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 nine months ended July 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- 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:
? The possibility of a railroad strike which would cause significant disruption
to our ability to receive feedstock and ship our products;
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, including the recent passage of the Inflation Reduction
Act of 2022;
? 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 Russia's
invasion of Ukraine and the potential loss of Ukrainian exports; 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 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 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;
? Changes in our business strategy, capital improvements or development plans;
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? 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 and the information provided is only as
of the date of this report unless otherwise stated.
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 a 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.
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The Company experienced an increase in its revenues during the three and nine
month periods ended July 31, 2022, as compared to the same three month and nine
month periods 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 Company
experienced an increase in net income for the three-month period ended July 31,
2022 as compared to the same three month period a year earlier, which was
primarily due to an increase in other income generated by the USDA Biofuel
Producer Program payment of approximately $14.2 million. The Company experienced
an increase in its net income for the nine-month period ended July 31, 2022, as
compared to the same nine-month period a year earlier, due primarily to a
substantial increase in the prices it receives for its ethanol, distillers
grains and corn oil in addition to the increase in other income. 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 factors including inflation-related economic factors, 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 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 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
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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.
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 2022, due in part to the improved
domestic economy as well as increased demand from China and drought in South
America's corn-growing regions. In addition, Russia's invasion of Ukraine is
also causing upward price pressure on corn since corn is viewed as a substitute
food item for wheat. Ukraine is a major exporter of wheat and other items, such
as sunflower oil, while Russia is a key producer of wheat and many of the
chemicals used in fertilizer. That is leading to an increased demand for corn as
a substitute food item and causing prices to increase. Average corn prices
remained above $6.60 per bushel for the nine months ended July 31, 2022, which
is a significant increase over the average corn price of $5.15 for the nine
months ended July 31, 2021.
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 first half of 2022, domestic ethanol production increased between
approximately 6% to 7% compared to the first half of 2021, 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").
The EIA maintained its forecasts for 2022 and 2023 fuel ethanol production in
its latest Short-Term Energy Outlook, released Aug. 9. The agency also
maintained its forecast for 2022 and 2023 ethanol consumption.
The EIA currently predicts U.S. fuel ethanol production will average 1.02
million barrels per day this year, falling to 1 million barrels per day next
year. Production averaged 980,000 barrels per day in 2021.
On a quarterly basis, ethanol production is expected to average 1.01 million
barrels per day during the third quarter of this year, expanding to 1.02 million
barrels per day during the fourth quarter. Moving into 2023, ethanol production
is expected to average 990,000 barrels per day in the first quarter, 1 million
barrels per day in the second quarter, 990,000 barrels per day in the third
quarter, and 1.02 million barrels per day in the fourth quarter. Continued
ethanol production capacity increases could also have a negative impact on the
market price of ethanol, which could negatively affect our profitability.
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Total U.S. ethanol exports for the first five months of 2022 were 725.9 million
gallons, up 24% from the same period in 2021 and remaining on a record pace. The
Renewable Fuels Association says May U.S. ethanol exports moderated from April's
four-year high, declining 21% to 147.1 million gallons (mg). However, Canada
increased its imports by 4% to 41.8 mg in May, maintaining its status as the top
customer for U.S. ethanol exports for 14 consecutive months and logging its
largest monthly volume in eight years (also its second largest on record). South
Korea saw weaker sales in May, importing 19.3 mg (down 18%). Exports to the
Netherlands climbed 12% to a 19-month high of 15.4 mg. Shipments to these three
countries represented half of total U.S. exports in May. Other substantial
importers of U.S. ethanol included India (10.9 mg, -9%), the United Kingdom (8.1
mg, -37%), Brazil (7.7 mg, -74%), and Peru (5.6 mg, -38%).
Export demand for ethanol is less consistent compared to domestic demand which
can lead to ethanol price volatility. 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. Further, reductions in 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.
In its August "Short-Term Energy Outlook" ("STEO"), the U.S. Energy Information
Administration estimated that 98.8 million barrels per day of petroleum and
liquid fuels was consumed globally in July 2022, an increase of 0.9 million
barrels per day from July 2021. The EIA forecasted global consumption of
petroleum and liquid fuels will average 99.4 million b/d for all of 2022, which
is a 2.1 million b/d increase from 2021. The EIA further forecasted that global
consumption of petroleum and liquid fuels will increase by another 2.1 million
b/d in 2023 to average 101.5 million b/d.
According to the August STEO, the U.S. retail price for regular grade gasoline
averaged $4.56 per gallon (gal) in July, and the average retail diesel price was
$5.49/gal. The EIA expects retail gasoline prices to average $4.29/gal in the
third quarter of 2022 and fall to an average of $3.78/gal in the fourth quarter
of 2022. Retail diesel prices in its August STEO forecast average $5.02/gal in
the third quarter of 2022 and $4.39/gal in the fourth quarter of 2022.
The Biden administration's plan to temporarily allow higher ethanol blends in
gasoline may increase ethanol demand in 2022. The Biden administration's move
allowed gasoline with 15% ethanol to be sold between June 1 and Sept. 15.
Typically, the federal government limits ethanol blends to 10% during summer
months, to curb smog caused by the 15% blend's higher volatility. Following the
Biden administration's move, E15 consumption is expected to increase by about
300 million gallons in 2022 from the 814 million gallons of E15 sold in 2021,
according to the Renewable Fuels Association. However, it is possible that
increased volatility will occur due to the conflict in Ukraine, the COVID-19
pandemic, inflation, or other unforeseen factors.
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.
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COVID-19 Pandemic
After experiencing volatile and adverse conditions for much of fiscal year 2020
and a portion of fiscal year 2021 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 2022 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 nine months ended July 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 revenues during the three
months and nine months ended July 31, 2022, compared to the three months and
nine months ended July 31, 2021.
During the nine months ended July 31, 2022, the outbreak of additional COVID-19
variants led to increased COVID-19 infections and hospitalizations and renewed
government restrictions in a few regions. However, demand for transportation
fuel, including the ethanol we produce, remained strong during the recent
three-month period. 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
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 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.
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. According to the RFS, if mandatory renewable fuel volumes
are reduced by at least 20% for two consecutive years, the EPA is required to
modify, or reset, statutory volumes through 2022, the year through which the
statutorily prescribed volumes run. While conventional ethanol maintained 15
billion gallons, 2019 was the second consecutive year that the total RVO was
more than 20% below the statutory volume levels. Thus, the EPA was expected to
initiate a reset rulemaking, and modify statutory volumes through 2022, and do
so based on the same factors they are to use in setting the RVOs post 2022.
These factors include environmental impact, domestic energy security, expected
production, infrastructure impact, consumer costs, job creation, price of
agricultural commodities, food prices, and rural economic development. However,
in late 2019, the EPA announced it would not be moving forward with a reset
rulemaking in 2020. It is unclear when or if the current EPA will propose a
reset rulemaking, though they have stated an intention to propose a post 2022
set rulemaking as required by law.
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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. The
EPA, as part of a consent decree, has agreed to propose 2023 renewable volume
obligations ("RVOs") by November 16, 2022 and final RVOs by June 14, 2023. The
consent decree would settle litigation brought by Growth Energy, which sued the
EPA for repeatedly missing deadlines on issuing annual RVO mandates. The consent
decree was submitted to the U.S. District Court for the District of Columbia on
July 22, 2022, and the court is expected to sign off on the decree in the coming
weeks.
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. In
June of 2021, USDA announced a $700.0 million Biofuel Producer Program to
distribute these funds to impacted producers of ethanol, biodiesel and other
renewable fuels, and they provided the specifics for the application process in
December of 2021. Applications were due in February 2022, and the USDA has
indicated they will calculate and distribute payments in the first half of 2022.
We applied to the USDA for these funds and in June 2022, we received
approximately $14.2 million in USDA support related to COVID-19 economic relief.
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.
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