Page 39 - New8814 GP 2011_AR-fnl

Basic HTML Version

19
19
threshold of a 20% reduction in GHG emissions from a 2005 baseline measurement for the ethanol over current capacity to
be eligible for the RFS 2 mandate. The EPA issued its final rule on GHG emissions from stationary sources under the Clean
Air Act in May 2010. These final rules may require us to apply for additional permits for our ethanol plants. In order to
expand capacity at our plants, we may have to apply for additional permits, install advanced technology, or reduce drying of
certain amounts of distillers grains. We may also be required to install carbon dioxide mitigation equipment or take other
steps unknown to us at this time in order to comply with other future law or regulation. Compliance with future law or
regulation of carbon dioxide, or if we choose to expand capacity at certain of our plants, compliance with then-current
regulation of carbon dioxide, could be costly and may prevent us from operating our plants as profitably, which may have an
adverse impact on our operations, cash flows and financial position.
The California Air Resources Board, or CARB, has adopted a Low Carbon Fuel Standard, or LCFS, requiring a 10%
reduction in GHG emissions from transportation fuels by 2020. Additionally, an Indirect Land Use Change, or ILUC,
component is included in the lifecycle GHG emissions calculation. On December 29, 2011, the U.S. District Court for the
Eastern District of California issued several rulings in federal lawsuits challenging the LCFS. One of the rulings preliminarily
prevents CARB from enforcing these regulations during the pending litigation. On January 23, 2012, CARB unsuccessfully
attempted to appeal these rulings in the U.S. District Court for the Eastern District of California and on January 26, 2012 filed
another appeal with the Ninth Circuit Court of Appeals. While this standard is currently being challenged by various lawsuits,
implementation of such a standard may have an adverse impact on our market for corn-based ethanol in California if it is
determined that corn-based ethanol fails to achieve lifecycle GHG emission reductions.
Our agribusiness business is subject to significant governmental and private sector regulations.
Our agribusiness operations are subject to government regulation and regulation by certain private sector associations,
compliance with which can impose significant costs on our business. Failure to comply with such regulations can result in
additional costs, fines or criminal action. Production levels, markets and prices of the grains we merchandise are affected by
federal government programs, which include acreage control and price support programs of the USDA. In addition, grain that
we sell must conform to official grade standards imposed by the USDA. Other examples of government policies that can
have an impact on our business include tariffs, duties, subsidies, import and export restrictions and outright embargos.
Changes in government policies and producer supports may impact the amount and type of grains planted, which in turn, may
impact our ability to buy grain in our market region. Because a portion of our grain sales are to exporters, the imposition of
export restrictions or tariffs could limit our sales opportunities.
Our agribusiness segment is affected by the supply and demand of commodities, and is sensitive to factors that are often
outside of our control.
Within our agribusiness segment, we compete with other grain merchandisers, grain processors and end-users for the
purchase of grain, as well as with other grain merchandisers, private elevator operators and cooperatives for the sale of grain.
Many of our grain competitors are significantly larger and compete in more diverse markets, and our failure to compete
effectively would impact our profitability.
We buy and sell various other commodities within our agribusiness division, some of which are readily traded on
commodity futures exchanges. For example, we sell agronomy products to producers which necessitate the purchase of large
volumes of fertilizer and chemicals for retail sale. Fixed-price purchase obligations and carrying inventories of these products
subject us to the risk of market price fluctuations for periods of time between the time of purchase and final sale. Weather,
economic, political, environmental and technological conditions and developments, both local and worldwide, as well as
other factors beyond our control, can affect the supply and demand of these commodities and expose them to liquidity
pressures due to rapidly rising or falling market prices. Changes in the supply and demand of these commodities can also
affect the value of inventories held for resale, as well as the price of raw materials. Fluctuating costs of inventory and prices
of raw materials could decrease operating margins and adversely affect profitability.
While our grain business hedges the majority of its grain inventory positions with derivative instruments to manage risk
associated with commodity price changes, including purchase and sale contracts, we are unable to hedge all of the price risk
of each transaction due to timing, unavailability of hedge contract counterparties and third-party credit risk. Furthermore,
there is a risk that the derivatives we employ will not be effective in offsetting the changes associated with the risks we are
attempting to manage. This can happen when the derivative and the hedged item are not perfectly matched. Our grain
derivatives, for example, do not hedge the basis pricing component of our grain inventory and contracts. Basis is defined as
the difference between the cash price of a commodity in one of our grain facilities and the nearest in time exchange-traded
futures price. Differences can reflect time periods, locations or product forms. Although the basis component is smaller and