Granite Falls Energy, LLC - Annual Report: 2021 (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, 2021

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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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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 20,059 membership units held by non-affiliates of the registrant (computed by reference to the most recent sale price of $1,350 per unit of membership units) was $27,079,650 as of April 30, 2021. 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 January 31, 2022, 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, 2021). This proxy statement is referred to in this report as the 2022 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 listed above.  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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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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Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”), which owns an ethanol plant located near Heron Lake, Minnesota, is a wholly owned subsidiary of GFE. In July 2013, we acquired controlling interest in HLBE through our wholly owned subsidiary Project Viking, L.L.C (“Project Viking”). Prior to September 29, 2021, GFE held a 50.7% ownership interest in HLBE. On September 29, 2021, we completed a merger in which we acquired the remaining non-controlling interest of HLBE for $14,000,000. As a result of the merger, GFE and Project Viking own 100% of HLBE’s issued and outstanding membership units. The merger is further described in the section captioned “Merger with HLBE.”

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Appointment of Jeffrey Oestmann as CEO

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We appointed Jeffrey Oestmann, to serve as CEO, effective May 26, 2021. Oestmann has worked in the agriculture and bio-fuel sectors for approximately 27 years, most recently serving as head of bio-fuel operations for Syngenta, an agricultural science and technology company.  Oestmann replaced Steve Christensen, who resigned as CEO of the Company effective May 26, 2021, pursuant to a separation agreement dated February 17, 2021.  Oestmann serves as the CEO of both GFE and its wholly owned subsidiary HLBE. Additional information regarding Oestmann’s

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employment agreement and Christensen’s separation agreement are available in GFE’s Form 8-K filed with the SEC May 25, 2021, which is incorporated herein by reference.

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Merger with HLBE

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On September 29, 2021, we completed a transaction, in which GFE acquired the remaining non-controlling interest of HLBE. The structure of the transaction was a merger, in which Granite Heron Merger Sub, LLC, a wholly owned subsidiary of GFE (“Merger Sub”), merged with and into HLBE, with HLBE emerging from the transaction as the surviving entity and as a wholly owned subsidiary of GFE (the “Merger”).  Prior to the Merger, GFE directly and indirectly owned approximately 50.7% of HLBE’s issued and outstanding units. The balance of HLBE’s units  were owned by approximately 1,200 investors. GFE paid $14 million for the non-controlling interest, or approximately $0.36405 per unit. Additional information regarding the Merger is available in HLBE’s Definitive Proxy Statement filed with the SEC August 19, 2021, which is incorporated herein by reference.

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To finance the Merger and consolidate certain existing debts, GFE on September 27, 2021, finalized loan documents for an amended credit facility (the “2021 Credit Facility”) with AgCountry Farm Credit Services, PCA, AgCountry Farm Credit Services, FLCA (“AgCountry”). CoBank FCB (“CoBank”) serves as AgCountry’s administrative agent for the 2021 Credit Facility.  The loan documents include an Amended and Restated Credit Agreement (the “Credit Agreement”), which amends and replaces the Company’s credit agreement with AgCountry dated September 27, 2018. The 2021 Credit Facility includes: the credit agreement, a $20 million revolving credit promissory note, a $500,000 amended and restated letter of credit promissory note, a $20 million amended and restated revolving term promissory note, a $25 million single advance term promissory note, and a $2.4 million single advance term promissory note.  Additional information regarding the 2021 Credit Facility is available in GFE’s Form 8-K filed with the SEC October 1, 2021, which is incorporated herein by reference, and in the section below titled “PART II - ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Arrangements.”

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The purpose of the Merger was to improve the financial stability of HLBE by allowing GFE to acquire HLBE’s non-controlling interest. In fiscal year 2020 and the first quarter of 2021, HLBE had experienced significant net losses due to several factors, including elevated corn prices, the breakdown of its ethanol plant boiler, and reduced demand for ethanol due to the COVID-19 pandemic.  Due to these net losses, HLBE violated certain loan covenants related to working capital and net worth ratio, for which the HLBE obtained waivers from its lender. HLBE was in violation of such loan covenants as of October 31, 2020, and January 31, 2021. As a result of these loan covenant violations, there was substantial doubt about HLBE’s ability to continue operating as a going concern. Additional loan covenant violations would have allowed HLBE’s lender to accelerate certain loans and designate a substantial portion of HLBE’s debt due and payable. If HLBE’s loans became due and payable, there was a substantial risk HLBE would have lacked the cash on hand, borrowing capacity, and cash flows to repay the debt, and if that had occurred, HLBE could have been forced to cease operations or seek bankruptcy protection. GFE believes the Merger reduces the risk of future loan covenant violations because GFE is expected to have sufficient working capital and net worth to remain in compliance with its loan covenants.

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On September 23, 2021, HLBE held a special meeting of its members, at which a majority in interest of HLBE’s members and a majority in interest of the non-controlling interest voted to authorize the Merger. The Merger was effective as of September 29, 2021, upon the filing of Articles of Merger with the Minnesota Secretary of State.  HLBE is the surviving entity of the Merger.  Upon completion of the Merger, 100% of the membership interests in Merger Sub were converted into and became 100% of the membership interest in HLBE, as the surviving entity in the Merger.  As a result of the Merger, HLBE became a wholly owned subsidiary of GFE. GFE and Project Viking together own 100% of the HLBE’s issued and outstanding units.

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Following the Merger, HLBE deregistered from the SEC and is no longer required to file annual, quarterly, or periodic reports with the SEC. By de-registering with the SEC, HLBE is expected to save approximately $300,000 in filing fees and regulatory costs on an annual basis. Upon completion of the Merger, each issued and outstanding unit of HLBE’s non-controlling interest was canceled and converted into the right to receive $0.36405 per unit. GFE has transferred $14 million to an exchange agent to hold in trust to be distributed pro-rata to the non-controlling interest unitholders.  The non-controlling interest unitholders no longer own any units of HLBE or any rights as a member of the HLBE.

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As part of the Merger, GFE and HLBE agreed to release, acquit, and discharge each other and all related parties from all claims, including, all liabilities, obligations, claims, litigation, actions, causes of action, suits, proceedings,

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executions, judgments, demands, damages, losses, duties, debts, dues, accounts, fees, costs, expenses and penalties, and agree not to initiate, maintain, prosecute or continue to maintain or prosecute any action, suit or proceeding, or seek to enforce any right or claim against the other or its related parties.

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We expect minimal changes, if any, to the operations of GFE and HLBE as a result of the Merger, as both companies are expected to maintain their same operations under the same management. HLBE, which had been managed by GFE’s executive officers pursuant to the Management Services Agreement, will continue to be managed by GFE’s executive officers.  As a result of the Merger, GFE’s Board of Governors has  assumed managerial and oversight control over HLBE. On January 3, 2022, HLBE adopted an operating agreement that repealed, replaced, and superseded HLBE’s existing member control agreement. The HLBE operating agreement eliminates the HLBE board of governors and establishes GFE as the sole manager of HLBE.

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HLBE Boiler Replacement

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In July 2020, HLBE experienced significant operational issues with its boiler, which negatively impacted production. HLBE operated with temporary boilers from August 2020 through part of January 2021. HLBE determined that the purchase and installation of a new boiler would be more economical and efficient than attempted repairs to the failing boiler. On September 2, 2020, HLBE received notice of approval of the new boiler from the Minnesota Pollution Control Agency. As a result, HLBE abandoned the failing boiler at that time. The Company recorded the loss on disposal as a component of operating expenses during the fourth fiscal quarter of the fiscal year ended October 31, 2020 of approximately $1.8 million. The new boiler was placed in service in January 2021 at cost of approximately $5.2 million. The Company believes that the new boiler has improved HLBE’s operating efficiency.

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COVID-19 Pandemic

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After experiencing volatile and adverse conditions for much of the fiscal year 2020 due to the COVID-19 pandemic and its ramifications, the Company and the ethanol industry as a whole benefited from more favorable market conditions during our 2021 fiscal year.

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The ethanol industry, including our Company, experienced significant adverse conditions throughout 2020 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels caused, in large part, by the COVID-19 pandemic.  Due to the market risks and uncertainties related to the COVID-19 pandemic, both GFE and HLBE idled their plants in the spring of 2020. Additionally, market conditions, coupled with the idling of our plants, resulted in lower production, negative operating margins, significantly lower cash flow from operations and substantial net losses in the fiscal year 2020. The ramifications of these net losses prompted GFE and HLBE to engage in the Merger.

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Market conditions improved in fiscal year 2021, as vehicle travel and demand for transportation fuel, including the ethanol we produce, rebounded. The prices we received for a gallon of ethanol increased significantly in 2021, as compared to the prior year.  As a result, we experienced greater production, positive operating margins, increased cash flow from operations, and net income for the fiscal year 2021, as compared to the previous year.

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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.  After experiencing major issues with the HLBE plant’s boiler, HLBE purchased and installed a new boiler, which was placed into service in January 2021 at cost of approximately $5.2 million. 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 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.

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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, 2021.  

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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. 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, in consultation with management, with regard to where our products are marketed.

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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, U.S. exports of ethanol have decreased slightly, according to the U.S. Department of Agriculture (the “USDA”). Importers of U.S. ethanol include Canada, South Korea, China, Brazil, India, Mexico, the United Kingdom, Nigeria, and the Netherlands. The decrease in ethanol exports is due to various factors, including a decrease in trading with Brazil, which had been one of the top two largest importers of U.S. ethanol, prior to the expiration of a Brazilian import quota. The USDA projects that U.S. ethanol exports will increase slightly in 2022 due to both volume and price gains due, in part, to increased renewable fuel blending requirements in the United Kingdom, India, and other nations. 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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U.S. ethanol exports to China increased during the 2021 fiscal year.  During the 12 months ended October 31, 2021, the U.S. exported approximately 3.14 million barrels of fuel ethanol to China.  This is an increase from virtually zero fuel ethanol exports to China in the 2020 and 2019 fiscal years. While China’s official tariffs on U.S. ethanol remains high, early last year such tariffs were reduced from an effective rate of 70% to 45% for importers who applied for tariff exclusions.

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The increase in ethanol exports to China followed the execution of a “phase one” trade agreement with China. The agreement, signed by former President Donald Trump on January 15, 2020, includes a commitment by China to purchase agricultural products, including ethanol, over the course of two years. While this agreement appears positive for the industry, China’s actual purchases of U.S. agricultural products have fallen below the levels set in the phase one agreement. There is no guarantee that exports of ethanol to China will continue or increase. Further, President Joe Biden may enter into additional or different trade agreements or may otherwise take positions that affect the export of U.S. ethanol to China and other international markets. U.S. trade policy towards China may change, and 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 (“DDGS”) 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.

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According to the U.S. Grains Council, total U.S. distiller’s grains exports through October 2021 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. Driven by strong exports to Mexico, Vietnam, Turkey, and Canada, exports of U.S. distiller’s grains increased more than 10% from the previous 12-month period, according to the U.S. Grains Council. Historically, the United States ethanol industry exported a significant amount of

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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. 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. There is no guarantee that distillers’ grains exports to China will return to pre-tariff levels.

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On January 15, 2020, then 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 has 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. Our marketing contracts were amended for an effective date of January 1, 2022, and an expiration date of December 31, 2023. The contracts will automatically renew for an additional two years unless either party gives written 90-day notice.

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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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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 increased significantly during the 12 months ended October 31, 2021, due in part to the improved domestic economy, increased demand from China, and drought in South America’s corn-growing regions. 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 higher during fiscal year 2021 compared to fiscal year 2020.  The increase in ethanol prices was due primarily to the rebound in demand for transportation fuel as the effects of the COVID-19 pandemic subsided. Management expects demand and prices for ethanol to be volatile in 2022, with factors including, but not limited to,

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inflation, federal infrastructure legislation, extreme weather events, and additional surges in COVID-19 infections contributing to market volatility. According to EIA forecasts, ethanol production is projected to increase slightly in 2022, and demand is also expected to increase slightly. However, there is no guarantee that either of these forecasts will occur. Ethanol exports decreased slightly in 2021, compared to the previous year, and are expected to increase slightly in 2022, according to the USDA. However, tariffs, international competition, the lingering effects of COVID-19, international conflicts, and other factors could adversely affect the export market, and there is no guarantee that the export market will improve in 2022. U.S. gas demand increased moderately year over year in 2021, due primarily to the rebound from the COVID-19 pandemic.  Ethanol consumption is projected to increase slightly in 2022; 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 80.8% and 71.6% of our cost of goods sold for the years ended October 31, 2021 and 2020, respectively. At GFE’s current production rate of approximately 60.3 million gallons of undenatured ethanol per year, the GFE plant requires approximately 20.4 million bushels of corn per year. The HLBE ethanol plant requires approximately 21.8 million bushels of corn per year to operate at its current production rate of approximately 65.6 million gallons of undenatured ethanol per year.  

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GFE purchases corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Granite Falls, Minnesota, and accepts delivery of corn at its Granite Falls plant.  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 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 20 days of corn supply at HLBE and approximately 20 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 significantly higher during our 2021 fiscal year, as compared to our 2020 fiscal year. If unfavorable conditions occur during our 2022 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 4.5% and 5.2% of our cost of goods sold for the years ended October 31, 2021 and 2020, 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 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 2022 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 2022 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

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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 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 17.4 billion gallons of ethanol per year, with two additional plants under expansion or construction with capacity to produce an additional 26 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.  Many 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 by subsidiaries of larger oil companies, such as Valero Renewable Fuels and POET Biorefining. 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 our 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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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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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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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 2021, the U.S. ethanol industry exports of distillers’ grains increased slightly compared to the previous year. If distillers’ grain experts decrease in the future, it 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 required 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. Under RFS statute, the EPA is required to finalize RVOs for a particular compliance year by

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November 30 of the preceding year. The EPA, however, failed to propose or finalize an RVO for compliance years 2021 and 2022 prior to the statutory deadline.

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On December 7, 2021, the EPA announced long-delayed blending requirement under the RFS. The EPA proposed RVOs of 17.13 billion gallons for 2020, 18.52 billion gallons for 2021, and 20.77 billion gallons for 2022. Ethanol industry advocates have denounced the proposal for significantly cutting the 2020 RVO, which was set in a 2019 final rule. The proposal reduces the 2020 blending requirement from 20.09 billion gallons to 17.13 billion gallons, an approximately 15 percent decrease. For 2021, the EPA proposed to set the RVO for total renewable fuel at 18.52 billion gallons. For 2022, the proposed RVO is 20.77 billion gallons, which the EPA said is the highest level in the history of the RFS program.

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In a separate action also on December 7, 2021, the EPA proposed an action to deny 65 pending applications for small refinery exemptions. Because the denial of the small refinery exemptions reflects an updated interpretation of the Clean Air Act, and is a change from previous EPA practice, the agency is implementing a public notice-and-comment process and seeking input from stakeholders, the public, and from individual petitioning refineries.

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Concurrently with the EPA’s RVO proposal and denial of small refinery exemptions, the USDA announced $800 million to support biofuel producers and infrastructure.  This includes up to $700 million to provide economic relief to biofuel producers and restore renewable fuel markets affected by the pandemic. The trio of actions drew mixed reviews from ethanol industry advocates. The RFA criticized the EPA’s RVO proposal, describing it as an unprecedented and possibly illegal move to retroactively reduce already-finalized 2020 RFS requirements, but also noted the small refinery exemption denials and economic relief funding were beneficial to ethanol producers and farmers.

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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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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

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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 in vehicles of model years 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. While the EPA in 2019 issued a final rule that allowed E15 to be sold year-round, the U.S. Court of Appeals for the District of Columbia struck down the rule in July 2021, dealing a significant setback to the ethanol industry, as the ruling is expected to lead to a decrease in demand for renewable fuels, including the ethanol we produce.

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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. Small refineries petitioned the EPA for 32 economic hardship exemptions in 2019 and 28 economic hardship exemptions in 2020. For the 2018 compliance year, the EPA granted 31 small refinery economic hardship petitions, which resulted in the exemption of approximately 1.43 billion RINs. Exemptions from RIN requirements reduces the amount of renewable fuel that must be blended into gasoline and diesel supplies and thereby reduces demand for ethanol. To the extent the EPA approves additional small refinery exemptions, it will further decrease demand for the ethanol we produce, which could negatively affect our profitability.

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On June 25, 2021, the U.S. Supreme Court provided a significant setback for the ethanol industry, issuing a ruling that will make it easier for small refineries to secure exemptions from the RVOs. The case was brought by a coalition of farm and ethanol groups, which challenged the economic hardship exemptions claimed by certain small refineries. In its decision, the U.S. Supreme Court ruled against the farm and ethanol coalition, holding that small refineries could apply for an extension to their hardship exemptions from the RFS’s blending requirements, even if such refineries’ exemptions had previously lapsed. The ruling overturned a 2020 decision from the United States Court of Appeals for the Tenth Circuit. The Supreme Court’s decision is expected to increase the availability of economic hardship exemptions for small refineries and thereby decrease demand for renewable fuels, including the ethanol we produce.

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Additional legal actions related to the RFS are underway. These include lawsuits challenging fuel volume waivers based on “inadequate domestic supply,” challenging the EPA’s lower threshold for granting small refinery exemptions, seeking broader, forward-looking remedy to account for the collective lost volumes caused by recent small refinery exemptions, alleging that the EPA and U.S. Department of Energy have improperly denied access to public records request by RFA, and challenging the Final 2019 Rule over the EPA’s failure to address small refinery exemptions in the rulemaking. If these legal actions, which generally seek to require the EPA to enforce the renewable fuel blending requirements of the RFS, are unsuccessful, there may negative impacts on the ethanol industry and our financial performance.

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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 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. Non-compliance with on-going performance testing may result in civil penalties or other enforcement actions by the Minnesota Pollution Control Agency (“MPCA”).

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In the fiscal year ended October 31, 2021, GFE and HLBE incurred costs and expenses of approximately $140,000 and $235,000, 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.

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In 2015, the EPA awarded efficient producer pathway approval to HLBE and GFE.  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. 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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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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GFE’s executive officers manage HLBE, pursuant to HLBE’s operating agreement adopted January 3, 2022, which appoints GFE as the sole manager of HLBE.

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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 2021 and 2020 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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GFE owns 1,600 capital units of Ringneck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $8,000,000.  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 Jeffrey Oestmann, 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 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 did not conduct 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 in Ringneck, GFE entered into a credit facility with Project Hawkeye, LLC (“Project Hawkeye”) pursuant to which GFE borrowed $7.5 million to finance the investment in Ringneck. Additional information regarding the Project Hawkeye credit facility are provided below in the section below entitled Part II - Item 8. Financial Statements, Note 10 - DEBT FACILITIES.

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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.

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On November 15, 2021,  Harvestone redeemed GFE’s 20 units for $3,000,000.  As a result of the Harvestone redemption, GFE no longer owns any Harvestone units and has ceased to be a member of Harvestone. As a result of the ongoing negotiations as of fiscal year end, the Harvestone investment was impaired to $3,000,000 at October 31, 2021. The Company received and recorded the $3,000,000 redemption in November 2021.

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In August 2004, GFE entered an electric service agreement with Minnesota Valley Cooperative Light and Power Association (“MVCLPA”) to supply electricity to the GFE plant. The MVCLPA electric service agreement entitles GFE to receive patronage dividends in the form of a special allocation of capital credits. The capital credits are recognized as a component of other income on the consolidated statement of operations. Through the fiscal year 2021, GFE has recognized approximately $3.2 million of investment income related to the MVCLPA capital credits. Approximately $273,000 of GFE’s capital credits were redeemed in March 2021, and as a result the investment balance was approximately $2.9 million as of October 31, 2021. MVCLPA generally redeems its capital credits on a first-in, first-out basis on a 13-year rotation, and therefore if MVCLPA continues to be successful, managements expects the MVCLPA capital credits will continue to be redeemed for cash payments to GFE.  Additional information regarding the MVCLPA capital credits is provided below in the section below entitled Part II - Item 8. Financial Statements, Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Patronage Investment, and Part II - Item 8. Financial Statements, Note 2 - PATRONAGE INVESTMENT AND CORRECTION OF ERROR.

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ITEM 1A.RISK FACTORS

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Not applicable.

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ITEM 1B.UNRESOLVED STAFF COMMENTS

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Not applicable.

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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.

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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. The site includes 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 tangible and intangible property, real and personal, serves as the collateral for our credit facilities with AgCountry.

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HLBE’s wholly owned subsidiary, 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 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 the QMS. We do not receive any compensation for creating or maintaining the QMS. In advertising the QMS, we do not characterize GFE 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 GFE 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 2021.

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Holders of Record

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As of January 31, 2022, there were 1,000 holders of record of our membership units.  

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As of October 31, 2021 and January 31, 2022, 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 prior to fiscal year 2023 without the consent of our lender, and that subsequent distributions may be no greater than 50% of the Company’s net profit (determined according to GAAP) for prior fiscal year, or up to 75% of the Company’s net profit from the prior fiscal year if the Company’s working capital remains above $26 million; 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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On December 22, 2021, the Board of Governors of the Company declared a cash distribution of $330.00 per membership unit to the holders of record of the Company’s units at the close of business on December 22, 2021, for a

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total distribution of $10,099,980, which the Company paid in January 2022. No distributions were declared or paid in fiscal years 2021 or 2020.

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Heron Lake BioEnergy

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Prior to the merger, distributions by HLBE to its unit holders were in proportion to the number of units held by each unit holder. A unit holder's distribution was determined by multiplying the number of units by distribution per unit declared. HLBE’s board of governors had complete discretion over the timing and amount of distributions to its unit holders. Distributions are restricted by certain loan covenants in our credit facility with AgCountry. 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 2020 or 2021.

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Unregistered Sales of Equity Securities

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The Company had no unregistered sales of securities during fiscal year 2021.

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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, 2021.  This discussion 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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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.

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Plan of Operations Through October 31, 2022

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During the twelve months ended October 31, 2021, the Company and the ethanol industry as a whole benefited from improved market conditions, as the effects of the COVID-19 pandemic subsided and demand for transportation fuel rebounded.  Due to the reduction in demand for transportation fuel, the ethanol industry experienced record-low ethanol prices in 2020, and we experienced prolonged negative operating margins, significantly lower cash flow from operations and substantial net losses. Economists estimated the ethanol industry suffered $8 billion in losses in 2020 due, in large part, to the effects of the pandemic, according to the Journal of Agricultural and Food Industrial Organization. In the 2021 fiscal year, the Company experienced increased market prices for our principal prices and improved profitability, as compared to the fiscal year ended October 31, 2020. However, the pandemic is ongoing and various dynamic factors, including the spread of new coronavirus variants, make it difficult to forecast the long-term effects of the pandemic on our industry as a whole and our Company specifically. Further, tangential effects of the COVID-19 pandemic, including supply chain bottlenecks, labor market volatility, and price increases of raw materials may adversely affect our operations and profitability.

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It is possible that even after the pandemic subsides, there will be permanent changes to social and economic patterns that will reduce demand for ethanol. For example, increased adoption of “work from home” policies or tele-commuting, and the use virtual meetings, may permanently reduce business travel and thereby reduce the demand for transportation fuel, including the ethanol we produce.

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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.  

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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 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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In the ethanol industry, it is generally expected that 2.8 gallons of denatured ethanol will be produced 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, 2021 compared to fiscal year ended October 31, 2020, our average price per gallon of ethanol sold increased by approximately 65%. Ethanol prices were higher during the fiscal year ended

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October 31, 2021, due primarily to the fact that the effects of the COVID-19 pandemic subsided in the fiscal year 2021, resulting in increased demand for transportation fuel, including the ethanol we produce. While demand for transportation fuel has increased, it is possible that new coronavirus variants, additional government lockdowns, or other factors could reduce demand for transportation fuel and thereby decrease the price of the ethanol we produce. Additionally, the continued issuance hardship exemptions from the RVOs may further decrease domestic demand for ethanol. Management believes that the ethanol outlook will remain volatile in the fiscal year 2022.  

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Exports of ethanol decreased slightly in our fiscal year 2021, after increasing slightly each of the previous two fiscal years. Export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. The decrease in ethanol exports is due to various factors, including a decrease in trading with Brazil, which had been one of the top two largest importers of U.S. ethanol, due to the expiration of a Brazilian import quota. The USDA projects that U.S. ethanol exports will increase slightly in 2022 due to both volume and price gains due, in part, to increased renewable fuel blending requirements in the United Kingdom, India, and other nations.

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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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U.S. ethanol exports to China increased during the 2021 fiscal year, following the execution of a “phase one” trade agreement with China. The agreement, signed by former President Donald Trump on January 15, 2020, includes a commitment by China to purchase agricultural products, including ethanol, over the course of two years.  There is, however, no guarantee that exports of ethanol to China will continue or increase.  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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Corn prices increased significantly in fiscal year 2021, due in part to the improved domestic economy as well as increased demand from China and drought in South America’s corn-growing regions. Corn prices remained above $5 per bushel for most of the year and peaked above $7 per bushel in May 2021.

The latest USDA supply and demand projections estimate the 2020-2021 ending corn stocks at approximately 1.24 billion bushels, and project the 2021-2022 U.S. corn production to be approximately 15.1 billion bushels, which is slightly less than the 2020-2021 production, with corn consumption for ethanol and co-products slightly higher at approximately 5.3 billion bushels, suggesting higher corn prices into fiscal 2022. In fiscal year 2021, China substantially increased its purchase of U.S. corn reducing U.S. inventories and increasing prices. Increases in domestic ethanol production in fiscal year 2021, also contributed to elevated corn 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 our other primary products outpace rising corn prices.

Distillers’ grain prices increased in 2021 compared to 2020, due to increased supply as a result of increased production. Top export markets include Mexico, Vietnam, South Korea, Indonesia, Turkey, Thailand, and Canada. 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 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. Exports to China remain substantially below the pre-tariff export levels, and there is no guarantee that distillers’ grains exports to China will return to pre-tariff levels.

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.

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Management anticipates distillers’ grains prices will remain steady during our 2022 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 increased significantly in fiscal year 2021, due in part to elevated corn prices and strong demand for biodiesel and livestock feed.  

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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, 2021 and 2020

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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, 2021 and 2020 (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.

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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, 2021 (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, 2020 (amounts in thousands):

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Our total consolidated revenues increased by approximately 87.7% for the fiscal year ended October 31, 2021, as compared to the fiscal year 2020, due to increases in both the prices received for and in the quantities sold of 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, 2021 and 2020 (quantities in thousands):

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Ethanol

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Total revenues from sales of ethanol increased by approximately 90.3% for fiscal year 2021 compared to the fiscal year 2020 due primarily to an approximately 20.5% increase in the volumes sold from period to period, coupled with an approximately 58.3% increase in the average price per gallon we received for our ethanol. The increase in price is primarily due to an increase in demand for transportation fuel, including the ethanol we produce, as a result of the larger economic rebound from the COVID-19 pandemic. The increase in the quantity of ethanol sold was due primarily to our increased production in fiscal year 2021 compared to the prior year, due to the fact that we operated our plants throughout the 2021 fiscal year and idled them for a portion of the 2020 fiscal year. Management anticipates steady ethanol production and sales during our 2022 fiscal year, as compared to our 2021 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, 2021, GFE had fixed and basis contracts for forward ethanol sales for various delivery periods through December 2021 valued at approximately $19.6 million, and HLBE had fixed and basis contracts for forward ethanol sales for various delivery periods through December 2021 valued at approximately $18.7 million. Separately, ethanol derivative instruments resulted in a gain of approximately $210,000 during the fiscal year ended October 31, 2021, and a loss of approximately $350,000 during the fiscal year ended October 31, 2020.

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Distillers’ Grains

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Total revenues from sales of distillers’ grains increased approximately 65.8% for fiscal year 2021 compared to fiscal year 2020. The increase in distillers' grains revenues is primarily attributable to an approximately 20.0% increase in the tons of distillers’ grains sold during fiscal year 2021 compared to fiscal year 2020, coupled with an approximately 38.3% increase in the average price per ton we received for our distillers’ grains from period to period.

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The increase in the market price of distillers’ grains is due to increased demand for livestock feed and higher prices for soybean meal, which is a competitive product to distillers’ grains. The increase in total tons of distillers’ grains sold during fiscal year 2021 compared to the fiscal year 2020 was due increased production at both plants, as a result of operating the plants year-round in the fiscal year 2021, after the plants for portions of the fiscal year 2020 due to the effects of the COVID-19 pandemic and HLBE’s boiler malfunction. Management anticipates steady distillers’ grains production during our 2022 fiscal year, as compared to our 2021 fiscal year.

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At October 31, 2021, GFE had forward contracts to sell approximately $1.3 million of distillers’ grains for delivery through November 2021, and HLBE had forward contracts to sell approximately $1.6 million of distillers’ grains for delivery through December 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 increased by approximately 160.2% for fiscal year 2021 compared to the fiscal year 2020. This increase is attributable to an approximately 30.6% increase in pounds sold from period to period, coupled with an approximately 100% increase in the average price per pound of corn oil sold from period to period. Management attributes the increase in corn oil prices to increased demand for biodiesel and livestock feed. Management attributes the increase in corn oil sales during fiscal year 2021 as compared to 2020 primarily to increased production at the plants as a result of the GFE plant and HLBE plant being idled during portions of the fiscal year 2020 as a result of the COVID-19 pandemic and HLBE’s boiler malfunction.

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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, 2021, GFE had forward corn oil sales contracts to sell approximately $1.7 million for delivery through December 2021, and HLBE had forward corn oil sales contracts to sell approximately $1.5 million for delivery through December 2021.

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Cost of Goods Sold

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Our cost of goods sold increased by approximately 60.7% for the fiscal year ended October 31, 2021, as compared to the fiscal year ended October 31, 2020. However, cost of goods sold, as a percentage of revenues, decreased to approximately 91.4% for the fiscal year ended October 31, 2021, as compared to approximately 106.7% for the 2020 fiscal year due to an improved 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 for the fiscal year ended October 31, 2021 was approximately $2.23 per gallon of ethanol sold compared to approximately $1.67 per gallon of ethanol sold for the fiscal year ended October 31, 2020.

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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, 2021 (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, 2020 (amounts in thousands):

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Corn Costs

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Our cost of goods sold related to corn increased approximately 80.9% for our 2021 fiscal year compared to our 2020 fiscal year, due to an approximately 19.1% increase in the number of bushels of corn processed from period to period, coupled with an approximately 51.9% increase 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 2021 fiscal year was $0.04 more than the corn-ethanol price spread we experienced for the same period of 2020.

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For our fiscal years ended October 31, 2021 and 2020, our plants processed approximately 42.2 million and 35.4 million bushels of corn, respectively. This increase in corn consumption was due primarily to the fact that we idled production at our plants in the fiscal year 2020 due to the effects of the COVID-19 pandemic and the boiler malfunction at HLBE’s plant.  Management anticipates steady corn consumption during our 2022 fiscal year compared to our 2021 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 increase in our cost per bushel of corn was a result of elevated corn prices caused primarily by export demand, including demand for corn from China and South America. Due to these factors, management anticipates that corn prices will be higher during our 2022 fiscal year.

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From time to time, we enter into forward purchase contracts for our corn purchases. At October 31, 2021, GFE had forward corn purchase contracts for approximately 4.9 million bushels for deliveries through December 2022 and HLBE had forward corn purchase contracts for approximately 3.2 million bushels for deliveries through December 2022.

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Our corn derivative positions resulted in a loss of approximately $8.2 million and $2.4 million for the fiscal years ended October 31, 2021, and October 31, 2020, respectively, which increased our 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 2021 fiscal year, we experienced an increase of approximately 37.0% in our overall natural gas costs compared to our 2020 fiscal year.  Management attributes the increase in natural gas costs to an increase in production, as we operated out plants throughout the year in the 2021 fiscal year after idling our plants for portions of the 2020 fiscal year. Further, natural gas prices spiked in early 2021 due to severe weather in Texas and other areas that disrupted the production and transportation of natural gas. 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 decreased  to 2.6% of revenues for our fiscal year ended October 31, 2021 compared to 5.2% of revenues for our fiscal year ended October 31, 2020. This

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decrease was primarily due to a significant increase in revenues and the recognition of the approximately $1.8 million loss on disposal of assets related to HLBE’s boiler during the 2020 fiscal year.

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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. Additionally, because HLBE has de-registered from the SEC and is no longer required to file SEC reports as a result of the Merger, we expect our operating expenses related to certain filing fees and regulatory costs to decrease. However, due to inflation, labor shortages, or other unforeseen issues, it is possible that our operating expenses will remain steady or increase during our 2022 fiscal year.

Operating Income (Loss)

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Our operating margin increased approximately $39.7 million during the past year as we recorded operating income of approximately $18.6 million in our fiscal year ended October 31, 2021, compared with an operating loss of approximately $21.0 million in our fiscal year ended October 31, 2020. The increase in our operating income resulted largely from increased prices for all our principal products coupled with increased production at both our plants.

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Other Income, Net

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We had net other income for our fiscal year ended October 31, 2021 of approximately $7.4 million compared to net other income of approximately $463,000 for our fiscal year ended October 31, 2020. We had more other income during fiscal year 2021 compared to fiscal year 2020 due in part to an increase in investment income during the 2021 fiscal year, the PPP loan forgiveness income recognized during fiscal year 2021, and the recognition of the MVCPLA patronage capital credit income.

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Changes in Financial Condition at October 31, 2021 and 2020

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The following table highlights the changes in our financial condition at October 31, 2021 compared to October 31, 2020 (amounts in thousands):

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Total assets increased by approximately $28.9 million and current assets increased by approximately $33.1 million at October 31, 2021 compared to October 31, 2020. The increase in total assets was primarily due to an increase in cash, accounts receivable, and inventory in the 2021 period.

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Total current liabilities decreased by approximately $1.2 million at October 31, 2021 compared to October 31, 2020. This decrease was mainly due to a decrease in current maturities of long-term debt, which occurred because certain HLBE debt was classified as current as of October 31, 2020, due to loan covenant violations, was reclassified as long-term debt as of October 31, 2021. The decrease in current maturities of long-term debt was partially offset by an increase in accounts payable.

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Long-term debt, less current portion, totaled approximately $27.6 million at October 31, 2021, which is approximately $21.7 million greater than our long-term debt, less current portion, at October 31, 2020. The increase is primarily due to the execution of the 2021 Credit Facility, which provided loans to finance the acquisition of HLBE’s non-controlling interest and to fund continued operations.

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Members’ equity attributable to Granite Falls Energy, LLC at October 31, 2021 increased by approximately $21.8 million compared to October 31, 2020. The increase was due primarily to the net income attributable to Granite Falls Energy, LLC for the 2021 fiscal year.

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There was no non-controlling interest at October 31, 2021, due to the Merger, in which GFE acquired HLBE’s remaining approximately 49.3% non-controlling interest.

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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 facility with AgCountry.  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 2022 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 2022 fiscal year.  However, should unfavorable operating conditions occur in the ethanol industry that prevent us from profitably operating our plants, we may need to seek additional debt or equity funding or idle ethanol production.

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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, 2021 to Year Ended October 31, 2020

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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, 2021, net cash provided by operating activities increased by approximately $20.6 million compared to the fiscal year ended October 31, 2020. This increase was due primarily to an approximately $46.6 million increase in net income, which was partially offset an approximately $12.7 million decrease in accounts receivable, approximately $7.0 million decrease in inventory, and an approximately $6.9 million decrease in commodity derivative instruments.

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Investing Cash Flows

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Cash used in investing activities was approximately $1.6 million less during fiscal year 2021 as compared to fiscal year 2020. During fiscal year 2021, we used approximately $4.3 million of cash related capital expenditures at the GFE and HLBE plants. Comparatively, during fiscal year 2020, we used approximately $5.8 million 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 $1.7 million by financing activities during fiscal year 2021, compared to being provided with approximately $9.5 million by financing activities during fiscal year 2020. The decrease was primarily attributable to the fact that we used approximately $14.0 million to acquire the non-controlling interest in fiscal year 2021, compared with using approximately $2.0 million to acquired non-controlling interest in fiscal year 2020. Additionally, in fiscal year 2021, we had proceeds on long-term debt of approximately $36.2 million and made payments on long-term debt of approximately $21.0 million, as compared with fiscal year 2020, when we had proceeds on long-term debt of approximately $66.3 million and made payments of long-term debt of approximately $56.8 million.

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Credit Arrangements

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On September 27, 2021, GFE finalized loan documents for an amended credit facility (the “2021 Credit Facility”) with AgCountry. CoBank serves as AgCountry’s administrative agent for the 2021 Credit Facility. We entered into the 2021 Credit Facility to finance the acquisition of HLBE’s non-controlling interest and consolidate certain debts of GFE and HLBE. The loan documents include an Amended and Restated Credit Agreement (the “Credit Agreement”), which amends and replaces the Company’s credit agreement with AgCountry dated September 27, 2018.

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As of October 31, 2021, GFE had indebtedness consisting of the following loans and agreements: the Credit Agreement, a $20 million revolving credit promissory note, a $500,000 amended and restated letter of credit promissory note, a $20 million amended and restated revolving term promissory note, a $25 million single advance term promissory note, a $2.4 million single advance term promissory note, and the Project Hawkeye credit facility. During the fiscal year 2021, two SBA Paycheck Protection Program loans to HLBE and two SBA Paycheck Protection Program loans to GFE were forgiven in full.

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Additional information regarding our credit arrangements is available in Part II - Item 8. Financial Statements, Note 10 - DEBT FACILITIES, and Note 16 COMMITMENTS AND CONTINGENCIES.

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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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Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles in the United States of America. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Our significant accounting policies are summarized in Part II - Item 8. Financial Statements, Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

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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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Granite Falls Energy, LLC and Subsidiaries (the Company) as of October 31, 2021 and 2020, and the related consolidated statements of operations, members’ equity, and cash flows for each of the years in the two-year period ended October 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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.

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.

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.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.

Boulay PLLP (PCAOB ID 542)

We have served as the Company’s auditor since 2002.

Minneapolis, Minnesota

January 31, 2022

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

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GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Consolidated Statement of Changes in Members’ Equity

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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 Cash Flows