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Risks relating to our business and industry
Our results of operations and ability to operate at a profit is largely dependent on managing the spread among the prices of
corn, natural gas, ethanol and distillers grains, the prices of which are subject to significant volatility and uncertainty.
The results of our ethanol production business are highly impacted by commodity prices, including the spread between
the cost of corn and natural gas that we must purchase, and the price of ethanol and distillers grains that we sell. Prices and
supplies are subject to and determined by market forces over which we have no control, such as weather, domestic and global
demand, shortages, export prices, and various governmental policies in the United States and around the world. As a result of
price volatility for these commodities, our operating results may fluctuate substantially. Increases in corn or natural gas prices
or decreases in ethanol or distillers grains prices may make it unprofitable to operate our plants. No assurance can be given
that we will be able to purchase corn and natural gas at, or near, current prices and that we will be able to sell ethanol or
distillers grains at, or near, current prices. Consequently, our results of operations and financial position may be adversely
affected by increases in the price of corn or natural gas or decreases in the price of ethanol or distillers grains.
We continuously monitor the profitability of our ethanol plants with a variety of risk management tools, including our
internally-developed real-time operating margin management system. In recent years, the spread between ethanol and corn
prices has fluctuated widely and narrowed significantly. Fluctuations are likely to continue to occur. A sustained narrow
spread or any further reduction in the spread between ethanol and corn prices, whether as a result of sustained high or
increased corn prices or sustained low or decreased ethanol prices, would adversely affect our results of operations and
financial position. Further, combined revenues from sales of ethanol and distillers grains could decline below our marginal
cost of production, which could cause us to reduce or suspend production at some or all of our plants. A decrease in
production volumes could adversely impact our overall profitability.
Our risk management strategies, including hedging transactions, may be ineffective and may expose us to decreased
liquidity.
In an attempt to partially offset the effects of volatility of ethanol, distillers grains, corn oil, corn and natural gas prices,
we enter into forward contracts to sell a portion of our respective ethanol, distillers grains and corn oil production or to
purchase a portion of our respective corn or natural gas requirements. To a much lesser extent, we also engage in other
hedging transactions involving exchange-traded futures contracts for corn, natural gas, ethanol and unleaded gasoline from
time to time. The financial statement impact of these activities is dependent upon, among other things, the prices involved
and our ability to physically receive or deliver the commodities involved. Hedging arrangements also expose us to the risk of
financial loss in situations where the counterparty to the hedging contract defaults on its contract or, in the case of exchange-
traded contracts, where there is a change in the expected differential between the price of the commodity underlying the
hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold. Hedging activities
can themselves result in losses when a position is purchased in a declining market or a position is sold in a rising market. A
hedge position is often settled in the same time frame as the physical commodity is either expensed as a cost of goods sold
(corn and natural gas) or sold (ethanol, distillers grains and corn oil). Hedging losses may be offset by a decreased cash price
for corn and natural gas and an increased cash price for ethanol, distillers grains and corn oil. We also vary the amount of
hedging or other risk mitigation strategies we undertake, and we may choose not to engage in hedging transactions at all. We
cannot assure you that our risk management and hedging activities will be effective in offsetting the effects of volatility. If
we fail to offset such volatility, our results of operations and financial position may be adversely affected.
We also attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative
financial instruments. Sudden changes in commodity prices may require cash deposits with brokers, or margin calls.
Depending on our open derivative positions, we may require additional liquidity with little advance notice to meet margin
calls. As part of our risk management strategy, we have routinely had to, and in the future will likely be required to, cover
margin calls. While we continuously monitor our exposure to margin calls, we cannot guarantee you that we will be able to
maintain adequate liquidity to cover margin calls in the future.
Price volatility of each commodity that we buy and sell could each adversely affect our results of operations and our ability
to operate at a profit.
Corn.
Because ethanol competes with non-corn derived fuels, we generally are unable to pass along increases in corn
costs to our customers. At certain levels, corn prices may make ethanol uneconomical to produce. There is significant price
pressure on local corn markets caused by nearby ethanol plants, livestock industries and other corn consuming enterprises.
Additionally, local corn supplies and prices could be adversely affected by rising prices for alternative crops, increasing input
costs, changes in government policies, shifts in global markets, or damaging growing conditions such as plant disease or