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Pursue Consolidation Opportunities within the Ethanol Industry.
We continue to focus on the potential acquisition of
additional ethanol plants. In the past several years, we have been approached with opportunities to acquire existing ethanol
plants. We believe those plants were available for a number of reasons including financial distress of a particular facility, a
lack of operational expertise or a desire by existing owners to exit their original investment. We take a disciplined approach
in evaluating new opportunities by considering whether the plants fit within the design, engineering and geographic criteria
we have developed. We acquired one additional ethanol plant during 2011 that met our criteria. We believe that our
integrated platform, plant operations experience and disciplined risk management approach give us the ability to generate
favorable returns from our acquisitions.
Improve Operational Efficiency
. We seek to enhance profitability at each of our plants by increasing our production
volumes through operational improvements. We continually research operational processes that may increase our efficiency
by increasing yields, lowering our processing cost per gallon and increasing our production volumes. Additionally, we
employ an extensive cost control system at each of our plants to continuously monitor our plants’ performance. We are able
to use performance data from our plants to develop strategies for cost reduction and efficiency that can be applied across our
platform.
Invest in Next Generation Biofuel Opportunities.
We plan to continue our investment in the BioProcess Algae joint
venture, which is focused on commercialization of advanced photo-bioreactor technologies for the growing and harvesting of
algal biomass which can be used as high-quality, low-cost feedstocks for human nutrition, animal feed and biofuels. We
believe this technology has specific applications with facilities that emit carbon dioxide, including ethanol plants. Algae are
currently grown in BioProcess Algae's Grower Harvester
TM
reactors co-located with our Shenandoah, Iowa ethanol plant.
Ethanol Industry Overview
The ethanol industry has grown significantly over the past decade, with annual reported production increasing from 1.6
billion gallons in 2000 to 13.2 billion gallons in 2010, according to the U.S. Energy Information Administration, or EIA. As
of February 13, 2012, the Renewable Fuels Association, or RFA, estimated that there were 209 ethanol production facilities
in the United States with capacity to produce approximately 14.8 billion gallons of ethanol per year. Annual ethanol
production for 2011, based upon average monthly production in the first ten months of the year, was expected to be 13.8
billion gallons. While the market prices for our feedstock commodities are volatile and at times result in unprofitable ethanol
operations, during the past three years, there have been few occasions where the simple crush spread, which we define as the
market value of 2.8 gallons of ethanol less the cost of one bushel of corn (which represents the typical industry yield), has
dropped to below $0.10 per gallon. We believe that ethanol, as a proportion of total transportation fuels, will continue to
experience increased demand in the United States as there remains a focus on reducing reliance on petroleum-based
transportation fuels due to high and volatile oil prices, heightened environmental concerns, and energy independence and
national security concerns. We believe ethanol’s environmental benefits, ability to improve gasoline performance, fuel supply
extender capabilities, attractive production economics and favorable government incentives could enable ethanol to comprise
an increasingly larger portion of the U.S. fuel supply as more fully described below:
Emissions Reduction.
Ethanol demand increased substantially in the 1990’s, when federal law began requiring the
use of oxygenates in reformulated gasoline in cities with unhealthy levels of air pollution on a seasonal or year-
round basis. These oxygenates included ethanol and MTBE which, when blended with gasoline, reduce vehicle
emissions. Although the federal oxygenate requirement was eliminated in 2006, oxygenated gasoline continues to be
used in order to help meet separate federal and state air emission standards. The refining industry has all but
abandoned the use of MTBE making ethanol the primary clean air oxygenate currently used.
Octane Enhancer.
Ethanol, with an octane rating of 113, is used to increase the octane value of gasoline with which
it is blended, thereby improving engine performance. It is used as an octane enhancer both for producing regular
grade gasoline from lower octane blending stocks and for upgrading regular gasoline to premium grades. According
to the EIA, approximately 75% of the conventional gasoline market (which is approximately 60% of the total
gasoline market) has switched to producing a lower grade of gasoline, commonly referred to as CBOB. CBOB is an
84 octane sub-grade gasoline that is economical to produce. As a result, octane must be added to the fuel prior to
sale to consumers. Ethanol has become the primary additive used by refiners to increase octane levels.
Fuel Stock Extender.
Ethanol is a valuable blend component that is used by refiners in the United States to extend
fuel supplies. According to the EIA, from 2000 to 2010, ethanol as a component of the United States gasoline supply
has grown from 1.3% to 9.0%. In 2011 alone, ethanol replaced the need for approximately 329 million barrels of oil
in the United States (based upon monthly average production for the first ten months of the year).