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 three months ended January 31, 2022 and 2021.

This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in PART I - Item 1 of this report and the information contained in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2021.

When we use the terms "Granite Falls Energy" or "GFE" or similar words in this Quarterly Report on Form 10-Q, 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 quarterly report on Form 10-Q, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our consolidated wholly- and majority-owned subsidiaries.

Disclosure Regarding Forward-Looking Statements

The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report. All statements that are not historical or current facts are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would," and similar expressions.

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. These risks and uncertainties include, but are not limited to, the following:

Fluctuations in the price of ethanol as a result of a number of factors,

? including: the price and availability of competing fuels; the overall supply

and demand for ethanol and corn; the price of gasoline, crude oil and corn; and

government policies;

? Fluctuations in the price of crude oil and gasoline and the impact of lower oil

and gasoline prices on ethanol prices and demand;

Fluctuations in the availability and price of corn, resulting from factors such

as domestic stocks, demand from corn-consuming industries, such as the ethanol

? industry, prices for alternative crops, increasing input costs, changes in

government policies, shifts in global markets or damaging growing conditions,

such as plant disease or adverse weather, including drought;

Fluctuations in the availability and price of natural gas, which may be

? affected by factors such as weather, drilling economics, overall economic

conditions, and government regulations;

? Negative operating margins which may result from lower ethanol and/or high corn

prices;

? Changes in general economic conditions or the occurrence of certain events

causing an economic impact in the agriculture, oil or automobile industries;

? Overcapacity and oversupply in the ethanol industry;

Ethanol trading at a premium to gasoline at times, which may act as a

? disincentive for discretionary blending of ethanol beyond Renewable Fuel

Standard requirements and consequently negatively impacting ethanol prices and

demand;

Changes in federal and/or state laws and environmental regulations including

elimination, waiver or reduction of corn-based ethanol volume obligations under

? the Renewable Fuel Standard and legislative acts taken by state governments

such as California related to low-carbon fuels, may have an adverse effect on

our business;

? Any impairment of the transportation, storage and blending infrastructure that

prevents ethanol from reaching markets;

? Any effect on prices and demand for our products resulting from actions in

international markets, particularly imposition of tariffs;




                                       18

  Table of Contents

? Changes in our business strategy, capital improvements or development plans;

? Effect of our risk mitigation strategies and hedging activities on our

financial performance and cash flows;

? Competition from alternative fuels and alternative fuel additives;

? Changes or advances in plant production capacity or technical difficulties in

operating the plant;

? Our reliance on key management personnel;

A slowdown in global and regional economic activity, demand for our products

? and the potential for labor shortages and shipping disruptions resulting from

COVID-19; and

Inflation and supply chain bottlenecks may lead to increases in the costs of

? corn, natural gas, labor and other expenses critical to the operation of our

ethanol plans.

We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management's views as of the date of this report. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.granitefallsenergy.com. Our annual report on Form 10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link "SEC Compliance," as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this report on Form 10-Q.

Industry and Market Data

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association ("RFA"), a national trade association for the United States ("U.S.") ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources.

Although we believe our third-party sources are reliable, we have not independently verified the information.

Overview

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. 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.

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 Company experienced a significant increase in its revenue and net income during the three month period ended January 31, 2022, as compared to the same three month period a year earlier, due primarily to a substantial increase in the price received per gallon of ethanol, as well as increases in the price received for our other principal products, distillers grain and corn oil. The increase in the price of ethanol is attributable, in part, to the economic rebound from the effects of the COVID-19 pandemic, which has led to increased demand for transportation fuel, including the ethanol we produce. Management expects demand for ethanol to remain strong in the near term; however, it is possible that additional



                                       19

  Table of Contents

factors including the conflict in Ukraine, inflation, and the possibility of additional COVID-19 outbreaks could lead to volatility in the economy generally and in the ethanol industry specifically.

Ethanol Production

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 ethanol plant located in Granite Falls, Minnesota and at HLBE's ethanol plant near Heron Lake, Minnesota.

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

We market and sell the products produced at our plants primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, Inc. to market all of the ethanol produced at our ethanol plants. GFE also independently markets a small portion of the ethanol production at its plant as E-85 to local retailers.

We do not have any long-term, fixed price exclusive supply contracts for the purchase of corn for either the GFE or HLBE plants. Both GFE and HLBE purchase the corn necessary for operating directly from grain elevators, farmers, and local dealers within approximately 80 miles of their respective plants. GFE's members are not obligated to deliver corn to our plants.

Plan of Operations for the Next Twelve Months

Over the next twelve months, 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 to take full advantage of our permitted production capacities, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies. Additionally, we expect to continue to conduct routine maintenance and repair activities at our ethanol plants to maintain current plant infrastructure, as well as small capital projects to improve operating efficiency. We anticipate using cash from our revolving term loans to finance these plant upgrade projects.

Trends and Uncertainties Impacting Our Operations

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers' grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol. Other factors that may affect our future results of operation include those risks discussed below and our annual report on Form 10-K for the fiscal year ended October 31, 2021, which are incorporated herein by reference.

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.



                                       20

Table of Contents

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.

Corn Prices

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. Average corn prices remained above $5.00 per bushel for the three months ended January 31, 2022.

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 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 plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our plants to minimize our variable costs and optimize cash flow.

U.S. Ethanol Supply and Demand

During the three months ended January 31, 2022, domestic ethanol production increased approximately 10% compared to the same three month period a year earlier, with U.S. ethanol plants producing more than 1 million barrels of fuel ethanol per day on average, according to the U.S. Energy Information Administration ("EIA").

Ethanol production is projected to increase slightly in 2022. The EIA projects fuel ethanol production will average 1.03 million barrels per day in 2022, up from approximately 980,000 barrels per day produced in 2021. Further, EIA projects fuel ethanol production will average 1.02 million barrels per day in 2023. Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could negatively affect our profitability.

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 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. 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.

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.

Further, reductions renewable fuel blending requirements or waivers of small refiner renewable volume obligations by the U.S. Environmental Protection Agency ("EPA") may also reduce demand for ethanol and thereby adversely affect our profitability.

Changes in the price for crude oil and unleaded gasoline affect the demand for gasoline and may impact the market price of ethanol. According to the EIA projections published in January 2021, U.S. gasoline consumption is forecast to average 9.1 million barrels per day in 2022, up from 8.8 million barrels per day in 2021. Further, according to EIA's January projections, regular gasoline retail prices in the U.S. were expected to average $3.06 in 2022, up from $3.00 in 2021. However, more recent events, including the conflict in Ukraine, have contributed to increased volatility in global fuel markets.

Management believes that the ethanol outlook in the fiscal year 2022 will remain relatively consistent with the three months ended January 31, 2022. However, it is possible that increased volatility will occur due to the conflict in Ukraine, the COVID-19 pandemic, inflation, or other unforeseen factors.



                                       21

  Table of Contents

Conflict in Ukraine

Russia's invasion of Ukraine in February 2022 has contributed to significant economic volatility, which could have adverse effects on our business. Since the beginning of the conflict in Ukraine, fuel prices, including retail gasoline, have increased significantly due, in part, to the United States and other nations imposing economic sanctions on Russia, a major producer and exporter of oil and other fuels. It is possible that increased gasoline prices will result in increased demand for alternative fuels, including the ethanol we produce. It is, however, also possible that the Ukrainian conflict will cause increased economic volatility or other unforeseen conditions that adversely affect the domestic economy generally and our business specifically.

Further, it is possible that the conflict in Ukraine could result in increased grain prices, including the price of corn we use to produce ethanol. If the Ukrainian conflict causes an increase in corn prices, or other volatility in agriculture markets, it could adversely affect the profitability of our business.

Additionally, while neither Russia nor Ukraine have historically imported U.S. ethanol, it is possible that economic turmoil caused by the Ukrainian conflict could affect the U.S. exports of ethanol, which could affect our business.

COVID-19 Pandemic

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, 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 during the three months ended January 31, 2022, as compared to the same period the prior year. As a result, we experienced positive operating margins, increased cash flow from operations, and increased net income during the three months ended January 31, 2022, compared to the three months ended January 31, 2021.

During the three months ended January 31, 2022, the outbreak of the COVID-19 Omicron variant led to increased COVID-19 infections and hospitalizations and renewed government restrictions in some regions. However, demand for transportation fuel, including the ethanol we produce, remained strong during the recent three-month period. Further, the Omicron variant began to subside in early 2022, and many local governments have eased COVID-19 related restrictions. As restrictions related to the pandemic subside, management expects favorable market conditions for the ethanol industry to continue.

However, the pandemic is ongoing and various dynamic factors, including the possible outbreak 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 inflation, supply chain bottlenecks, labor market volatility, and raw material shortages may continue affect our operations and profitability.

It is possible that even after the pandemic subsides, there will be permanent changes to business and transportation norms 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.

The Renewable Fuels Standard

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.

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



                                       22

Table of Contents

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.

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 November 30 of the preceding year.

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.

In a separate action also on December 7, 2021, the EPA proposed an action to deny 65 pending applications for small refinery exemptions. Concurrently, 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.

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 E85 blending develops.



                                       23

Table of Contents

© Edgar Online, source Glimpses