obligations owed to HLBE.

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HLBE’s and Agrinatural’s credit facilities are discussed in more detail under “ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Arrangements”.

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ITEM 3.LEGAL PROCEEDINGS

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From time to time in the ordinary course of business, Granite Falls Energy, LLC or its subsidiaries may be named as a defendant in legal proceedings related to various issues, including workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

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ITEM 4.MINE SAFETY DISCLOSURES

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None.

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PART II

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ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

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Market Information

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There is no public trading market for our units. However, GFE has established an online unit trading bulletin board (“QMS”) through FNC Ag Stock, LLC, in order to facilitate trading in our units. The QMS has been designed to comply with federal tax laws and IRS regulations establishing a “qualified matching service,” as well as state and federal securities laws. The QMS consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes. The QMS does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached. We do not become involved in any purchase or sale negotiations arising from the QMS and have no role in effecting the transactions beyond approval, as required under our member control agreement, and the issuance of new certificates. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating

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the QMS. We do not receive any compensation for creating or maintaining the QMS. In advertising the QMS, we do not characterize Granite Falls Energy as being a broker or dealer or an exchange.  We do not use the QMS to offer to buy or sell securities other than in compliance with securities laws, including any applicable registration requirements.

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There are detailed timelines that must be followed under the QMS rules and procedures with respect to offers and sales of membership units. All transactions must comply with the QMS rules and procedures, our member control agreement, and are subject to approval by our board of governors.

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So long as we remain a publicly reporting company, information about the Company will be publicly available through the SEC’s filing system. However, if at any time we cease to be a publicly reporting company, we anticipate continuing to make information about the Company publicly available on our website in order to continue operating the QMS.

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The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified.  We believe this most accurately represents the current trading value of the Company’s units.  The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.

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As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status.  Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof).  All transfers are subject to a determination that the transfer will not cause Granite Falls Energy to be deemed a publicly traded partnership.

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Issuer Repurchases of Equity Securities

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We did not make any repurchases of our units during fiscal year 2020.

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Holders of Record

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As of February 16, 2021, there were approximately 994 holders of record of our membership units.  

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As of October 31, 2020 and February 16, 2021, there were no outstanding options or warrants to purchase, or securities convertible for or into, our units.

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Distributions

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Granite Falls Energy

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Distributions by GFE to its unit holders are in proportion to the number of units held by each unit holder.  A unit holder’s distribution is determined by multiplying the number of units by distribution per unit declared.  GFE’s board of governors has complete discretion over the timing and amount of distributions to our unit holders. However, GFE’s credit facility with AgCountry provides that we may not declare any distributions other than, for each fiscal year, one or more distributions up to an aggregate of 100% of the net profit (determined according to GAAP) for such fiscal year; provided that we are and will remain in compliance with all of the covenants, terms and conditions of the credit facility. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments, along with distributions in excess of these amounts. Cash distributions are not assured, however, and in the future, we may not be in a position to make distributions. Under Minnesota law, we cannot make a distribution to a member if, after the distribution, we would not be able to pay our debts as they become due or our liabilities, excluding liabilities to our members on account of their capital contributions, would exceed our assets.

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Below is a table representing the cash distributions declared or paid to the members of Granite Falls Energy during the fiscal years ended October 31, 2020 and 2019. Based on the covenants discussed above, all of the below distributions were approved by our lender prior to distribution. No additional distributions were either declared or paid in 2020.

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Heron Lake BioEnergy

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Distributions by HLBE to its unit holders are in proportion to the number of units held by each unit holder. A unit holder's distribution is determined by multiplying the number of units by distribution per unit declared. HLBE’s board of governors has complete discretion over the timing and amount of distributions to its unit holders. Distributions are restricted by certain loan covenants in its credit facility with Compeer. Additionally, under Minnesota law, HLBE cannot make a distribution to a member if, after the distribution, it would not be able to pay its debts as they become due or its liabilities, excluding liabilities to its members on account of their capital contributions, would exceed its assets.

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No distributions were either declared or paid in 2019 or 2020.

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Unregistered Sales of Equity Securities

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The Company had no unregistered sales of securities during fiscal year 2020.

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Securities Authorized for Issuance Under Equity Compensation Plans

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As of the date of this annual report, we had no “equity compensation plans” (including individual equity compensation arrangements) under which any of our equity securities are authorized for issuance.

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ITEM 6. SELECTED FINANCIAL DATA

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Not applicable.

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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General

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We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the fiscal year ended October 31, 2020.  This discussion

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should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements thereto and the risk factors contained herein.

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Overview

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Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S.  Our production operations are carried out at GFE’s plant located in Granite Falls, Minnesota and HLBE’s ethanol plant near Heron Lake, Minnesota.

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The GFE plant has an annual production capacity of approximately 63 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis.  The HLBE plant has an approximate annual production capacity of 65 million gallons of denatured ethanol, but is currently permitted production capacity to produce approximately 72 million gallons of undenatured ethanol on a twelve-month rolling sum basis.  We intend to continue working toward increasing production to take advantage of the additional production allowed pursuant to our permits as long as we believe it is profitable to do so.

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Beginning December 11, 2019, HLBE also owns a 100% interest in Agrinatural, which is a natural gas distribution and sales company located in Heron Lake, Minnesota that owns approximately 190 miles of natural gas pipeline and provides natural gas to HLBE’s ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company.  Agrinatural's revenues are generated through natural gas distribution fees and sales. At October 31, 2019, HLBE held a 73% controlling interest in Agrinatural.

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Plan of Operations Through October 31, 2021

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The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2019 and 2020 as a result of industry-wide record low ethanol prices due to reduced demand, high industry inventory levels and other effects of the COVID-19 pandemic. These factors resulted in prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. We expect to have sufficient cash generated by continuing operations and availability on our credit facilities and other loans to fund our operations.  However, should unfavorable operating conditions continue in the ethanol industry that prevent us from profitably operating our plants, we may need to seek additional debt or equity funding or further idle ethanol production altogether.

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Over the next year we will continue our focus on operational improvements at our plants. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plants, continued emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

In addition, we expect to continue to conduct routine maintenance and repair activities at the ethanol plants to maintain current plant infrastructure, as well as some small capital projects to improve operating efficiency. We anticipate using cash we generate from our operations and our credit facilities for each plant to finance these plant upgrade projects.

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Trends and Uncertainties Impacting Our Operations

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The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol.  Other factors that may affect our future results of operation include those risks and factors discussed in this report at “PART I - Item 1. Business” and “PART I - Item 1A. Risk Factors”.

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Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and

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octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

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We expect our ethanol plants to produce approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our ethanol plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our ethanol plants in order to minimize our variable costs and optimize cash flow.

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For the fiscal year ended October 31, 2020 compared to fiscal year ended October 31, 2019, our average price per gallon of ethanol sold decreased by approximately 4.4%. Ethanol prices were lower during the fiscal year ended October 31, 2020 due primarily to effects of the COVID-19 pandemic, which resulted in reduced demand and high inventory levels. Additionally, the increase in approved economic hardship exemptions from the RVOs has recently effectively lowered the RVOs by a significant number of gallons of domestic demand. If this trend continues, it may continue to negatively impact the U.S. ethanol market. Management believes that the ethanol outlook moving into fiscal year 2021 will remain relatively flat and our margins will remain tight due to higher corn prices and depressed gasoline demand.  

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In recent years, including fiscal year 2020 over fiscal year 2019, exports of ethanol have increased. Export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. During 2017, Brazil and China adopted import quotas and/or tariffs on the importation of ethanol which are expected to continue to negatively impact U.S. exports. China, the number three importer of U.S. ethanol in 2016, has imported negligible volumes since imposing a 70% tariff in 2018  until January 2021.

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On September 1, 2017, Brazil’s Chamber of Foreign Trade imposed a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons, per quarter. The tariff was renewed in September 2019, but the import quota was raised to 187.5 million liters, or 49.5 million gallons, per quarter. In December 2020, the import quota expired, thereby subjecting all Brazilian imports of U.S. ethanol to a 20% tariff. These tariffs have had and will likely continue to have a negative impact on the export market demand and prices for ethanol produced in the United States. Any decrease in U.S. ethanol exports could adversely impact the market price of ethanol unless domestic demand increases or additional foreign markets are developed..

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Corn prices trended upward during fiscal year 2020, due primarily to strong export demand during the 2020 period compared to the 2019 period. The latest estimates of supply and demand provided by the U.S. Department of Agriculture (“USDA”) estimate the 2019-2020 ending corn stocks at approximately 1.9 billion bushels, and project the 2020-2021 corn supply at approximately 16.5 billion bushels, which is more than the 2019-2020 supply, with corn consumption for ethanol and co-products slightly higher at approximately 5.1 billion bushels, suggesting higher corn prices into fiscal 2021. Beginning in December 2020, and carrying through January and into February 2021, China substantially increased its purchase of U.S. corn reducing U.S. inventories and increasing prices. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices.

Distillers’ grains prices decreased in 2020 over 2019, due to decreased supply as a result of decreased production. Top export markets include Mexico, Vietnam, Korea, Indonesia, Turkey, Thailand, and the European Union and United Kingdom. Of note, however, is that export demand from China, historically one of the largest importers of U.S. produced distillers grains, has significantly declined. In 2017, China imposed significant anti-dumping and anti-subsidies on distillers’ grains imported from the U.S. which resulted in significant declines in exports of U.S. distillers’ grains to China. The anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. The imposition of these duties has resulted in a significant decline in demand from this top importer requiring U.S. producers to seek out alternative markets. While exports to China increased during fiscal year 2020 compared to fiscal year 2019, exports to China remain substantially below the pre-tariff export levels. There is no guarantee that distillers’ grains exports to China will return to pre-tariff levels.

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On January 15, 2020, President Trump signed a “phase one” trade agreement with China. The agreement includes a commitment by China to purchase agricultural products over the next two years, including distillers’ grains. The agreement will also provide U.S. manufacturers of DDGS with a streamlined process for registration and licensing in order to facilitate U.S. exports to China. While this agreement appears positive for the industry, there is no guarantee that the agreement will be fully implemented, nor is there a guarantee that exports to China return to pre-tariff levels.

Additionally, exports of U.S. distillers’ grains to Vietnam had halted completely due to Vietnam’s imposition of stricter regulations in December 2016. In a statement issued September 1, 2017, the U.S. Grains Council announced that Vietnam is lifting its suspension of U.S. distillers’ grains imports and easing fumigation requirements. While exports to Vietnam have resumed, they remain substantially below the pre-2016 levels. There is no guarantee that distillers’ grains exports to Vietnam will return to such levels.

Management anticipates distillers’ grains prices will remain steady during our 2021 fiscal year, unless additional domestic demand or other foreign markets develop. Domestic demand for distillers’ grains could remain low if corn prices decline and end-users switch to lower priced alternatives.

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Corn oil prices as a whole have been adversely impacted during the last few years by oversupply of corn oil due to the substantial increase in corn oil production. Additionally, corn oil prices have been impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production. In December 2019, legislation was signed extending the $1.00 per-gallon biodiesel blender tax credit retroactively to January 1, 2018, and through December 31, 2022.

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Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil and grain prices in future periods will be consistent compared to historical periods.

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Results of Operations for the Fiscal Years Ended October 31, 2020 and 2019

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The following table shows the results of our operations and the percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our audited consolidated statements of operations for the fiscal years ended October 31, 2020 and 2019 (amounts in thousands):

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Revenues

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Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers’ grains and sales of corn oil. Our remaining consolidated revenues are attributable to miscellaneous other revenue from incidental sales of corn syrup at HLBE’s plant and revenues generated from natural gas pipeline operations at Agrinatural, net of eliminations for distribution fees paid by HLBE to Agrinatural for natural gas transportation services.

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The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our audited consolidated statements of operations for the fiscal year ended October 31, 2020 (amounts in thousands):

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The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our audited consolidated statements of operations for the fiscal year ended October 31, 2019 (amounts in thousands):

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Our total consolidated revenues decreased by approximately 21.7% for the fiscal year ended October 31, 2020, as compared to the fiscal year 2019, primarily due to decreases in production of ethanol, distillers’ grains, and corn oil and decreases in average price received for our ethanol, distillers’ grains, and corn oil.

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The following table reflects quantities of our three primary products sold and the average net prices received for the fiscal years ended October 31, 2020 and 2019 (quantities in thousands):

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Ethanol

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Total revenues from sales of ethanol decreased by approximately 21.7% for fiscal year 2020 compared to the fiscal year 2019 due primarily to an approximately 18.0% decrease in the volumes sold from period to period, coupled with an approximately 4.4% decrease in the average price per gallon we received for our ethanol. The decrease in price is primarily due to a decrease in demand for ethanol and significantly lower gasoline prices. We  sold fewer ethanol gallons during fiscal year 2020 as compared to fiscal year 2019 primarily due to decreases in ethanol production at the GFE and HLBE plants. Ethanol production was lower at our plants compared to the prior year as a result of the GFE plant and HLBE plant being idled due to effects of the COVID-19 pandemic from on or about April 3, 2020 through approximately May 18, 2020 and from on or about March 30, 2020 through approximately May 31, 2020, respectively. Additionally, in July 2020, HLBE’s plant experienced operational issues with its boiler, which negatively impacted production. Management anticipates higher ethanol production and sales during our 2021 fiscal year, as compared to our 2020 fiscal year. 

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We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. At October 31, 2020, GFE had fixed and basis contracts for forward ethanol sales for various delivery periods through December 2020 valued at approximately $11.8 million, and HLBE had fixed and basis contracts for forward ethanol sales for various delivery periods through December 2020 valued at approximately $12.4 million. Separately, ethanol derivative instruments

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resulted in a loss of approximately $350,000 during the fiscal year ended October 31, 2020, and a gain of approximately $220,000 during the fiscal year ended October 31, 2019.

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Distillers’ Grains

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Total revenues from sales of distillers’ grains decreased approximately 19.9% for fiscal year 2020 compared to fiscal year 2019. The decrease in distillers' grains revenues is primarily attributable to an approximately 17.0% decrease in the tons of distillers’ grains sold during fiscal year 2020 compared to fiscal year 2019, coupled with an approximately 3.8% decrease in the average price per ton we received for our distillers’ grains from period to period.

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The decrease in the market price of distillers’ grains is due to decreased demand and lower prices in soybean meal, which is a competitive product to distillers’ grains. The decrease in total tons of distillers’ grains sold during fiscal year 2020 compared to the fiscal year 2019 was due to an approximately 34.4% decrease in distillers’ grains produced at HLBE’s plant and an approximately 10.0% decrease in distillers’ grain production at the GFE plant. The decreases in tons produced at both the GFE and HLBE plants was due to overall decreased production at both plants as a result of the GFE plant and HLBE plant being idled due to effects of the COVID-19 pandemic from on or about April 3, 2020 through approximately May 18, 2020 and from on or about March 30, 2020 through approximately May 31, 2020, respectively. Additionally, in July 2020, HLBE’s plant experienced operational issues with its boiler, which negatively impacted production. Management anticipates higher distillers’ grains production during our 2021 fiscal year, as compared to our 2020 fiscal year.

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At October 31, 2020, GFE had forward contracts to sell approximately $5.9 million of distillers’ grains for delivery through March 2021, and HLBE had forward contracts to sell approximately $5.4 million of distillers’ grains for delivery through March 2021.

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Corn Oil

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Separating the corn oil from our distillers’ grains decreases the total tons of distillers’ grains that we sell; however, our corn oil has a higher per ton value than our distillers’ grains. Total revenues from sales of corn oil decreased by approximately 13.1% for fiscal year 2020 compared to the fiscal year 2019. This decrease is attributable to an approximately 10.9% decrease in pounds sold from period to period, coupled with an approximately 4.0% decrease in the average price per pound of corn oil sold from period to period.

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Management attributes the decrease in corn oil sales during fiscal year 2020 as compared to 2019 primarily to decreased production at the plants as a result of the GFE plant and HLBE plant being idled due to effects of the COVID-19 pandemic from on or about April 3, 2020 through approximately May 18, 2020 and from on or about March 30, 2020 through approximately May 31, 2020, respectively. Additionally, in July 2020, HLBE’s plant experienced operational issues with its boiler, which negatively impacted production. Management anticipates higher corn oil production during our 2021 fiscal year, as compared to our 2020 fiscal year.

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Although management believes that corn oil prices will remain relatively steady, prices may decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil or if biodiesel blenders’ tax credit is not renewed and biodiesel production declines.

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At October 31, 2020, GFE had forward corn oil sales contracts to sell approximately $681,000 for delivery through December 2020, and HLBE had forward corn oil sales contracts to sell approximately $633,000 for delivery through December 2020.

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Cost of Goods Sold

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Our cost of goods sold decreased by approximately 17.2% for the fiscal year ended October 31, 2020, as compared to the fiscal year ended October 31, 2019. However, cost of goods sold, as a percentage of revenues, increased to approximately 106.7% for the fiscal year ended October 31, 2020, as compared to approximately 101.8% for the 2019 fiscal year due to a narrower margin between the price of ethanol and the price of corn.  Approximately 90% of our total costs of goods sold is attributable to ethanol production. As a result, the cost of goods sold per gallon of ethanol produced

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for the fiscal year ended October 31, 2020 was approximately $1.69 per gallon of ethanol sold compared to approximately $1.67 per gallon of ethanol produced for the fiscal year ended October 31, 2019.

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The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, depreciation expense, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year ended October 31, 2020 (amounts in thousands):

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The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year ended October 31, 2019 (amounts in thousands):

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Corn Costs

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Our cost of goods sold related to corn decreased approximately 19.1% for our 2020 fiscal year compared to our 2019 fiscal year, due primarily to an approximately 17.5% decrease in the number of bushels of corn processed from period to period, coupled with an approximately 1.9% decrease in the average price per bushel paid for corn from period to period. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for our 2020 fiscal year was approximately $0.03 less than the corn-ethanol price spread we experienced for same period of 2019.

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For our fiscal years ended October 31, 2020 and 2019, our plants processed approximately 35.4 million and 42.9 million bushels of corn, respectively. This decrease was due primarily to decreased production at the plants as a result of the GFE plant and HLBE plant being idled due to effects of the COVID-19 pandemic from on or about April 3, 2020 through approximately May 18, 2020 and from on or about March 30, 2020 through approximately May 31, 2020, respectively. Additionally, in July 2020, HLBE’s plant experienced operational issues with its boiler, which negatively impacted production. Management anticipates higher corn consumption during our 2021 fiscal year compared to our 2020 fiscal year provided that we can achieve operating margins that allow us to continue to operate the ethanol plants at capacity.

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The decrease in our cost per bushel of corn was primarily related to lower markets due to loss of demand as a result of the COVID-19 pandemic as well as favorable growing conditions through much of the growing season. Due to projected decreased corn stocks and projected slightly increased demand, management anticipates that corn prices will be higher during our 2021 fiscal year.

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From time to time we enter into forward purchase contracts for our corn purchases. At October 31, 2020, GFE had forward corn purchase contracts for approximately 4.0 million bushels for deliveries through December 2022 and HLBE had forward corn purchase contracts for approximately 2.5 million bushels for deliveries through July 2022.

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Our corn derivative positions resulted in a loss of approximately $2.4 million for the fiscal year ended October 31, 2020, which increased cost of goods sold and a gain of approximately $1.1 million for the fiscal year ended October 31, 2019, which decreased cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 

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Natural Gas Costs

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For our 2020 fiscal year, we experienced a decrease of approximately 22.4% in our overall natural gas costs compared to our 2019 fiscal year.  Management attributes the decrease in price to increased natural gas supply and less consumption due to decreased production at the plants as a result of the GFE plant and HLBE plant being idled due to effects of the COVID-19 pandemic from on or about April 3, 2020 through approximately May 18, 2020 and from on or about March 30, 2020 through approximately May 31, 2020, respectively. Additionally, in July 2020, HLBE’s plant experienced operational issues with its boiler, which negatively impacted production.  However, management anticipates higher natural gas prices during the winter months due to the typical seasonal natural gas cost increases experienced during the winter months.

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Operating Expense

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Operating expenses include wages, salaries and benefits of administrative employees at the plants, insurance, professional fees and similar costs.  Operating expenses as a percentage of revenues rose to 5.2% of revenues for our fiscal year ended October 31, 2020 compared to 3.1% of revenues for our fiscal year ended October 31, 2019. This increase is primarily due to lower revenues and the recognition of approximately $1.8 million loss on disposal of assets during the 2020 period at HLBE.

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Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the 2021 fiscal year.

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Operating Loss

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Our operating loss increased by approximately $10.8 million for our fiscal year ended October 31, 2020 compared to fiscal year 2019. This increase resulted largely from increased prices for corn relative to the price of ethanol and negative operating margin, largely due to losses on disposal of assets of approximately $1.8 million and goodwill impairment of approximately $1.4 million, and losses resulting from the GFE plant and HLBE plant being idled due to effects of the COVID-19 pandemic from on or about April 3, 2020 through approximately May 18, 2020 and from on or about March 30, 2020 through approximately May 31, 2020, respectively, and the HLBE plant experiencing operational issues with its boiler after production resumed.

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Other Income (Expense), Net

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We had net other income for our fiscal year ended October 31, 2020 of approximately $463,000 compared to net other expense of approximately $745,000 for our fiscal year ended October 31, 2019. We had more other income during fiscal year 2020 compared to fiscal year 2019 due primarily to approximately $472,000 investment income received during the 2020 fiscal year compared to the 2019 fiscal year.

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Changes in Financial Condition at October 31, 2020 and 2019

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The following table highlights the changes in our financial condition at October 31, 2020 compared to October 31, 2019 (amounts in thousands):

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The increase in total assets at October 31, 2020 compared to the prior year is primarily due to the recognition of operating lease right of use asset of approximately $19.4 million in the 2020 period.

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Total current liabilities increased by approximately $17.9 million at October 31, 2020 compared to October 31, 2019. This increase was mainly due to increases in current maturities of long-term debt of approximately $10.9 million, accounts payable of approximately $1.1 million, checks drawn in excess of bank balance of approximately $693,000, commodity derivative instruments of approximately $816,000, and the recognition of short-term operating lease liabilities of approximately $3.6 million. 

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Long-term debt totaled approximately $5.9 million at October 31, 2020, which is approximately $0.7 million lower than our long-term debt at October 31, 2019. The decrease is primarily due to the amortization of the Project Hawkeye loan.

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Our other long-term liabilities increased by approximately $46,000 at October 31, 2020 compared to October 31, 2019. The increase is due to rail car rehabilitation costs recorded for fiscal year 2020.

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Members’ equity attributable to Granite Falls Energy, LLC at October 31, 2020 decreased by approximately $13.4 million compared to October 31, 2019. The decrease was due primarily to the net loss attributable to Granite Falls Energy, LLC of approximately $13.3 million at October 31, 2020. 

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Non-controlling interest totaled approximately $9.8 million at October 31, 2020. This is directly related to recognition of the approximately 49.3% noncontrolling interest in HLBE at October 31, 2020. Also, this decreased by approximately $2.0 million due to acquisition of the Agrinatural non-controlling interest during fiscal year 2020.

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Liquidity and Capital Resources

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Our principal sources of liquidity consist of cash provided by operations, cash on hand, and available borrowings under our credit facilities with AgCountry and Compeer.  Our principal uses of cash are to purchase raw materials necessary to operate the ethanol plants, capital expenditures to maintain and upgrade our plants, to make debt service payments, and to make distribution payments to our members.

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We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next twelve months. For our 2021 fiscal year, we anticipate completion of several small capital projects to maintain current plant infrastructure and improve operating efficiency.  We expect to have sufficient cash generated by continuing operations and availability on our credit facilities and other loans to fund our operations and complete our capital expenditures during our 2021 fiscal year.  However, should unfavorable operating conditions continue in the ethanol industry that prevent us from profitably operating our plants, we may need to seek additional debt or equity funding or further idle ethanol production altogether.

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Management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require additional capital to supplement cash generated from operations and our current debt.

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Year Ended Compared October 31, 2020 to Year Ended October 31, 2019

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The following table summarizes cash flows for the fiscal years ended October 31 (amounts in thousands):  

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Operating Cash Flows

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During the fiscal year ended October 31, 2020, net cash provided by operating activities decreased by approximately $5.6 million compared to the fiscal year ended October 31, 2019. This decrease was due primarily to an approximately $9.5 million increase in net loss, which was partially offset by a non-cash charge in fiscal year 2020 for loss on disposal of assets of approximately $1.8 million and decreases from period to period in various working capital items.

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Investing Cash Flows

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Cash used in investing activities was approximately $4.4 million more during fiscal year 2020 as compared to fiscal year 2019. During fiscal year 2020, we used approximately $5.8 million of cash related capital expenditures at the GFE and HLBE plants. Comparatively, during fiscal year 2019, we used approximately $500,000 of cash related to GFE’s subscription for its additional Ringneck investment and approximately $930,000 for capital expenditures at the GFE and HLBE plants.

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Financing Cash Flows

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We were provided with approximately $9.5 million by financing activities during fiscal year 2020, as compared to using approximately $1.9 million in financing activities during fiscal year 2019, to acquire non-controlling interest in the amount of $2.0 million. During fiscal year 2020, we had net proceeds of approximately $10.3 million of long-term debt. In comparison, for fiscal year 2019, we used cash to make member distributions of approximately $1.2 million, payments of approximately $414,000 on long-term debt and to acquire non-controlling interest in the amount of approximately $225,000.  Additionally, in fiscal year 2020, we received proceeds from our Paycheck Protection Program loans of approximately $596,000 and $704,000 at HLBE and GFE, respectively.

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Credit Arrangements

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Granite Falls Energy

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Credit Arrangements with AgCountry

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GFE has a credit facility with AgCountry Farm Credit Services, PCA (“AgCountry”) for which Co-Bank serves as the administrative agent.  The credit facility originally consisted of a long-term revolving term loan, with an aggregate principal commitment amount of $18,000,000 that reduced by $2,000,000 semi-annually beginning September 1, 2014, until final payment at maturity on March 1, 2018.  However, on September 8, 2017, GFE entered into amendment to the master loan agreement with AgCountry to amend the AgCountry credit facility to replace our long-term revolving loan with a seasonal revolving loan. In connection therewith, our revolving term loan was terminated, and we executed a revolving credit supplement to establish the seasonal revolving loan. GFE had no outstanding balance on the revolving term loan at its termination on September 8, 2017.  

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Under the seasonal revolving loan, GFE could borrow, repay, and re-borrow up to the aggregate principal commitment of $6.0 million until its maturity on October 1, 2020. On September 30, 2020, the seasonal revolving loan

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was converted into a revolving term loan in the amount of $11,000,000 that will expire on October 20, 2024. GFE had no outstanding balance on the revolving term loan at October 31, 2020.  The aggregate principal amount available to GFE for borrowing was $11.0 million at October 31, 2020.

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Interest on the revolving term loan accrues at a variable weekly rate equal to 3.25% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which totaled 3.39% at October 31, 2020.

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GFE pays an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.500% per annum, payable monthly in arrears. The credit facility with AgCountry is secured by substantially all of GFE’s assets. There are no savings account balance collateral requirements as part of this credit facility.

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GFE's credit facility with AgCountry is subject to numerous financial and non-financial covenants that limit distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio, including the following:

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During the second fiscal quarter of 2020, the credit facility was amended to reduce the working capital covenant to $9 million, from the original $10 million working capital covenant, during the period from March 31, 2020 through September 30, 2020, and increasing to $10 million beginning October 1, 2020. Additionally, the current portion of leases are excluded from the calculation of current liabilities.   Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties. For the fiscal year ended October 31, 2019, GFE had an event of non-compliance with the debt service coverage ratio as defined in the credit facility. In December 2019, GFE received a waiver from its lender waiving this event of non-compliance. In May 2020, GFE had an event of non-compliance related to the minimum working capital requirement as defined in the credit facility. The Company obtained a waiver from its lender for this event of non-compliance. For the fiscal year ended October 31, 2020, GFE had an event of non-compliance with respect to our debt service coverage ratio.  GFE has obtained a waiver from its lender for this event of non-compliance.

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Credit Arrangements with Fagen Energy and Project Hawkeye

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In connection with GFE’s subscription for investment in Ringneck in November 2016, GFE entered into a credit facility with Fagen Energy, LLC (“Fagen Energy”), an affiliate of Fagen, Inc., which is a member of GFE. The Fagen Energy credit facility would have allowed GFE to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt from Fagen Energy using the Ringneck investment as collateral. On August 2, 2017, GFE executed a termination and replacement agreement with Fagen Energy and Project Hawkeye, also an affiliate of Fagen, Inc., to terminate the Fagen Energy credit facility and the loan agreements entered into in connection with the Fagen Energy credit facility, and secure

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a replacement credit facility with Project Hawkeye on substantially the same as the terms under the terminated credit facility with Fagen Energy.

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On August 2, 2017, the Fagen Energy credit facility was terminated and there were no amounts outstanding at termination. Simultaneously with the termination of the Fagen Energy credit facility, GFE entered into a replacement credit facility with Project Hawkeye. The terms of the replacement credit facility allow GFE to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt from Project Hawkeye using the Ringneck investment as collateral.  On August 2, 2017, GFE borrowed $7.5 million under the Project Hawkeye credit facility to finance the balance of its investment in Ringneck. The outstanding balance on this loan was approximately $6,339,000 at October 31, 2020.

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The Project Hawkeye loan bears interest from the date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of (x) the One Month LIBOR Index Rate plus (y) 3.05% per annum, with an interest rate floor of 3.55%. The interest rate was 3.55% and 4.82% at October 31, 2020 and 2019, respectively.

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The Project Hawkeye loan  requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years 3 through 9 based on a 7-year amortization period.  The monthly amortized payments will be re-amortized following any change in interest rate. The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full on August 2, 2026. GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty.

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Pursuant to a pledge agreement entered into in connection with the Project Hawkeye loan, GFE’s obligations are secured by all of its right, title, and interest in its investment in Ringneck, including the 1,500 units subscribed for by GFE. The loan is non-recourse to all of GFE’s other assets, meaning that in the event of default, the only remedy available to Project Hawkeye will be to foreclose and seize all of GFE’s right, title and interest in its investment in Ringneck.

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SBA Paycheck Protection Program Loan

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In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 17, 2020, GFE received a loan in the amount of $703,900 through the Paycheck Protection Program. Management expects that the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, GFE would be required to repay that portion at an interest rate of 1% over a period of two years, beginning August 2021 with a final installment in April 2022.

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Heron Lake BioEnergy

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Revolving Term Note

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HLBE had a revolving term note payable to Compeer Financial, formerly known as AgStar Financial Services, FCLA (“Compeer”) under which we could borrow, repay, and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity at March 1, 2022.  The original aggregate principal commitment was $28,000,000, which reduced by $3,500,000 annually, starting March 1, 2015 and continuing each anniversary thereafter until maturity.  In December 2017, HLBE and Compeer orally agreed to reduce the aggregate principal commitment of the revolving term loan to $8,000,000.  On April 6, 2018, HLBE finalized loan agreements with an effective date of March 29, 2018 for an amended credit facility with Compeer (the “2018 Credit Facility”). On January 7, 2020, the Company finalized loan agreements for an amended credit facility with its lender (the “2020 Credit Facility”).

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2018 Credit Facility with Compeer

The 2018 Credit Facility included an amended and restated revolving term loan with a $4.0 million principal commitment and a revolving seasonal line of credit with a $4.0 million principal commitment.  CoBank, ACP (“CoBank”) will continue to act as Compeer's administrative agent with respect to HLBE’s 2018 Credit Facility and has a participation interest in the loans. HLBE agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

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Under the terms of the amended revolving term loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $4.0 million.  Final payment of amounts borrowed under amended revolving term loan was due December 1, 2021.  Interest on the amended revolving term loan accrues at a variable weekly rate equal to 3.10% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which was 3.24% at October 31, 2020.    

HLBE agreed to pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

The aggregate principal amount available to HLBE for borrowing under the revolving term loan at October 31, 2019 was $4.0 million.

Under the terms of the seasonal revolving loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $4.0 million until its maturing on May 1, 2020.  Amounts borrowed under the seasonal revolving loan bear interest at a variable weekly rate equal to 2.85% above the LIBOR Index rate, which was 2.99% at October 31, 2020.

HLBE also agreed to pay an unused commitment fee on the unused portion of the seasonal revolving loan commitment at the rate of 0.250% per annum.

The amended revolving term loan and seasonal revolving loan are secured by substantially all of HLBE’s assets, including a subsidiary guarantee.

Under the 2018 Credit Facility, HLBE is subject to certain financial and non-financial covenants that limit HLBE’s distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio.  HLBE agreed to a debt service coverage ratio of 1.15 to 1.0, to maintain minimum working capital $8.0 million through September 30, 2018 and $10.0 million thereafter, and to maintain net worth of $32.0 million.  HLBE is permitted to pay distributions to its members up to 75% of its net income for the year in which the distributions are paid provided that immediately prior to the distribution and after giving effect to the distribution, no default exists and HLBE is in compliance with all of its loan covenants.  Further, HLBE agreed not to make loans or advances to Agrinatural that exceed an aggregate principal amount of approximately $6.6 million without the consent of Compeer.

In October 2019, HLBE had an event of non-compliance related to the debt service coverage ratio as defined in the 2018 Credit Facility. In December 2019, HLBE received a waiver from its lender waiving this event of noncompliance.  

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2020 Credit Facility with Compeer

The 2020 Credit Facility includes an amended and restated revolving term loan with an $8,000,000 principal commitment, which was increased to a $13,000,000 principal commitment in June 2020.  The loans are secured by substantially all of the Company’s assets, including a subsidiary guarantee. The 2020 Credit Facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. During the second fiscal quarter of 2020, the 2020 Credit Facility was amended to reduce the working capital covenant to $8 million, from the original $10 million working capital covenant, for the period of April 30, 2020 through December 31, 2020, and increasing to $10 million beginning January 1, 2021. Additionally, the current portion of leases are excluded from the calculation of current liabilities. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges, or penalties. In May 2020, HLBE had an event of non-compliance related to the minimum working capital requirement as defined in the 2020 Credit Facility. HLBE has obtained a waiver from its lender for this event of non-compliance. As of and for the fiscal year ended October 31, 2020, HLBE had events of non-compliance with respect to its working capital covenant and its debt service coverage ratio. HLBE has since obtained a waiver for the non-compliance events from the lending institution.

Under the terms of the amended and restated revolving term loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $13,000,000.  Final payment of amounts borrowed under amended revolving term loan is due December 1, 2022. Interest on the amended and restated revolving term loan accrues at a variable weekly rate equal to 3.35% above the LIBOR Index rate, which was 3.51% at October 31, 2020. HLBE agreed to

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pay an unused commitment fee on the unused available portion of the amended revolving term loan commitment at the rate of 0.500% per annum, payable monthly in arrears.

As part of the 2020 Credit Facility closing, HLBE entered into an amended administrative agency agreement with CoBank.  As a result, CoBank will continue act as the agent for the lender with respect to the 2020 Credit Facility. The Company agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

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HLBE was out of compliance with its debt covenants at its fiscal year end.  Although the lender waived this event, additional noncompliance and forecasted probably future noncompliance has resulted in the reclassification of approximately $10,300,000 of long term debt has been as current maturities.  Due to operational losses, HLBE has a shortage of working capital.  As a result, it exited its Chicago Board of Trade corn futures positions, realized losses, and has become unprotected against future corn price increases,   HLBE will need to obtain either additional equity or debt financing.   There is a risk that CoBank, as the administrative agent for our lender Compeer, may seek to enforce its security interests and take control of HLBE’s assets.  If that were to happen, HLBE may be faced with the prospects of either ceasing operations or seeking Chapter 11 “reorganization” bankruptcy protection.

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Single Advance Term Note

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In June 2020, HLBE entered into a single advance term note with a $3,000,000 principal commitment, with the purpose to finance the construction of a new grain bin and provide principal reduction on the revolving term note. The interest rate is fixed at 3.80%. Principal with interest is to be paid in 10 consecutive, semi-annual installments, with the first installment due on December 20, 2020 and the last installment due on June 20, 2025. The note is secured as provided in the 2020 Credit Facility.

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SBA Paycheck Protection Program Loan

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In March 2020, Congress passed the Paycheck Protection Program, authorizing loans to small businesses for use in paying employees that they continue to employ throughout the COVID-19 pandemic and for rent, utilities and interest on mortgages. Loans obtained through the Paycheck Protection Program are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. On April 18, 2020, HLBE received a loan in the amount of $595,693 through the Paycheck Protection Program. Management expects that the entire loan will be used for payroll, utilities and interest; therefore, management anticipates that the loan will be substantially forgiven. To the extent it is not forgiven, HLBE would be required to repay that portion at an interest rate of 1% over a period of two years, with principal repayment installments in May 2021 with a final installment in May 2022.

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Negotiable Promissory Note

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In December 2020, HLBE entered into a negotiable promissory note with GFE with a $5,000,000 principal commitment. Interest on the loan accrues at a variable weekly rate equal to the higher of 1.00% or the One-Month LIBOR Index rate, plus 3.35%. The note is due on demand, and accrued interest must be paid in full the first business day of each month. The note is unsecured and may be prepaid at any time without penalty.

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In January 2021, HLBE borrowed the $5,000,000 on the promissory note. In February 2021, GFE agreed to modify the promissory note to remove the due on demand feature, instead agreeing that GFE will not require any principal repayment on the loan until March 2023. However, should there be future violations of the Compeer loan covenants, those violations would also be considered a default on this promissory note.

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Short Term Revolving Promissory Note

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In February 2021, HLBE entered into a revolving promissory note with its lender in order to finance the operating needs of HLBE. Under the terms, HLBE may borrow, repay and reborrow up to the aggregate principal commitment amount of $5,000,000. Final payment of amounts borrowed under the revolving promissory note is June 1, 2021. Interest of the loan accrues at a variable weekly rate equal to 3.35% above the higher of 0.00% or the One-Month London Interbank Offered Rate (“LIBOR”) Index rate and is payable monthly in arrears. In addition, HLBE agreed to pay an unused commitment fee on the unused available portion of the loan at the rate of 0.50% per annum payable monthly in arrears. The revolving promissory note is subject to the 2020 Credit Facility.

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Other HLBE Credit Arrangements

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In addition to its primary credit arrangement with Compeer, HLBE has other material credit arrangements and debt obligations.

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In October 2003, HLBE entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors, an unrelated company. In consideration of this agreement, HLBE and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. On September 30, 2019, HLBE finalized a new industrial water supply development and distribution agreement with the City of Heron Lake, effective as of February 1, 2019. Under this agreement, HLBE pays flow charges and fixed monthly charges to the City of Heron Lake, in addition to certain excess maintenance costs. The term of this agreement expires February 1, 2029.

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In May 2006, HLBE entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, HLBE pays monthly installments over 24 months starting January 1, 2007 equal to one years’ debt service on approximately $3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement.

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As of October 31, 2020 and 2019, there was a total of approximately $301,000 and $634,000 in outstanding water revenue bonds, respectively. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%. Final payment on the water revenue bonds is due October 2021.

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HLBE Loans to Agrinatural

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Original Agrinatural Credit Facility

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On July 29, 2014, HLBE entered into an intercompany loan agreement and related loan documents with Agrinatural (the “Original Agrinatural Credit Facility”). Under the Original Agrinatural Credit Facility, HLBE agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

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On March 30, 2015, HLBE entered into an allonge (the “Allonge”) to the July 29, 2014 note with Agrinatural. Under the terms of the Allonge, HLBE and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately $3.06 million, defer commencement of repayment of principal until May 1, 2015, decrease the monthly principal payment to $36,000 per month and shorten maturity of the Original Agrinatural Credit Facility to May 1, 2019.

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Interest on the Original Agrinatural Credit Facility was not amended and accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  Accrued interest is due and payable on a monthly basis. Except as otherwise provided in the Allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect.

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In exchange for the Loan Agreement, the Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural’s equipment and assets and a collateral assignment assigning HLBE all of Agrinatural’s interests in its contracts, leases, easements and other agreements. In addition, RES, the former minority owner of Agrinatural, executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural’s obligations to HLBE.

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Upon the passage of the May 1, 2019 maturity date, Agrinatural went into default on the Original Agrinatural Credit Facility. As noted, HLBE has a security interest in all of Agrinatural’s assets. No interruption in the service of natural gas to its ethanol production facility occurred as a result of the default. The balance of this loan was approximately $1.1 million October 31, 2019. Subsequent to the closing of HLBE’s indirect acquisition of Agrinatural’s non-controlling interest in December 2019, the parties agreed to forgive the debt related to the Original Agrinatural Credit Facility.

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Additional Agrinatural Credit Facility

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On March 30, 2015, HLBE entered into a second intercompany loan agreement and related loan documents (the “Additional Agrinatural Credit Facility”) with Agrinatural. Under the Additional Agrinatural Credit Facility, HLBE agreed to make a four-year term loan in the principal amount of $3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital. The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

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Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  Prior to May 1, 2015, Agrinatural is required to pay only monthly interest on the term loan.  Commencing May 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan was due and payable in full on May 1, 2019.

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On May 19, 2016, HLBE and Agrinatural amended the Additional Agrinatural Credit Facility, entering into amendment to the loan agreement dated March 30, 2015 (the “Amendment”).  Additionally, HLBE and Agrinatural entered into an allonge to the negotiable promissory note dated March 30, 2015 issued by Agrinatural to HLBE (the “Additional Allonge”) to increase the amount of the capital expenditures allowed by Agrinatural during the term of the facility and deferred a portion of the principal payments required for 2016.  

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The Amendment provides that the portion of principal payments deferred in calendar year 2016 to continue to accrue interest at the rate set forth in the loan agreement and become a part of the balloon payment due at maturity.  Additionally, for calendar years, 2017, 2018 and 2019, the Amendment provides that Agrinatural may, without consent of HLBE, proceed with and pay for capital expenditures in an amount up to $100,000 plus the amount of contributions in aid of construction received by Agrinatural from customers for capital improvements (“CIAC”), less a reserve for distribution to the Agrinatural members to cover the income or other taxes imposed as a result of receipt of CIAC in an amount equal to 40% of CIAC. Prior to the Amendment, Agrinatural’s capital expenditures were restricted to $100,000 per year.

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In exchange for the Additional Agrinatural Credit Facility, Agrinatural executed a security agreement granting HLBE a first lien security interest in all of Agrinatural’s equipment and assets and a collateral assignment assigning HLBE all of Agrinatural’s interests in its contracts, leases, easements and other agreements. In addition, RES executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural’s obligations to HLBE under the Additional Agrinatural Credit Facility.

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Upon the passage of the May 1, 2019 maturity date, Agrinatural went into default on the Additional Agrinatural Credit Facility. As noted, HLBE has a security interest in all of Agrinatural’s assets. No interruption in the service of natural gas to its ethanol production facility occurred as a result of the default. The balance of this loan was approximately $1.5 million at October 31, 2019. Subsequent to the closing of HLBE’s indirect acquisition of Agrinatural’s non-controlling interest in December 2019, the parties agreed to forgive the debt related to the Additional Agrinatural Credit Facility.

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Off-Balance Sheet Arrangements

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We currently have no off-balance sheet arrangements.

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Critical Accounting Estimates

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Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require management to use estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. We use our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies, the following are most noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations:

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Revenue Recognition

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Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Our contracts primarily consist of agreements with marketing companies and other customers as described above. Our performance obligations consist of the delivery of ethanol, distillers' grains, and corn oil to our customers. Our customers primarily consist of two distinct marketing companies as described above. The consideration we receive for these products reflects an amount that the Company expects to be entitled to in exchange for those products, based on current observable market prices at the Chicago Mercantile Exchange, generally, and adjusted for local market differentials. Our contracts have specific delivery modes, rail or truck, and dates. Revenue is recognized when the Company delivers the products to the mode of transportation specified in the contract, at the transaction price established in the contract, net of commissions, fees, and freight. We sell each of the products via different marketing channels as described above.

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Agrinatural generates revenue from the transportation of natural gas to residential and commercial customers. Revenue is recognized at the point when natural gas is delivered at the transaction price established in the contract.

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Derivative Instruments

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From time to time, the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheets at fair value.

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In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.

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Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.

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Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our consolidated financial statements.

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In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company’s ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

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The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 7 to our consolidated financial statements.

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Inventory

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We value our inventory at the lower of cost or net realizable value using the first in first out method or net realized value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events

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and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plants and our risk management strategies in place through our use of derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realized value on inventory to be a critical accounting estimate.

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Property and Equipment

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Management’s estimate of the depreciable lives of property and equipment is based on the estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. The Company tests for impairment at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

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Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate.

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Rail Car Rehabilitation Costs

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GFE leases 75 hopper rail cars under a multi-year agreement, which ends November 2025. HLBE leases 50 hopper rail cars under a multi-year agreement, which ends in May 2027. Under the agreements, the Company is required to pay to rehabilitate each car for “damage” that is considered to be other than normal wear and tear upon turn in of the car(s) at the termination of the lease. Prior to the year ending October 31, 2019, the Company believed ongoing repairs resulted in an insignificant future rehabilitation expense. During the year ending October 31, 2019, based on new information, we re-evaluated our assumptions and believe that it is probable that we may be assessed for damages incurred. During the years ended October 31, 2020 and 2019, GFE has recorded an estimated long-term liability totaling $825,000. During the fiscal years ended October 31, 2020 and 2019, HLBE has recorded an estimated long-term liability totaling approximately $596,000 and $551,000, respectively. The Company accrues the estimated cost of rail car damages over the term of the leases as the damages are incurred.

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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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To the Board of Governors and Members of

Granite Falls Energy, LLC and Subsidiaries

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Opinion on the Financial Statements

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We have audited the accompanying consolidated balance sheets of Granite Falls Energy, LLC and Subsidiaries (the Company) as of October 31, 2020 and 2019, and the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the years in the two-year period ended October 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

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Basis for Opinion

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These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

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GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

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Notes to the Consolidated Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

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