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Passed in 2007 as part of the Energy Independence and Security Act, a federal Renewable Fuels Standard, or RFS, has
been and will continue to be a driving factor in the growth of ethanol usage. As mandated by the RFS, 12.6 billion gallons of
conventional biofuels, which corn-based ethanol falls under, were required to be blended into the U.S. fuel supply in 2011,
increasing to 15.0 billion gallons per year by the year 2015. The RFS Flexibility Act was introduced on October 5, 2011 in
the U.S. House of Representatives to reduce or eliminate the volumes of renewable fuel use required by RFS based upon corn
stocks-to-use ratios. The Domestic Alternative Fuels Act of 2012 was introduced on January 18, 2012 in the U.S. House of
Representatives to modify the RFS to include ethanol and other fuels produced from fossil fuels like coal and natural gas. We
believe the RFS is a significant component of national energy policy that reduces dependence on foreign oil by the United
States. As a result, we believe that the RFS Flexibility Act and the Domestic Alternative Fuels Act will not garner sufficient
support to be enacted; however, no assurance can be provided.
To further drive growth in the increased adoption of ethanol, Growth Energy, an ethanol industry trade association, and a
number of ethanol producers requested a waiver from the EPA to increase the amount of ethanol blended into gasoline from
the current 10% level, or E10, to a 15% level, or E15. In October 2010, the EPA granted a partial waiver for E15 for use in
model year 2007 and newer model passenger vehicles, including cars, SUVs and light pickup trucks. In January 2011, the
EPA granted a second partial waiver for E15 for use in model year 2001 through 2006 passenger vehicles. On February 17,
2012, the EPA announced that evaluation of the health effects tests on E15 are complete and that fuel manufacturers are now
able to register E15 with the EPA to sell. Over 141 million vehicles, or 60% of the passenger vehicles in service, would be
eligible to use E15.
Another previous benefit to the industry was the Volumetric Ethanol Excise Tax Credit, or VEETC (often commonly
referred to as the “blender’s credit”) created by the American Jobs Creation Act of 2004. This credit allowed gasoline
distributors who blend ethanol with gasoline to receive a federal excise tax credit of $0.45 per gallon of pure ethanol used, or
$0.045 per gallon for E10 and $0.3825 per gallon for E85. The credit expired on December 31, 2011 and the impact on
ethanol demand is uncertain at this time.
Ethanol produced in foreign countries, from sugarcane or other feed stocks imported into the United States, was
previously subject to an import tariff of $0.54 per gallon. The import tariff expired on December 31, 2011. Production
imported from the Caribbean region was eligible for tariff reduction or elimination under a program known as the Caribbean
Basin Initiative. Depending on feed stock prices, ethanol imported from foreign countries may be less expensive than
domestically-produced ethanol though foreign demand, transportation costs and infrastructure constraints may temper the
market impact on the United States. However, the impact of the expired tariff on the demand for domestically-produced
ethanol is uncertain at this time.
Changes in corporate average fuel economy, or CAFE, standards have also benefited the ethanol industry by encouraging
use of E85 fuel products. CAFE provides an effective 54% efficiency bonus to flexible-fuel vehicles running on E85. Though
E85 is not in widespread use today, auto manufacturers may find it attractive to build more flexible-fuel trucks and sport
utility vehicles that are otherwise unlikely to meet CAFE standards.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the
Reform Act, which, among other things, aims to improve transparency and accountability in derivative markets. While the
Reform Act increases the regulatory authority of the Commodity Futures Trading Commission, or CFTC, regarding over-the-
counter derivatives, there is uncertainty on several issues related to market clearing, definitions of market participants,
reporting, and capital requirements. While many details remain to be addressed in CFTC rulemaking proceedings, at this time
we do not anticipate any material impact to our risk management strategy.
In addition to these federal standards, many states have taken other steps to encourage ethanol consumption including tax
credits, mandated blend rates and subsidies.
Environmental and Other Regulation
Our ethanol production and agribusiness activities are subject to environmental and other regulations. We obtain
environmental permits to construct and operate our ethanol plants.
Ethanol production involves the emission of various airborne pollutants, including particulate, carbon dioxide, oxides of
nitrogen, hazardous air pollutants and volatile organic compounds. In 2007, the U.S. Supreme Court classified carbon dioxide
as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle
emissions. In February 2010, the EPA released its final regulations on the Renewable Fuels Standard, or RFS 2. We believe