GRANITE FALLS ENERGY, LLC 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 and six months ended
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
Disclosure Regarding Forward-Looking Statements
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 including the impact of
invasion of
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 including recent increases in interest
? rates 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
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;
? 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;
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? 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
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
Overview
The Company experienced a significant increase in its revenues during the three
and six month periods ended
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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 factors including the conflict in
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
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
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 in PART II - Item 1A. Risk
Factors and in "PART I - Item 1A. Risk Factors" of our annual report on Form
10-K for the fiscal year ended
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
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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.
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 continue an upward trend in early 2022, due in part to the improved
domestic economy as well as increased demand from
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.
During the three and six months ended
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. The agency now predicts fuel ethanol production will fall to an average of 990,000 barrels per day in 2023, down slightly from the agency's previous forecast of 1 million barrels per day. Fuel ethanol production averaged 980,000 barrels per day last year. Continued ethanol production capacity increases could also have a negative impact on the market price of ethanol, which could negatively affect our profitability.
Total ethanol exports for the first two months of 2022 reached 266.89 million
gallons at a value of
Further, reductions in renewable fuel blending requirements or waivers of small
refiner renewable volume obligations by the
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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, 97.4
million barrels per day ("b/d") of petroleum and liquid fuels was consumed
globally in
The
The Biden administration's plan to temporarily allow higher ethanol blends in
gasoline may increase ethanol demand in 2022. The Biden administration's move
would allow gasoline with 15% ethanol to be sold
Conflict in
Further, it is possible that the conflict in
Additionally, while neither
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 and six months
ended
During the six months ended
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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 especially if higher gasoline prices cause consumers to reduce or restrict gasoline purchases. For example, increased adoption of "work from home" policies or tele-commuting, and the use of 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
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
On
In a separate action also on
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
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USDA Biofuel Producer Program
In June of 2021, the
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