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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," or "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:
•A slowdown in global and regional economic activity, demand for our products and the potential for labor shortages and shipping disruptions resulting from pandemics including COVID-19;
•Reductions in the corn-based ethanol use requirement in the Federal Renewable Fuels Standard;
•The impact of small refinery exemptions from the RFS which have reduced ethanol demand;
•Oversupply in the ethanol industry resulting in lower market ethanol prices;
•Negative operating margins which result from lower ethanol prices;
•Lower ethanol prices due to the Chinese and Brazilian ethanol tariffs;
•Lower distillers grains prices due to the Chinese antidumpinganti-dumping and countervailing duty tariffs;
•Lower gasoline prices may negatively impact ethanol prices which could hurt our profitability;
•Availability and costs of raw materials, particularly corn and natural gas;
•Changes in the price and market for ethanol, distillers grains and corn oil;
•Our ability to maintain liquidity and maintain our risk management positions;
•Changes in the availability and cost of credit;
•Changes and advances in ethanol production technology;
•The effectiveness of our risk management strategy to offset increases in the price of our raw materials and decreases in the prices of our products;
•Overcapacity within the ethanol industry causing supply to exceed demand;
•Our ability to market and our reliance on third parties to market our products;
•The decrease or elimination of governmental incentives which support the ethanol industry;
•Changes in the weather or general economic conditions impacting the availability and price of corn;
•Our ability to generate free cash flow to invest in our business and service our debt;
•Changes in plant production capacity or technical difficulties in operating the plant;
•Changes in our business strategy, capital improvements or development plans;
•Our ability to retain key employees and maintain labor relations;
•Our liability resulting from potential litigation;
•Competition from alternative fuels and alternative fuel additives; and
•Other factors described elsewhere in this report.
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
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PART I
ITEM 1.BUSINESS.
Overview
Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages an ethanol plant that has a nameplate production capacity of 4090 million gallons of ethanol per year through its wholly-owned subsidiary Dakota Ethanol, L.L.C. The ethanol plant producerscurrently produces at rates in excess of 5090 million gallons of ethanol per year. The ethanol plant is located near Wentworth, South Dakota. Lake Area Corn Processors, LLC is referred to in this report as "LACP," the "Company," "we," or "us." Dakota Ethanol, L.L.C. is referred to in this report as "Dakota Ethanol" or the "ethanol plant."
Since September 4, 2001, we have been engaged in the production of ethanol and distillers grains. Fuel grade ethanol is our primary product accounting for the majority of our revenue. We also sell distillers grains and corn oil, the principal co-products of the ethanol production process.
The ethanol industry experienced industry-wide record low ethanol prices throughout most of 2018 and 2019 due to reduced demand and high industry inventory levels. This continued into 2020 and the situation was compounded by the crisis associated with the 2019 novel coronavirus disease (“COVID-19”). In response to these unfavorable operating conditions and a slowdown in global and regional economic activity and a disruption in transportation fuel demand resulting from the COVID-19 pandemic, we reduced our ethanol production rate early in 2020 which impacted our total ethanol production for our 2020 fiscal year.
General Development of Business
LACP was formed as a South Dakota cooperative on May 25, 1999. On August 20, 2002, our members approved a plan to reorganize into a South Dakota limited liability company. The reorganization became effective on August 31, 2002, and the assets and liabilities of the cooperative were transferred to the newly formed limited liability company. Following the reorganization, our legal name was changed to Lake Area Corn Processors, LLC.
Our ownership of Dakota Ethanol represents our primary asset and source of revenue. Since we operate Dakota Ethanol as a wholly-owned subsidiary, all net income generated by Dakota Ethanol is passed to LACP. We make distributions of the income received from Dakota Ethanol to our unit holders in proportion to the number of units held by each member comparedmember.
We entered into a loan agreement with the Small Business Association through First State Bank, Gothenburg, NE on April 4, 2020 for $760,400 as part of the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The loan matures in January 2023 and has an interest rate of 1%. Proceeds of the loan are restricted for use towards payroll costs and other allowable uses such as covered utilities for incurred before December 31, 2020 under the Paycheck Protection Program Rules. Provisions of the agreement allow for a portion of the loan to be forgiven if certain qualifications are met. We applied for forgiveness of this loan. The Paycheck Protection Program Flexibility Act, which was put into effect on June 5, 2020, may effect the units held byterms of our members generally.loan.
On July 11, 2017,June 5, 2020, we madeentered into a $10 million investment in Ring-neck Energy & Feed, LLC. Ring-neck Energy & Feed, LLC plans to construct an ethanol plant in Onida, South Dakota. We have the right to appoint a member of Ring-neck Energy & Feed, LLC's board of managers.
During our 2019 fiscal year, we completed a new $8 million term loan which we used to finance a portion of our investment in Ring-neck Energy & Feed, LLC. We agreed to make annual principal payments of $1 million plus accrued interest starting on August 1, 2018 and annually thereafter until the maturity date on August 1, 2025.
Financial Information
Please refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding our results of operations and "Item 8 - Financial Statements and Supplementary Data" for our audited consolidated financial statements.
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Principal Products
The principal products produced at the ethanol plant are fuel grade ethanol, distillers grains and corn oil. The table below shows the approximate percentage of our total revenue which is attributed to each of our primary products for each of our last three fiscal years.
| Product | Fiscal Year 2020 | Fiscal Year 2019 | Fiscal Year 2018 | |||||||||||||||||
| Ethanol | 76% | 78% | 77% | |||||||||||||||||
| Distillers Grains | 20% | 18% | 20% | |||||||||||||||||
| Corn Oil | 4% | 4% | 3% | |||||||||||||||||
| Product | Fiscal Year 2017 | Fiscal Year 2016 | Fiscal Year 2015 | |||
| Ethanol | 79% | 78% | 76% | |||
| Distillers Grains | 17% | 18% | 20% | |||
| Corn Oil | 4% | 3% | 3% | |||
Ethanol
Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains. Ethanol is primarily used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Ethanol produced in the United States is primarily used for blending
with unleaded gasoline and other fuel products. Ethanol blended fuel is typically designated in the marketplace according to the percentage of the fuel that is ethanol, with the most common fuel blend being E10, which includes 10% ethanol. The United States Environmental Protection Agency ("EPA") has approved the use of gasoline blends that contain 15% ethanol, or E15, for use in all vehicles manufactured in model year 2001 and later. In addition, flexible fuel vehicles can use gasoline blends that contain up to 85% ethanol called E85.
An ethanol plant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce a substance called "beer," which contains approximately 15% alcohol, 11% solids and 74% water. The "beer" is boiled to separate the water, resulting in ethyl alcohol, which is then dehydrated to increase the alcohol content. This product is then mixed with a certified denaturant, such as gasoline, to make the product unfit for human consumption which allows it to be sold commercially.
Distillers Grains
A principal co-product of the ethanol production process is distillers grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry. We primarily produce distillers grains in two forms, modified/wet distillers grains and dried distillers grains. Modified/wet distillers grains have a higher moisture content than dried distillers grains. Our modified/wet distillers grains are sold primarily in our local market because they have a shorter shelf life and are more expensive to transport than dried distillers grains.
Corn Oil
We separate a portion of the corn oil contained in our distillers grains which we market separately from our distillers grains. The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. The primary uses for the corn oil that we produce are animal feed, industrial uses and biodiesel production.
Principal Product Markets
Ethanol
The primary market for our ethanol is the domestic fuel blending market. However the ethanol industry has focused on increasing ethanol exports. According to the U.S. Energy Information Administration, Brazil, Canada, India and Mexico were top destinations for ethanol exports in recent years2020. However, overall exports of ethanol for this period decreased compared to the same period last year due to escalating trade barriers and the impacts of COVID-19. Tariffs implemented by Brazil and China on ethanol imported from the United States has experienced increasedreduced export demand from these markets. Trade barriers with key markets may continue to take a toll on ethanol exports. This increase inexport demand negatively effecting domestic ethanol exports follows a conscious effort by the United States ethanol industry to expand ethanol exports along with lower ethanol prices which encouraged exports. During 2017, the primary export markets served by the United States ethanol industry were Canada, Brazil, India, China, South Korea, the Philippines and Peru. However, ethanolprices. Ethanol export demand is more unpredictable than domestic demand and tends to fluctuate throughout the year as it is subject to monetary and political forces in other nations. BothAn example of this, the imposition of a tax on imported ethanol by Brazil and China, each a major sourcehas created uncertainty as to the viability of export demand in the past, have instituted tariffs onthat market for ethanol produced in the United States during 2017. The imposition of these tariffs have resulted in a decline in demand from these top importers requiringand has required the United States producers to seek out alternative markets.
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Export demand has negatively impacted ethanol exports to the European Union, other countries have increased their ethanol imports. Further, some ethanol exports to the European Union have continued despite the tariffalso decreased due to the relatively lower price of ethanol produceddisruption in global fuel demand resulting from travel restrictions in response to the United States.COVID-19 pandemic. Restricted travel, new lockdown measures and slow economic growth continue to have a negative effect on global fuel consumption and it is unknown when such demand will recover as reopening efforts continue to evolve.
Ethanol is generally blended with gasoline before it is sold to the end consumer. Therefore, the primary purchasers of ethanol are fuel blending companies which mix the ethanol we produce with gasoline. As discussed below in the section entitled "Distribution of Principal Products," we have a third party marketer that sells all of our ethanol. Our ethanol marketer makes substantially all decisions regarding where our ethanol is sold.
Distillers Grains
Distillers grains are primarily used as animal feed. Distillers grains are typically fed to animals instead of other traditional animal feeds such as corn and soybean meal. Distillers grains exports have increased in recent years as distillers grains have become a more accepted animal feed. Currently, the United States ethanol industry exports a significant amount of distiller grains. During 2017,According to the U.S. Grains Council, during the 2019/2020 marketing year, the largest importers of United States distiller grains were Mexico, Turkey,China, Canada, Japan, Colombia and South Korea, Thailand, China and Canada. Korea.
During 2016, China began an anti-dumping and countervailing duty investigation related to distillers grains imported from the United States which contributed to a decline in distillers grains shipped to China. In September 2016, China issued a preliminary ruling on the anti-dumping investigation imposing an immediate duty on distillers grains that are produced in the United States.
We anticipate that the vast majority of our distillers grains will continue to be sold in the domestic market due to our plant's location. Further, management anticipates that we will continue to sell a large proportion of our distillers grains in the modified/wet form which is marketed locally.
Corn Oil
The primary markets for corn oil are the industrial chemicals market, animal feeding market and the biodiesel production market. Corn oil demand was higher during 2017 due to increased biodiesel production. ThisThe biodiesel blenders' tax credit expired at the end of 2016.2017. However, in early 2018on December 20, 2019, the biodiesel blenders' tax credit was reinstated retroactively for 20172018 and 2019 after it expired at the end of 2016, but no2017, and a forward looking extension was included so this may not provide support for corn oil prices during our 2018 fiscal year.the years 2020, 2021, and 2022. Since corn oil can be used as a feedstock to produce biodiesel, when biodiesel production increases it has a positive impact on corn oil prices. Further,However, additional corn oil supply has continued to enter the market which has negatively impacted corn oil prices. The market for corn oil is expected to continue to shift as changes in supply and demand of corn oil interact. Our corn oil is primarily marketed in the United States and we do not expect that significant exports of corn oil will occur in the near future.
Distribution of Principal Products
Ethanol Distribution
We have an ethanol marketing agreement with RPMG, Inc. ("RPMG"), a professional third party marketer, which is the sole marketer of our ethanol. We are an equity owner of Renewable Products Marketing Group, LLC ("RPMG, LLC"), the parent company of RPMG, which allows us to realize favorable marketing fees in the sale of our ethanol, distillers grains and corn oil. Our ethanol marketing agreement provides that we can sell our ethanol either through an index arrangement or at a fixed price agreed to between us and RPMG. The term of our ethanol marketing agreement is perpetual, until it is terminated according to the terms of the agreement. The primary reasons our ethanol marketing agreement would terminate are if we cease to be an owner of RPMG, LLC, if there is a breach of our ethanol marketing agreement which is not cured, or if we give advance notice to RPMG that we wish to terminate our ethanol marketing agreement. Notwithstanding our right to terminate our ethanol marketing agreement, we may be obligated to continue to market our ethanol through RPMG for a period of time after termination. Further, following termination we agreed to accept an assignment of certain railcar leases which RPMG has secured to service our ethanol sales. If our ethanol marketing agreement is terminated, it would trigger a redemption by RPMG, LLC of our ownership interest in RPMG, LLC.
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Distillers Grains Distribution
Other than the distillers grains that we market locally without a third party marketer, our distillers grains are marketed by RPMG. Our distillers grains marketing agreement with RPMG automatically renews for additional one-year terms unless notice of termination is given as provided by the distillers grains marketing agreement. We pay RPMG a commission based on each ton of distillers grains sold by RPMG.
We market a portion of our distillers grains to our local market without the use of an external marketer. Currently, we market approximately 65%62%, based on volume, of our distillers grains internally. Shipments of these products are made to local markets by truck. This has allowed us to sell less distillers grains in the form of dried distillers grains which has decreased our natural gas usage and improved our margins from the sale of distillers grains.
Corn Oil Distribution
We market all of our corn oil through RPMG. Our corn oil marketing agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed. We pay RPMG a commission based on each pound of our corn oil that is sold by RPMG.
New Products and Services
We did not introduce any new products or services during our20172020 fiscal year.
Patents, Trademarks, Licenses, Franchises and Concessions
We do not currently hold any patents, trademarks, franchises or concessions. We were granted a license by Broin and Associates, Inc. ("Broin"), the company that designed and built the ethanol plant, to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by Broin was included in the amount we paid Broin to design and build our ethanol plant.
Sources and Availability of Raw Materials
Corn Feedstock Supply
The major raw material required for our ethanol plant to produce ethanol, distillers grains and corn oil is corn. The plant operates at a rate in excess of its nameplate capacity of 4090 million gallons of ethanol per year, producingyear. We anticipate using approximately 51 million gallons of ethanol annually from approximately 1831 million bushels of corn. The area surrounding the ethanol plant currentlyusually provides an ample supply of corn to meet and exceed our raw material requirements for the production capacity of the plant.
Corn prices have been volatile in recent years due to changes in corn demand as well as yield and production fluctuations that have had a significant impact on corn prices. CornHigh corn prices were lower during our 2017 fiscal year as a result of five consecutive years of favorable corn crops which has increased the amount of corn available to us. As a result of these favorable corn crops, we have not had difficulty securing the corn we need to operate the ethanol plant at prices that have allowed us to operate profitably. However, as we experienced during 2012, an unfavorable corn crop can have a significant negative impacteffect on our profitability.operating margins unless the price of ethanol and distillers grains out paces rising corn prices. We could experience a drought or other unfavorable weather conditionconditions during our 20182021 fiscal year which could impact the price we pay for corn and could negatively impact the availability of corn near our plant. If we experience a localized shortage of corn, we may be forced to purchase corn from producers who arelocated farther away from our ethanol plant which can increase our transportation costs. In addition, if new corn customers enter the market, it can increase demand for corn which could result in higher corn prices. Since corn is the primary raw material we use to produce our products, the availability and cost of corn can have a significant impact on the profitability of our operations.
Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market. We anticipate purchasing corn from third parties should our members fail to supply us with enough corn to operate the ethanol plant at capacity. We do not anticipate experiencing difficulty purchasing the corn we require to operate the ethanol plant.
We have an agreement with John Stewart & Associates ("JSA") to provide us with consulting services related to our risk management strategy. We pay JSA a fee of $2,500 per month to assist us in making risk management decisions regarding our commodity purchases. The agreement renews on a month-to-month basis.
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Natural Gas
Natural gas is an important input to our manufacturing process. We purchase our natural gas on the open market and the price for our natural gas is based on market rates. We have a contract with Northern Natural Gas for the interstate transportation of our natural gas. We contract with NorthWestern Energy for the local transportation of our natural gas. Both contracts expire in 2018.2028. We have had no interruptions or shortages in the supply of natural gas to the plant since operations commenced in 2001. We anticipate that we will be able to purchase sufficient natural gas to continue to operate the ethanol plant during our 20182021 fiscal year.
Electricity
Electricity is necessary for lighting and powering much of the machinery and equipment used in the production process. We contract with Sioux Valley Energy, Inc. to provide all of the electric power and energy requirements for the ethanol plant. We have had no interruptions or shortages in the supply of electricity to the plant since operations commenced in 2001.
Water
Water is a necessary part of the ethanol production process. It is used in the fermentation process and to produce steam for the cooking, evaporation, and distillation processes. We contract with Big Sioux Community Water System, Inc. to meet our water requirements. Our current agreement with Big Sioux is for a five-year term commencingwas modified in December 2014February 2020 and is renewable for additional five year terms.expires in 2025. Since our operations commenced in September 2001, we have had no interruption in the supply of water and all of our requirements have been met.
Seasonal Factors in Business
We experience some seasonality of demand for our ethanol, distillers grains and corn oil. Since ethanol is predominantly blended with gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving and, as a result, increased gasoline demand. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand. We also experience decreased distillers grains demand during the summer months due to natural depletion in the size of herds at cattle feed lots. Further, we expect some seasonality of demand for our corn oil since the biodiesel industry is a major corn oil user and biodiesel plants typically reduce production during the winter months. We experience some seasonality in the price we pay for natural gas with premium pricing during the winter months. This increase in natural gas prices coincides with increased natural gas demand for heating needs in the winter months.
Working Capital
We primarily use our working capital for purchases of raw materials necessary to operate the ethanol plant, for payments on our credit facilities, for distributions to our members and for capital expenditures to maintain and upgrade the ethanol plant. Our primary sources of working capital are income from our operations and investments as well as our revolving lines of credit with our primary lender, FCSA.Farm Credit. For our 20182021 fiscal year, we anticipate using cash from our operations and our credit facilities for our plant expansion project and to maintain our current plant infrastructure. Management believes that our current sources of working capital are sufficient to sustain our operations for our 20182021 fiscal year and beyond.
Dependence on One or a Few Major Customers
As discussed above, we have entered into marketing agreements with RPMG to market our ethanol, distillers grains and corn oil. Therefore, we rely on RPMG to market almost all of our products, except for the modified/wet distillers grains that we market locally. Our financial success will be highly dependent on RPMG's ability to market our products at competitive prices. Any loss of RPMG as our marketing agent or any lack of performance under these agreements or inability to secure competitive prices could have a significant negative impact on our revenues. While we believe we can secure new marketers if RPMG were to fail, we may not be able to secure such new marketers at rates which are competitive with RPMG's.
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Our Competition
Ethanol Competition
We are in direct competition with numerous ethanol producers in the sale of our products and with respect to raw material purchases related to those products. Many of the ethanol producers with which we compete have greater resources than we do. While management believes we are a lower cost producer of ethanol, larger ethanol producers may be able to take advantage of economies of scale due to their larger size and increased bargaining power with both ethanol, distillers grains and corn oil customers and raw material suppliers. As of January 23, 2018,December 31, 2020, the Renewable Fuels Association estimates that there are213 210 ethanol production facilities in the United States with capacity to produce approximately 16.217.6 billiongallons of ethanol per year. According to RFA estimates, approximately 3%of the ethanol production capacity in the United States was not operating as ofJanuary 23, 2018. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET Biorefining, and Valero Renewable Fuels, each of which is capable of producing significantly more ethanol than we produce.
The following table identifies the largest ethanol producers in the United States along with their production capacities.
U.S. FUEL ETHANOL PRODUCTION CAPACITY
BY TOP PRODUCERS
Producers of Approximately 700800
million gallons per year (MMgy) or more
| Company | Current Capacity (MMgy) | Percent of Total | ||||||||||||
| Archer Daniels Midland | 1,716 | 9.8% | ||||||||||||
| POET Biorefining | 1,805 | 10.3% | ||||||||||||
| Green Plains Renewable Energy | 1,128 | 6.4% | ||||||||||||
| Valero Renewable Fuels | 1,730 | 9.8% | ||||||||||||
| Flint Hills Resources | 840 | 4.8% | ||||||||||||
| Company | Current Capacity (MMgy) | Percent of Total | ||
| Archer Daniels Midland | 1,716 | 11% | ||
| POET Biorefining | 1,629 | 10% | ||
| Green Plains Renewable Energy | 1,475 | 9% | ||
| Valero Renewable Fuels | 1,400 | 9% | ||
| Flint Hills Resources | 840 | 5% | ||
The products that we produce are commodities. Since our products are commodities, there are typically no significant differences between the products we produce and the products of our competitors that would allow us to distinguish our products in the market. As a result, competition in the ethanol industry is primarily based on price and consistent fuel quality.
We have experienced increased competition from oil companies that have purchased ethanol production facilities. These oil companies are required to blend a certain amount of ethanol each year. Therefore, the oil companies may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, some ethanol producers own multiple ethanol plants which may allow them to compete more effectively by providing them flexibility to run certain production facilities while they have other facilities shut down. Finally some ethanol producers who own ethanol plants in geographically diverse areas of the United States may spread the risk they encounter related to feedstock prices due to localized corn shortages or poor growing conditions.
A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas, and continues to represent a source of competition for the ethanol industry. While there are currently a limited number of vehicle recharging stations, making electric cars not feasible for all consumers, there has been increased focus on developingdevelopment of these recharging stations to make electric carwhich is making this technology more widely available in the future.available. Additional competition from these other sources of alternative energy, particularly in the automobile market, could reduce the demand for ethanol, which would negatively impact our profitability.
In addition to domestic producers of ethanol, we face competition from ethanol produced in foreign countries, particularly Brazil. Ethanol imports have been lower in recent years and ethanol exports have been higher. As of May 1, 2013, Brazil increased its domestic ethanol use requirement from 20% to 25% which decreased the amount of ethanol available in Brazil for export. Further, in August 2017, Brazil instituted a quota and tariff on ethanol produced in the United States and exported to Brazil which reduced exports to Brazil. Brazil increased the quota during our 2019 fiscal year which resulted in additional demand from Brazil, however, without this quota and tariff, Brazilian exports likely would have been higher. In December 2020, the Brazilian quota expired so all ethanol produced in the United States and exported to Brazil is now subject
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to Brazil's import tariff. In the future, we may experience increased ethanol imports from Brazil which could put negative pressure on domestic ethanol prices and result in excess ethanol supply in the United States.
Competition among ethanol producers may continue to increase as gasoline demand decreases due to more fuel efficient vehicles being produced. If the concentration of ethanol used in most gasoline does not increase and gasoline demand is lower due to increased fuel efficiency by the vehicles operated in the United States, competition may increase among ethanol producers to supply the ethanol market.
Distillers Grains Competition
Our ethanol plant competes with other ethanol producers in the production and sales of distillers grains. Distillers grains are primarily used as an animal feed supplement which replaces corn and soybean meal. As a result, we believe that distillers grains prices are positively impacted by increases in corn and soybean prices. In addition, in recent years the United States ethanol industry has increased exports of distillers grains which management believes has positively impacted demand and prices for distillers grains in the United States. In the event these distillers grains exports decrease, including as a result of the Chinese tariffs which have significantly reduced export demand for distillers grains, it could lead to an oversupply of distillers grains in the United States. An oversupply of distillers grains could result in increased competition among ethanol producers for sales of distillers grains which could negatively impact market distillers grains prices in the United States.
Corn Oil Competition
We compete with many ethanol producers for the sale of corn oil. Many ethanol producers have installed the equipment necessary to separate corn oil from the distillers grains they produce which has increased competition for corn oil sales and has resulted in lower market corn oil prices.sales.
Governmental Regulation
Federal Ethanol Supports
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 requires that in each year, a certain amount of renewable fuels must be used in the United States. 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 statutory volume requirement increases incrementally each year until the United States is required to use 36 billion gallons of renewable fuels by 2022. Starting in 2009, the RFS required that a portion of the RFS must be met by certain "advanced" renewable fuels. These advanced renewable fuels include ethanol that is not made from corn, such as cellulosic ethanol and biomass based biodiesel. The use of these advanced renewable fuels increases each year as a percentage of the total renewable fuels required to be used in the United States.
The United States Environmental Protection Agency (the "EPA") has the authority to waive the RFS statutory volume requirement, in whole or in part, provided one of the following two conditions have been met: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Annually,Recently, the EPA is supposedhas been granting small refinery exemptions from the RFS while not using its authority to passwaive the RFS statutory volume requirements. These small refinery exemptions created unallocated gallons reducing the corn-based conventional biofuel RFS requirements by 2.25 billion gallons in 2018 and 2 billion gallons in 2019. These small refinery exemptions have had a rule that establishes the number of gallons of different types of renewable fuels that must be usedsignificant negative impact on domestic demand for ethanol and have resulted in negative operating margins in the United States which is called the renewable volume obligations.ethanol industry.
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Most ethanol that is used in the United States is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the United States is approximately 140143 billion gallons per year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 14.014.3 billion gallons per year. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical
limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the United States and it discounts the use of higher percentage blends such as E15 or E85. These higher percentage blends may lead to additional ethanol demand if they become more widely available and accepted by the market.
Many in the ethanol industry believe that it will be impossible to meet the RFS requirement in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. The EPA has approved the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. However, there are still state hurdles that need to be addressed in some states before E15 will become more widely available. Many states still have regulatory issues that prevent the sale of E15. Sales of E15 may be limited because it is not approved for use in all vehicles, the EPA requires a label that management believes may discourage consumers from using E15, and retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may be required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions which may limit E15 sales in these markets. As a result, the approval of E15 by the EPA has not had an immediate impact on ethanol demand in the United States. In June 2019, the Trump Administration approved the use of E15 year-round which has somewhat expanded the use of E15.
In May 2020, the United States Department of Agriculture ("USDA") announced the Higher Blends Infrastructure Incentive Program which consists of up to $100 million in funding for grants to be used to increase the availability of higher blends of ethanol and biodiesel fuels. Funds may be awarded to retailers such as fueling stations and convenience stores to assist in the cost of installation or upgrading of fuel pumps and other infrastructure. In October 2020, the USDA announced the first round of awards to recipients of $22 million worth of grants. Recently the USDA closed on an additional $30 million worth of grants in a second round of funding.
Effect of Governmental Regulation
The government's regulation of the environment changes constantly. We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the ethanol plant. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. Plant operations are governed by the Occupational Safety and Health Administration ("OSHA"). OSHA regulations may change such that the costs of operating the ethanol plant may increase. Any of these regulatory factors may result in higher costs or other adverse conditions effecting our operations, cash flows and financial performance.
We have obtained all of the necessary permits to operate the ethanol plant. During our20172020 fiscal year, our costs of environmental compliance were approximately $166,000.$219,000. We anticipate that our environmental compliance costs will be approximately $292,000$230,000 during our2018 2021 fiscal year. Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.
In late 2009, California passed a Low Carbon Fuels Standard ("LCFS"). The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to the RFS. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably.
In August 2017, Brazil instituted an import quota for ethanol produced in the United States and exported to Brazil, along with a 20% tariff on ethanol imports in excess of the quota. The quota expired in December 2020 so all U.S. ethanol exports to Brazil are now subject to the tariff. This tariff and quota have reduced exports of ethanol to Brazil and may continue to negatively impact ethanol exports from the United States. Any reduction in ethanol exports could negatively impact market ethanol prices in the United States. RecentlyIn addition, the Chinese government increased the tariff on United States ethanol imports into China from 30% to 45% and ultimately to 70%. Due to other recent tariff activity between the United States and China, management does not expect these Chinese tariffs to be removed in the near term. Both China and Brazil announced ithave been major
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sources of import demand for United States ethanol and distillers grains. These trade actions may remove this tariff.result in negative operating margins for United States ethanol producers.
We are subject to environmental oversight by the EPA. There is always a risk that the EPA may enforce certain rules and regulations differently than South Dakota's environmental administrators. South Dakota or EPA rules are subject to change, and any such changes could result in greater regulatory burdens on plant operations. We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the area arising from possible foul smells or other air or water discharges from the ethanol plant. Such claims may result in an adverse result in court if we are deemed to engage in a nuisance that substantially impairs the fair use and enjoyment of property.
Employees
As ofDecember 31, 2017,2020, we had a total of 3943 full-time employees. We do not expect to hire a significantthe number of employees to materially change in the next 12 months.
ITEM 1A. RISK FACTORS.
You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.
Risks Relating to Our Business
We are subject to global and regional economic downturns and related risks and the effects of COVID-19 or another pandemic may materially and adversely affect demand and the market price for our products. The level of demand for our products is affected by global and regional demographic and macroeconomic conditions. A significant downturn in global economic growth, or recessionary conditions in major geographic regions for prolonged periods, may lead to reduced demand for our products, which could have a negative effect on the market price of our products. In December 2019, a novel coronavirus surfaced in Wuhan, China (“COVID-19”). The spread of COVID-19 worldwide has resulted in businesses suspending or substantially curtailing global operations and travel, quarantines, and an overall substantial slowdown of economic activity. Transportation fuels in particular, including ethanol, have experienced significant price declines and reduced demand. The effects of COVID-19 have and may continue to materially and adversely affect the market price for our products, our business, results of operations and liquidity.
COVID-19 or another pandemic may negatively impact our ability to operate our business which could decrease or eliminate the value of our units. COVID-19 has resulted in significant uncertainty in many areas of our business. We do not know how long these conditions will last. This uncertainty is expected to negatively impact our operations. We may experience labor shortages if our employees are unable or unwilling to come to work. If our suppliers cannot deliver the supplies we need to operate our business or if we are unable to ship our products due to trucking or rail shipping disruptions, we may be forced to suspend operations or reduce production. If we are unable to operate the ethanol plant at capacity, it may result in unfavorable operating results. Any shut down of operations or reduction in production, especially for an extended period of time, could reduce or eliminate the value of our units.
The EPA issued small refinery exemption waivers to the RFS requirement which has resulted in demand destruction and negatively impacted profitability in the ethanol industry. During 2019, the ethanol industry learned that the EPA has been issuing small refinery waivers to the ethanol use requirements in the RFS. In previous years, when the EPA issued small refinery exemption waivers, the EPA reallocated the waived gallons to other refiners. The EPA under the Trump Administration was granting significantly more waivers than in the past and was not reallocating the waived gallons to other refiners. These actions have resulted in demand destruction in 2019 and 2020 which led to reduced market ethanol prices and negative operating margins in the ethanol industry. This reduction in ethanol demand has negatively impacted the profitability of our operations. In January 2020, the Tenth Circuit Court of Appeals ruled that small refinery exemptions may only be granted to refineries that had secured them continuously each year since 2010. Consistent with this ruling, in September 2020, the EPA denied certain small refinery exemption petitions filed by oil refineries in 2020 seeking retroactive relief from their ethanol use requirements for prior years. These small refinery exemption waivers have impacted the ethanol industry which could reduce or eliminate the value of our units.
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The spread between ethanol and corn prices can vary significantly which can negatively impact our financial condition. Our only source of revenue comes from sales of our ethanol, distillers grains and corn oil. The primary raw materials we use to produce our ethanol, distillers grains and corn oil are corn and natural gas. In order to operate the ethanol plant profitably, we must maintain a positive spread between the revenue we receive from sales of our products and our corn and natural gas costs. This spread between the market price of our products and our raw material costs has been volatile in the past. If we were to experience a period of time where this spread is negative, and the negative margins continue for an extended period of time, it may prevent us from profitably operating the ethanol plant which could decrease the value of our units.
Decreasing gasoline prices may lower ethanol prices which could negatively impact our ability to operate profitably. In recent years,Recently, the price of ethanol has been less than the price of gasoline which increased ethanol demand. However, in recent years, at times gasoline prices have decreased significantly which have reduced the spread between the price of gasoline and the price of ethanol. ThisWhen it occurs, this trend has negatively impacted ethanol prices. If this trend continues for a significant period of time, it could hurt our ability to profitably operate the ethanol plant which could decrease the value of our units.
We may be forced to reduce production or cease production altogether if we are unable to secure the corn we require to operate the ethanol plant. We require a significant amount of corn to operate the ethanol plant at capacity. In recent years, other than in our 2019 fiscal year, the supply of corn in the market has been higher and we have not had difficulty securing the corn we require at prices that allow us to operate profitably. However, poor weather conditions can have a significant impact on corn production. If the corn crop harvested in future years is smaller than we have recently experienced, it is possible that we could experience corn shortages in the future which could negatively impact our ability to operate the ethanol plant. We may also experience a shortage of corn in our local market which may not increase national corn prices but may require us to increase our corn basis in order to attract corn which can impact our overall corn costs. If we are unable to secure the corn we require to continue to operate the ethanol plant, or we
are unable to secure corn at prices that allow us to operate profitably, we may have to reduce production or cease operating altogether which may negatively impact the value of our units.
Our revenue will be greatly affected by the price at which we can sell our ethanol, distillers grains and corn oil. Our ability to generate revenue is dependent on our ability to sell the ethanol, distillers grains and corn oil that we produce. Ethanol, distillers grains and corn oil prices can be volatile as a result of a number of factors. These factors include overall supply and demand, the market price of corn, the market price of gasoline, levels of government support, general economic conditions and the availability and price of competing products. Ethanol, distillers grains and corn oil prices tend to fluctuate based on changes in energy prices and other commodity prices, such as corn and soybean meal. Exports of our products and the various trade actions taken by China and Brazil have impacted the market prices for our products. If we experience lower prices for our products for a significant period of time, the value of our units may be negatively affected.
Our business is not diversified. Our success depends primarily on our ability to profitably operate our ethanol plant. We do not have any other lines of business or any other significant source of revenue if we are unable to operate our ethanol plant and manufacture ethanol, distillers grains and corn oil. If economic or political factors adversely affect the market for ethanol, distillers grains and corn oil, we may not be able to continue our operations. Our business would also be significantly harmed if our ethanol plant could not operate at full capacity for any extended period of time, which could reduce or eliminate the value of our units.
Our inability to secure credit facilities we may require in the future may negatively impact our liquidity. While we do not currently require more financing than we have, in the future we may need additional financing. If we require financing in the future and we are unable to secure such financing, or we are unable to secure the financing we require on reasonable terms, it may have a negative impact on our liquidity which could negatively impact the value of our units.
Our product marketer may fail to market our products at competitive prices which may cause us to operate unprofitably.RPMG is the sole marketer of all of our ethanol, corn oil and some of our distillers grains, and we rely heavily on its marketing efforts to successfully sell our products. Because RPMG sells ethanol, corn oil and distillers grains for a number of other producers, we have limited control over its sales efforts. Our financial performance is dependent upon the financial health of RPMG as most of our revenue is attributable to RPMG's sales. If RPMG breaches our marketing agreements or it cannot market all of the ethanol, corn oil and distillers grains we produce, we may not have any readily available means to sell our ethanol, corn oil and distillers grains and our financial performance could be negatively affected. While we market a portion of our distillers grains internally to local consumers, we do not anticipate that we would have the ability to sell all of the distillers grains, corn oil and ethanol we produce ourselves. If our agreements with RPMG terminate, we may seek other arrangements to sell our ethanol, corn oil and distillers grains, including selling our own products, but we may not be able to achieve results comparable to those achieved by RPMG which could harm our financial performance. Switching marketers may negatively impact our cash flow and our ability to continue to operate the ethanol plant. If we are unable to sell all of our ethanol, distillers grain and corn oil at prices that allow us to operate profitably, it may decrease the value of our units.
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We engage in hedging transactions which involve risks that could harm our business. We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments. These hedging instruments can be risky and can negatively impact our liquidity. In times when commodity prices are volatile, we may be required to use significant amounts of cash to make margin calls as a result of our hedging positions. The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts. Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to corn and natural gas prices. We may choose not to engage in hedging transactions in the future and our operations and financial conditions may be adversely affected during periods in which corn and/or natural gas prices increase. These hedging transactions could impact our ability to profitably operate the ethanol plant and negatively impact our liquidity.
We may incur casualty losses that are not covered by insurance which could negatively impact the value of our units. We have purchased insurance which we believe adequately covers our potential losses from foreseeable risks. However, there are risks that we may encounter for which there is no insurance or for which insurance is not available on terms that are acceptable to us. If we experience a loss which materially impairs our ability to operate the ethanol plant which is not covered by insurance, the value of our units could be reduced or eliminated.
Our operations may be negatively impacted by natural disasters, severe weather conditions, and other unforeseen plant shutdowns which can negatively impact our operations. Our operations may be negatively impacted by events outside of our control such as natural disasters, severe weather, strikes, train derailments and other unforeseen events which may negatively
impact our operations. If we experience any of these unforeseen circumstances which negatively impact our operations, it may affect our cash flow and negatively impact the value of our business.
We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably. We are highly dependent on our management team to operate our ethanol plant. We may not be able to replace these individuals should thethey decide to cease their employment with us, or if they become unavailable for any other reason. While we seek to compensate our management and key employees in a manner that will encourage them to continue their employment with us, they may choose to seek other employment. Any loss of these managers or key employees may prevent us from operating the ethanol plant profitably and could decrease the value of our units.
We may violate the terms of our loan agreements and financial covenants which could result in our lender demanding immediate repayment of our loans. We have a credit facility with Farm Credit Services of America ("FCSA").Credit. Our credit agreements with FCSAFarm Credit include various financial loan covenants. We are currently in compliance with all of our financial loan covenants. Current management projections indicate that we will be in compliance with our loan covenants for at least the next 12 months. However, unforeseen circumstances may develop which could result in us violating our loan covenants. If we violate the terms of our loan agreements, FCSA,Farm Credit, our primary lender, could deem us in default of our loans and require us to immediately repay any outstanding balance of our loans. If we do not have the funds available to repay the loans and we cannot find another source of financing, we may fail which could decrease the value of our units.
Risks Related to Ethanol Industry
Excess ethanol supply in the market could put negative pressure on the price of ethanol which could lead to tight operating margins and may impact our ability to operate profitably. In the past the ethanol industry has confronted market conditions where ethanol supply exceeded demand which led to unfavorable operating conditions. Most recently, in 2012, profitability in the ethanol industry was reduced due to increased ethanol imports from Brazil at a time when gasoline demand in the United States was lower and domestic ethanol supplies were higher. This disconnect between ethanol supply and demand resulted in lower ethanol prices at a time when corn prices were higher which led to unfavorable operating conditions. We may experience periods of time when ethanol supply exceeds demand which could negatively impact our profitability. During 2020 we experienced excess ethanol supply compared to demand which negatively impacted profitability in the industry. The United States benefited from additional exports of ethanol in recent years which may not continue to occur during our 20182021 fiscal year. We may experience periods of ethanol supply and demand imbalance during our 20182021 fiscal year. If we experience excess ethanol supply, either due to increased ethanol production or lower gasolinedomestic or foreign demand, it could negatively impact the price of ethanol which could hurt our ability to profitably operate the ethanol plant.
Demand for ethanol may not increase past current levels unless higher percentage blends of ethanol are more widely used. Currently, ethanol is primarily blended with gasoline for use in standard (non-flex fuel) vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 140143 billion gallons of gasoline are sold in the
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United States each year. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum domestic demand for ethanol is 14.014.3 billion gallons. This is commonly referred to as the "blend wall," which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. Many in the ethanol industry believe that the ethanol industry has reached this blend wall. In order to expand demand for ethanol, higher percentage blends of ethanol must be utilized in standard vehicles. Such higher percentage blends of ethanol are a contentious issue. Automobile manufacturers and environmental groups have fought against higher percentage ethanol blends. The EPA approved the use of E15 for standard (non-flex fuel) vehicles produced in the model year 2001 and later. The fact that E15 has not been approved for use in all vehicles and the labeling requirements associated with E15 may lead to gasoline retailers refusing to carry E15. In addition, restrictions on the evaporative emissions of E15 during the summer months can limit the availability of E15 in some markets. Without an increase in the allowable percentage blends of ethanol that can be used in all vehicles, demand for ethanol may not continue to increase which could decrease the selling price of ethanol and could result in our inability to operate the ethanol plant profitably, which could reduce or eliminate the value of our units.
Changes and advances in ethanol production technology could require us to incur costs to update our plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably. Advances and changes in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than we are able. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. These third-party licenses may not be available or, once obtained, they may not continue to be available on commercially reasonable terms. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.
Decreases in ethanol demand may result in excess production capacity in our industry. The supply of domestically produced ethanol is at an all-time high. According to the Renewable Fuels Association, as of January 23, 2018,December 31, 2020, there are 213210 ethanol plants in the United States with capacity to produceproduct approximately 16.217.6 billion gallons of ethanol per year. Excess ethanol production capacity may have an adverse impact on our results of operations, cash flows and general financial condition. According to the Renewable Fuels Association, approximately 3% of the ethanol production capacity in the United States was idled as of January 23, 2018. Further, ethanol demand may be negatively impacted by reductions in the RFS. While the United States is currently exporting ethanol which has generally resulted in increased ethanol demand, these ethanol exports may not continue. If ethanol demand does not grow at the same pace as increases in supply, we expect the selling price of ethanol to decline. If excess capacity in the ethanol industry continues to occur, the market price of ethanol may decline to a level that is inadequate to generate sufficient cash flow to cover our costs, which could negatively affect our profitability.
We operate in an intensely competitive industry and compete with larger, better financed companies which could impact our ability to operate profitably. There is significant competition among ethanol producers. There are numerous producer-owned and privately-owned ethanol plants operating throughout the Midwest and elsewhere in the United States. We also face competition from ethanol producers located outside of the United States. The largest ethanol producers include Archer Daniels Midland, Flint Hills Resources, Green Plains Renewable Energy, POET Biorefining, and Valero Renewable Fuels, each of which is capable of producing significantly more ethanol than we produce. Further, many believe that there will be consolidation occurring in the ethanol industry which will likely lead to a few companies that control a significant portion of the United States ethanol production market. We may not be able to compete with these larger producers. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could negatively impact our financial performance and the value of our units.
Competition from the advancement of alternative fuels and other technologies may lessen demand for ethanol. Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids, and electric cars or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.
Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines and/or takes more energy to produce than it contributes or based on perceived issues related to the use of corn as the feedstock to produce ethanol may affect demand for ethanol. Certain individuals believe that the use of ethanol will have a negative impact on gasoline prices at the pump. Some also believe that ethanol adds to air pollution and harms car and truck
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engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. Further, some consumers object to the fact that ethanol is produced using corn as the feedstock which these consumers perceive as negatively impacting food prices. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in vehicles. If consumers choose not to buy ethanol based on these beliefs, it would affect demand for the ethanol we produce which could negatively affect our profitability and financial condition.
If exports of ethanol are reduced, including as a result of the imposition byof tariffs on U.S. ethanol, ethanol prices may be negatively impacted. The United States ethanol industry was supported during our 20172020 fiscal year with exports of ethanol, which has generally over the recent years increased demand for our ethanol. Management believes these additional exports of ethanol were due to lower market ethanol prices in the United States and increased global demand for ethanol. However, these ethanol exports may not continue. In 2012, the European Union concluded an anti-dumping investigation related to ethanol produced in the United States and exported to Europe. As a result of this investigation, the European Union has imposed a tariff on ethanol which is produced in the United States and exported to Europe. Further, in 2017 both Brazil and China implemented tariffs on ethanol produced in the United States. These tariffs have resulted in decreased demand for ethanol from these countries which has negatively impacted ethanol prices in the United States. Any decrease in ethanol prices or demand may negatively impact our ability to profitably operate the ethanol plant.
Distillers grains demand and prices may continue to be negatively impacted by the Chinese antidumping and countervailing duty investigation. China was historically the world's largest importer of distillers grains produced in the United States. On January 12, 2016, the Chinese government announced that it would commence an anti-dumping and countervailing duty investigation related to distillers grains imported from the United States. In January 2017, the Chinese set the final anti-dumping duties from 42.2% to 53.7%, and set the final anti-subsidy tariffs from 11.2% to 12%. Both during the investigation and after the announcement of the duty, distillers grains demand and prices have been negatively impacted. While we expect China to continue to import some distillers grains, due to continued trade disputes and tensions between the United States and China, management does not expect these tariffs to be removed in the near term which could continue to negatively impact market distillers grains demand and prices. This reduction in demand along with lower domestic corn prices could negatively impact our ability to profitably operate the ethanol plant.
A reduction in ethanol exports to Brazil due to the imposition by the Brazilian government of a tariff on U.S. ethanol could have a negative impact on ethanol prices. Brazil has historically been a top destination for ethanol produced in the United States. However, in 2017, Brazil imposed a 20% tariff on ethanol which is produced in the United States and exported to Brazil. This tariff has resulted in a decline in demand for ethanol from Brazil. The effect of the tariff had been mitigated somewhat by the adoption of a rate tariff quota that allowed 750 million liters of ethanol annually to be allowed into Brazil before the tariff applies. However, this rate tariff quota expired on December 14, 2020, so all of the ethanol exports to Brazil is now subject to the 20% tariff. This tariff has negatively impacted ethanol demand and prices in the United States, and could negatively impact our ability to profitably operate the ethanol plant.
Overcapacity within the ethanol industry could cause an oversupply of ethanol and a decline in ethanol prices. Excess ethanol production capacity could have an adverse impact on our results of operations, cash flows and general financial condition. If demand for ethanol does not grow at the same pace as increases in supply, we would expect the price of ethanol to decline. If excess capacity in the ethanol industry occurs, the market price of ethanol may decline to a level that is inadequate to generate sufficient cash flow to cover our costs which could reduce the value of our units.
Many ethanol producers are expanding their production capacity which could lead to an oversupply of ethanol in the United States. Recently, many ethanol producers have commenced projects to expand their ethanol production capacities. These expansions could result in a significant increase in the supply of ethanol in the United States. Currently, ethanol prices are supported by ethanol exports which may not continue at their current levels. While many in the ethanol industry are working to increase the amount of ethanol that is used domestically, specifically in the form of E15, which contains 15% ethanol as compared to the 10% ethanol which is used in most current blends, adoption of E15 has not been as rapid as most ethanol producers would like. Also, the additional ethanol capacity which is being constructed may exceed current domestic and export demand. An oversupply of ethanol negatively impacts domestic ethanol prices which could negatively impact our ability to profitably operate the ethanol plant.
We made significant investments in Guardian Hankinson, LLC and Ring-neck Energy & Feed, LLC which may fail. In December 2013, we made a $12 million investment in Guardian Hankinson, LLC, an entity that owns an ethanol plant in North Dakota. In addition, in July 2017, we made a $10 million investment in Ring-neck Energy & Feed, LLC. Both of these companies will face many of the same risks that we face in operating our ethanol plant. Further, we have limited control over the management decisions made by Guardian Hankinson, LLC and Ring-neck Energy & Feed, LLC. If Guardian Hankinson, LLC or Ring-neck Energy & Feed, LLC is ultimately unsuccessful, it could negatively impact the return we receive on our investment which could negatively impact our financial performance and the value of our units.
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Failures of our information technology infrastructure could have a material adverse effect on operations. We utilize various software applications and other information technology that are critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including production, manufacturing, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses and ransomware attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected.
A cyber attack or other information security breach could have a material adverse effect on our operations and result in financial losses. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and ransomware as well as other events that could have a security impact. If we are unable to prevent cyber attacks and other information security breaches, we may encounter significant disruptions in our operations which could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.
Risks Related to Regulation and Governmental Action
Government incentives for ethanol production may be reduced or eliminated in the future, which could hinder our ability to operate at a profit.The ethanol industry is assisted by various federal and state ethanol incentives, includingthe most important of which is the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive. The United States Environmental Protection Agency ("EPA")EPA has the authority to waive the RFS statutory volume requirement, in whole or in part, provided certain conditions have been met. Annually, the EPA is supposed to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used in the United States which is called the renewable volume obligations. In the past, the EPA has set the renewable volume obligations below the statutory volume requirements. On November 30, 2017,December 19, 2019, the EPA released its final rule and set the 20182020 total volume obligation at 19.2920.09 billion gallons of which 15.0 billion gallons could be met by corn-based ethanol. The EPA has not yet set the RVO for 2021. If the EPA were to significantly reduce the volume requirements under the RFS or if the RFS were to be otherwise reduced or eliminated by the exercise of the EPA waiver authority or by Congress in the future, the market price and demand for ethanol could decrease which will negatively impact our financial performance.
The California Low Carbon Fuel Standard may decrease demand for corn-based ethanol which could negatively impact our profitability. California passed a Low Carbon Fuels Standard ("LCFS") which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn-based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn-based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.
Changes in environmental regulations or violations of these regulations could be expensive and reduce our profitability. We are subject to extensive air, water and other environmental laws and regulations. In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A
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violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns. In the future, we may be subject to legal actions brought by environmental advocacy groups and other parties for actual or alleged violations of environmental laws or our permits. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profitability and negatively affect our financial condition.
Carbon dioxide may be regulated in the future by the EPA as an air pollutant requiring us to obtain additional permits and install additional environmental mitigation equipment, which could adversely affect our financial performance. In 2007, the Supreme Court decided a case in which it ruled that carbon dioxide is an air pollutant under the Clean Air Act for motor vehicle emissions. In 2011 the EPA issued a tailoring rule that deferred greenhouse gas regulations for ethanol plants until July of 2014. However, in July of 2013 the D.C. Circuit issued an opinion vacating the EPA's deferral of those regulations for biogenic sources, including ethanol plants. On June 23, 2014 the U.S. Supreme Court affirmed in part and reversed in part the D.C. Circuit’s decision. For plants that already hold PSD permits the court generally affirmed the EPA's ability to regulate greenhouse gas regulations. Our plant produces a significant amount of carbon dioxide. While there are currently no regulations restricting carbon dioxide emissions, if the EPA or the State of South Dakota were to regulate carbon dioxide emissions by plants such as ours, we may have to apply for additional permits or we may be required to install carbon dioxide mitigation equipment or take other as yet unknown steps to comply with these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs, could be costly and may prevent us from operating the ethanol plant profitably which could decrease or eliminate the value of our units.
Government policies and regulations, particularly those affecting the agricultural sector and related industries, could adversely affect our operations and profitability. Agricultural commodity production and trade flows are significantly affected by government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, trade tariffs, duties, subsidies, import and export restrictions on commodities and commodity products, can influence industry profitability, the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, and the volume and types of imports and exports. In addition, international trade disputes can adversely affect trade flows by limiting or disrupting trade between countries or regions. Future governmental policies, regulations or actions affecting our industry may adversely affect the supply of, demand for and prices of our products, restrict our ability to do business and cause our financial results to suffer. We may experience negative impacts of higher ethanol tariffs and other disruptions to international agricultural trade. In April of 2018, the Chinese government increased the tariff on United States ethanol imports into China from 30% to 45% and ultimately 70%. We cannot estimate the exact effect this tariff increase will have on the overall domestic ethanol market. However, the increased tariff is expected to reduce overall United States ethanol export demand, which could have a negative effect on domestic ethanol prices.
ITEM 2. PROPERTIES.
We own Dakota Ethanol as a wholly-owned subsidiary. The ethanol plant is located on Dakota Ethanol's 210-acre rural site near Wentworth, South Dakota. All of our operations occur at our plant in Wentworth, South Dakota.
All of Dakota Ethanol's tangible and intangible property, real and personal, serves as the collateral for debt financing with FCSA described below under "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness."
ITEM 3. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURESDISCLOSURES.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Recent Sales of Unregistered Equity Securities
None.
Market Information
There is no public trading market for our units. Our units may only be transferred in accordance with our Capital Units Transfer System, which provides for transfers by gift to family members, upon death, and through a qualified matching service, subject to approval by our board of managers. Our qualified matching service is operated through Variable Investment Advisors, Inc., a registered broker-dealer based in Sioux Falls, South Dakota. Variable Investment Advisor's Alternative Trading System may be accessed at www.agstocktrade.com. The matching service consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. We do not receive any compensation relating to the matching service. We have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates. So long as we remain a publicly reporting company, information about us will be publicly available through the SEC's filing system.
Unit Holders
As of March 2, 2018,12, 2021, we had 29,620,000 membership units issued and outstanding and a total of approximately 1,069 unit holders.
Bid and Asked Prices
The following table contains historical information concerning completed unit transactions that occurred during our last two fiscal years. Our bulletin board trading system does not track bid and asked prices and therefore we only have information concerning completed unit transactions.
| Quarter | Low Price | High Price | Average Price | Number of Units Traded | |||||||||||
| First Quarter 2016 | $ | 2.87 | $ | 3.80 | $ | 3.27 | 23,500 | ||||||||
| Second Quarter 2016 | 2.79 | 3.00 | 2.88 | 64,500 | |||||||||||
| Third Quarter 2016 | 4.00 | 4.00 | 4.00 | 2,000 | |||||||||||
| Fourth Quarter 2016 | 3.05 | 4.15 | 3.77 | 19,000 | |||||||||||
| First Quarter 2017 | 3.95 | 4.15 | 4.01 | 28,000 | |||||||||||
| Second Quarter 2017 | 3.86 | 4.10 | 3.89 | 45,000 | |||||||||||
| Third Quarter 2017 | 3.50 | 3.51 | 3.51 | 20,000 | |||||||||||
| Fourth Quarter 2017 | 3.39 | 3.50 | 3.45 | 12,500 | |||||||||||
| Quarter | Low Price | High Price | Average Price | Number of Units Traded | ||||||||||||||||||||||
| First Quarter 2019 | $ | 3.09 | $ | 3.25 | $ | 3.15 | $ | 23,000 | ||||||||||||||||||
| Second Quarter 2019 | 3.00 | 3.10 | 3.02 | 54,500 | ||||||||||||||||||||||
| Third Quarter 2019 | 2.75 | 2.80 | 2.79 | 31,500 | ||||||||||||||||||||||
| Fourth Quarter 2019 | 2.40 | 2.50 | 2.43 | 29,000 | ||||||||||||||||||||||
| First Quarter 2020 | 2.10 | 2.34 | 2.16 | 59,000 | ||||||||||||||||||||||
| Second Quarter 2020 | — | — | — | — | ||||||||||||||||||||||
| Third Quarter 2020 | 1.50 | 1.51 | 1.50 | 45,000 | ||||||||||||||||||||||
| Fourth Quarter 2020 | 1.57 | 1.63 | 1.61 | 90,000 | ||||||||||||||||||||||
Distributions
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Performance Graph
The following graph shows a comparison of cumulative total member return since December 31, 2012,2015, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the "NASDAQ Market Index") and an index of other companies that have the same SIC code as the Company (the "SIC Code Index"). The graph assumes $100 was invested in each of our units, the NASDAQ Market Index, and the SIC Code Index on December 31, 2012.2015. Data points on the graph are annual. Note that historic unit price performance is not necessarily indicative of future unit price performance. The data for this performance graph was compiled for us by Zacks Investment Research, Inc.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
ITEM 6. SELECTED FINANCIAL DATADATA.
The following table sets forth selected consolidated financial data, which is derived from our audited financial statements for the periods indicated. The selected consolidated balance sheet financial data as of December 31, 2015, 20142018, 2017 and 20132016 and the selected consolidated income statement data and other financial data for the years ended December 31, 20142017 and 20132016 have been derived from our audited consolidated financial statements that are not included in this Form 10-K. The selected consolidated balance sheet financial data as of December 31, 20172020and 20162019 and the selected consolidated income statement data and other
financial data for each of the years in the three year period ended December 31, 20172020 have been derived from the audited Consolidated Financial Statements included elsewhere in this Form 10-K. You should read the following table in conjunction with (i) the consolidated financial statements and accompanying notes included elsewhere in this Form 10-K; (ii) "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"; and (iii) "Item 1A - Risk Factors"found elsewhere in this Form 10-K. Among other things, those items include more detailed information regarding the basis of presentation for the following consolidated financial data.
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| Statement of Operations Data: | 2017 | 2016 | 2015 | 2014 | 2013 | Statement of Operations Data: | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 84,821,788 | $ | 88,812,550 | $ | 88,997,947 | $ | 124,469,094 | $ | 145,412,968 | Revenues | $ | 130,521,814 | $ | 115,986,821 | $ | 74,703,630 | $ | 84,821,788 | $ | 88,812,550 | |||||||||||||||||||||||||||||||
| Cost of Revenues | 76,253,945 | 76,097,861 | 81,445,770 | 89,068,125 | 129,091,165 | Cost of Revenues | 124,493,268 | 114,687,231 | 68,619,694 | 76,253,945 | 76,097,861 | |||||||||||||||||||||||||||||||||||||||||
| Gross Profit | 8,567,843 | 12,714,689 | 7,552,177 | 35,400,969 | 16,321,803 | Gross Profit | 6,028,546 | 1,299,590 | 6,083,936 | 8,567,843 | 12,714,689 | |||||||||||||||||||||||||||||||||||||||||
| Operating Expense | 3,717,291 | 3,642,087 | 1,827,789 | 3,550,980 | 3,511,026 | Operating Expense | 4,418,074 | 4,060,343 | 3,837,659 | 3,717,291 | 3,642,087 | |||||||||||||||||||||||||||||||||||||||||
| Income From Operations | 4,850,552 | 9,072,602 | 5,724,388 | 31,849,989 | 12,810,777 | |||||||||||||||||||||||||||||||||||||||||||||||
| Income (Loss) From Operations | Income (Loss) From Operations | 1,610,472 | (2,760,753) | 2,246,277 | 4,850,552 | 9,072,602 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other Income (Expense) | 1,534,531 | 2,332,606 | 2,929,142 | 7,957,330 | 494,070 | Other Income (Expense) | (554,833) | (1,063,431) | 470,310 | 1,534,531 | 2,332,606 | |||||||||||||||||||||||||||||||||||||||||
| Net Income | $ | 6,385,083 | $ | 11,405,208 | $ | 8,653,530 | $ | 39,807,319 | $ | 13,304,847 | ||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | Net Income (Loss) | $ | 1,055,639 | $ | (3,824,184) | $ | 2,716,587 | $ | 6,385,083 | $ | 11,405,208 | |||||||||||||||||||||||||||||||||||||||||
| Capital Units Outstanding | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | Capital Units Outstanding | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | 29,620,000 | |||||||||||||||||||||||||||||||||||||||||
| Net Income Per Capital Unit | $ | 0.22 | $ | 0.39 | $ | 0.29 | $ | 1.34 | $ | 0.45 | ||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) Per Capital Unit | Net Income (Loss) Per Capital Unit | $ | 0.04 | $ | (0.13) | $ | 0.09 | $ | 0.22 | $ | 0.39 | |||||||||||||||||||||||||||||||||||||||||
| Cash Distributions per Capital Unit | $ | 0.20 | $ | 0.40 | $ | 0.30 | $ | 1.00 | $ | 0.20 | Cash Distributions per Capital Unit | $ | — | $ | — | $ | 0.10 | $ | 0.20 | $ | 0.40 | |||||||||||||||||||||||||||||||
| Balance Sheet Data: | 2017 | 2016 | 2015 | 2014 | 2013 | Balance Sheet Data: | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||
| Working Capital | $ | 6,131,109 | $ | 11,313,046 | $ | 8,443,572 | $ | 6,634,185 | $ | 17,836,992 | Working Capital | $ | 12,348,891 | $ | 8,323,445 | $ | 72,709 | $ | 6,131,109 | $ | 11,313,046 | |||||||||||||||||||||||||||||||
| Net Property, Plant & Equipment | 39,968,930 | 34,824,202 | 34,184,059 | 28,349,272 | 22,958,064 | Net Property, Plant & Equipment | 61,367,497 | 66,707,481 | 63,748,268 | 39,968,930 | 34,824,202 | |||||||||||||||||||||||||||||||||||||||||
| Total Assets | 84,072,240 | 78,116,089 | 79,746,514 | 78,574,975 | 82,577,805 | Total Assets | 121,857,947 | 119,810,318 | 102,866,072 | 84,072,240 | 78,116,089 | |||||||||||||||||||||||||||||||||||||||||
| Long-Term Obligations | 6,983,944 | 26,556 | 106,475 | 226,940 | 9,170,592 | Long-Term Obligations | 35,561,237 | 37,993,208 | 23,593,368 | 6,983,944 | 26,556 | |||||||||||||||||||||||||||||||||||||||||
| Members' Equity | 68,282,537 | 67,821,454 | 68,264,246 | 68,600,228 | 58,455,182 | Members' Equity | 65,268,579 | 64,212,940 | 68,037,124 | 68,282,537 | 67,821,454 | |||||||||||||||||||||||||||||||||||||||||
| Book Value Per Capital Unit | $ | 2.31 | $ | 2.29 | $ | 2.30 | $ | 2.32 | $ | 1.97 | Book Value Per Capital Unit | $ | 2.20 | $ | 2.17 | $ | 2.30 | $ | 2.31 | $ | 2.29 | |||||||||||||||||||||||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS.
Results of Operations
Comparison of the Fiscal Years Ended December 31, 20172020 and 20162019
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the fiscal years ended December 31, 20172020 and 2016:2019:
| 2020 | 2019 | |||||||||||||||||||||||||
| Income Statement Data | Amount | % | Amount | % | ||||||||||||||||||||||
| Revenue | $ | 130,521,814 | 100.0 | $ | 115,986,821 | 100.0 | ||||||||||||||||||||
| Cost of Revenues | 124,493,268 | 95.4 | 114,687,231 | 98.9 | ||||||||||||||||||||||
| Gross Profit | 6,028,546 | 4.6 | 1,299,590 | 1.1 | ||||||||||||||||||||||
| Operating Expense | 4,418,074 | 3.4 | 4,060,343 | 3.5 | ||||||||||||||||||||||
| Income (Loss) from Operations | 1,610,472 | 1.2 | (2,760,753) | (2.4) | ||||||||||||||||||||||
| Other Income (Expense) | (554,833) | (0.4) | (1,063,431) | (0.9) | ||||||||||||||||||||||
| Net Income (Loss) | $ | 1,055,639 | 0.8 | $ | (3,824,184) | (3.3) | ||||||||||||||||||||
| 2017 | 2016 | |||||||||||||
| Income Statement Data | Amount | % | Amount | % | ||||||||||
| Revenue | $ | 84,821,788 | 100.0 | $ | 88,812,550 | 100.0 | ||||||||
| Cost of Revenues | 76,253,945 | 89.9 | 76,097,861 | 85.7 | ||||||||||
| Gross Profit | 8,567,843 | 10.1 | 12,714,689 | 14.3 | ||||||||||
| Operating Expense | 3,717,291 | 4.4 | 3,642,087 | 4.1 | ||||||||||
| Income from Operations | 4,850,552 | 5.7 | 9,072,602 | 10.2 | ||||||||||
| Other Income | 1,534,531 | 1.8 | 2,332,606 | 2.6 | ||||||||||
| Net Income | $ | 6,385,083 | 7.5 | $ | 11,405,208 | 12.8 | ||||||||
Revenues
Revenue from ethanol sales decreasedincreased by approximately 3%9.6% during our 20172020 fiscal year compared to the same period of 2016.2019. Revenue from distillers grains sales decreasedincreased by approximately 12%20.4% during our 20172020 fiscal year compared to the same period of 2016.2019. Revenue from corn oil sales increased by approximately 8%35.6% during our 20172020 fiscal year compared to the same period of 2016.2019.
Ethanol
Our ethanol revenue decreasedincreased by approximately $1.9 million9.6% during our 20172020 fiscal year compared to our 20162019 fiscal year, a decrease of approximately 3%.year. This decreaseincrease in ethanol revenue was due to increased gallons of ethanol produced and sold due to our plant expansion project partially offset by a lower average price we received per gallon of ethanol sold. The average price we received for our ethanol during our 2020 fiscal year was approximately 8.2% lower compared to our 2019 fiscal year. Management attributes this decrease in the average price we received for our ethanol of approximately $0.03 per gallon alongof ethanol with decreased gasoline demand due to travel restrictions from the COVID-19 pandemic. Since ethanol is typically blended with gasoline, when gasoline demand is lower, it has a corresponding impact on ethanol demand. As a result, we experienced a significant decrease in the total gallons of ethanol we sold. Management attributes this decrease in ethanol prices with increased ethanol supply in the market which was not met with corresponding increases in demand during our 2017 fiscal year. Ethanol in recent years has sold at a discount compared to gasoline prices which has made ethanol an attractive fuel for blending with gasoline and has increased export demand for ethanol. Ethanol provides additional octane to fuels and the lower price of ethanol positively impacts the overall cost of ethanol blended fuels. Management expects continued loweraverage ethanol prices during our 2018first and second quarters of our 2020 fiscal year. Ethanol prices rebounded during our third and fourth quarters of our 2020 fiscal year. Ethanol exports were also lower during our 2020 fiscal year duecompared to anticipated increases in marketour 2019 fiscal year as the COVID-19 pandemic had an impact on gasoline and ethanol supply. Ifdemand globally. Management expects ethanol exports increaseprices to remain lower during our 20182021 fiscal year the supply andas gasoline demand balance maywill continue to be more favorable.negatively impacted by COVID-19. However, export demand for ethanol is less certain compared to domestic demand. As a result, if ethanol demand decreases in the future, it could negatively impact the price we receive for our ethanol. In addition, gasoline prices have been increasing recently which management believes will positively impact ethanol prices. Ifthat as the spread between the price of ethanol and the price of gasoline increases during our 2017 fiscal year,COVID-19 vaccine is administered, it may lead to additional domesticresult in increased travel which may have a positive impact on ethanol demand which could positively impact prices.
Ethanol sales volumes were lowergreater during our 20172020 fiscal year compared to the same period of 20162019 due to increased inventory during our 2017plant expansion project, which was operational for our entire 2020 fiscal year, partially offset by an increase inlower ethanol productionsales during our 2017 fiscal year comparedfirst and second quarters of 2020 due to our 2016 fiscal year. Ourthe COVID-19 pandemic. The total gallons of ethanol we sold during our 20172020 fiscal year was comparableapproximately 19.4% greater compared to the same period of 2016, with a decrease of approximately 71,000 gallons.2019. Management anticipates increased ethanol production and sales during our 20182021 fiscal year compared to our 20172020 fiscal year dueprovided ethanol demand is higher during our 2021 fiscal year compared to efficiency improvementsour 2020 fiscal year. Further, management anticipates that we have madewill continue to the plant.work to maximize our production following completion of our plant expansion project.
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Distillers Grains
Our total distillers grains revenue decreasedincreased by approximately 20.4% for our 20172020 fiscal year compared to the same period of 2016.2019. The increase in revenue from distillers grains was primarily due to increased tons of distillers grains sold during our 2020 fiscal year. For our 20172020 fiscal year,, we sold approximately 35%38.1% of our total distillers grains, by volume, in the dried form and approximately 65%61.9% of our total distillers grains in the modified/wet form. For our 20162019 fiscal year, we sold approximately 36%25.9% of our total distillers grains, by volume, in the dried form and approximately 64%74.1% of our total distillers grains in the modified/wet form. The average price we received for our driedmodified/wet distillers grains was approximately 12%1.3% less duringfor our 20172020 fiscal year compared to the same period of 2016, a decrease2019. Due to our plant expansion project, the supply of approximately $14 per ton. Management attributes this decrease in driedmodified/wet distillers grains prices with significantly decreased export demand from China duringin our 2017 fiscal year along with lower corn and soybean prices. Since distillers grains are typically used as a feed substitute for corn and soybean meal, asmarket is higher which has had an impact on the prices of corn and soybeans decrease, the price of distillers grains typically also decreases. In recent years, China has imported a significant amount of distillers grains from the United States. However, at the request of Chinese distillers grains producers, China commenced an anti-dumping and countervailing duty investigation against the United States during 2016. In September 2016, the Chinese implemented a preliminary anti-subsidy duty of between 10% and 10.7% in addition to a preliminary anti-dumping duty of 33.8%. Further, in January 2017, China finalized the duties to between 11.2% and 12% for the anti-subsidy duty and between 42.2% and 53.7% for the anti-dumping duty. As a result, distillers grains exports decreased sharply during our 2017 fiscal year which significantly impacted distillers grains prices. The average price we received for our modified/wet distillers grains. Modified/wet distillers grains have a shorter shelf life and are more expensive to transport compared to dried distillers grains. As a result, they are only sold in our local market.
The average price we received for our dried distillers grains was approximately 13% less for0.4% greater during our 20172020 fiscal year compared to the same period of 2016,2019. Management attributes this increase in dried distillers grains prices with lower distillers grains production in the United States due to reduced ethanol demand. This reduction in distillers grains production reduced the supply of distillers grains in the market which had a decrease of approximately $16 per dry equivalent ton.positive impact on prices.
Management anticipates continued lowexpects that distillers grains prices may be higher during our 2021 fiscal year due to anticipated higher corn prices during our 2021 fiscal year which typically has a positive impact on distillers grains prices. Further, if China and the United States reach an agreement on trade disputes which have occurred in recent years, it may have a positive impact on distillers grains prices and lower export demand fordemand.
Management anticipates increased distillers grains untilproduction during our 2021 fiscal year compared to our 2020 fiscal year due to anticipated increased overall production at the Chinese increase their imports. However, the low price of distillers grains has resulted in increased exportethanol plant provided ethanol demand to other countries and may be positively impacting domestic distillers grains demand.remains steady during our 2021 fiscal year.
Corn Oil
Our total corn oil revenue increased by approximately 8%35.6% during our 20172020 fiscal year compared to the same period of 2016.2019. Our total pounds of corn oil sold increased by approximately 8%27.4% during our 20172020 fiscal year compared to the same period of 2016, an increase of approximately 854,000 pounds,2019, primarily due to decreased downtime onincreased production due to our extraction equipmentplant expansion project. Management anticipates increased corn oil production during our 20172021 fiscal year compared to our 20162020 fiscal year. Management anticipates relatively stable corn oilyear due to anticipated increased production provided ethanol demand remains at current levels allowing us to operate the ethanol plant at capacity during our 20182021 fiscal year compared to our 2017 fiscal year, depending on the amount of oil in the corn harvested in the fall of 2017.year.
The average price we received for our corn oil was comparable inapproximately 6.4% greater during our 20172020 fiscal year and compared to the same period of 2016.2019. Management expectsbelieves that corn oil prices were higher due to remain lowerless total industry-wide ethanol production during our 20182020 fiscal year unlesswhich reduced the volume of corn oil in the market. In addition, corn oil demand remained favorable due to demand from the biodiesel industry which uses corn oil as a feedstock to produce biodiesel. The biodiesel blenders' tax credit is extended for 2018. If not, biodiesel production may be lower which may negatively impactwas reinstated through 2022 so we expect that corn oil demand and prices.will remain higher through 2022.
Cost of Revenues
The primary raw materials we use to produce ethanol, distillers grains and corn oil are corn and natural gas.
Corn
Our cost of revenues relating to corn was approximately 3% less8.1% greater for our 20172020 fiscal year compared to the same period of 2016.2019. Our average cost per bushel of corn decreased by approximately 2%10.0% for our 20172020 fiscal year compared to our 20162019 fiscal year.year. Management attributes the decrease in corn prices to several years of largedecreased corn crops and additional corn carryoverdemand from the 2016 corn crop. This increase in corn supply resulted inethanol industry. Corn demand was lower marketdue to decreased ethanol demand during the COVID-19 pandemic. Management anticipates corn prices will be higher during our 2017 fiscal year. Management anticipates relatively stable corn prices during our 20182021 fiscal year due to stronganticipated higher corn supplies and anticipated stable corn demand.demand from the ethanol industry.
We used approximately 2% fewer19.9% more bushels of corn during our 20172020 fiscal year compared to the same period of 20162019 due to improved corn toincreased overall production at the ethanol yieldsplant during our 20172020 fiscal year due to running the plant slower and a new yeast we used which improved our operating efficiency.year. Management expects our corn consumption will be consistent inhigher during our 20182021 fiscal year compared to our 20172020 fiscal year.
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We experienced approximately $815,000$1,627,000 of combined realized and unrealized loss for our 20172020 fiscal year related to our corn derivative instruments which increased our cost of goods sold. By comparison, Wewe experienced approximately $167,000$906,000 of combined realized and unrealized gainsloss for our 20162019 fiscal year related to our corn derivative instruments which decreasedincreased our cost of goods sold.sold We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance.
Natural Gas
Our cost of revenues related to natural gas increased by approximately 10.8% for our 2020 fiscal year compared to our 2019 fiscal year. This increase was due to increased consumption due to our plant expansion project, partially offset by lower natural gas costs per MMBtu during our 2020 fiscal year compared to the same period of 2019. Natural gas prices were lower during our 2020 fiscal year compared to the same period of 2019 primarily because of decreased natural gas demand and lower energy prices generally during 2020 which decreased natural gas prices during that period of time. Our average cost per MMBtu of natural gas during our 2020 fiscal year was approximately 6.7% less compared to the cost for our 2019 fiscal year. Management anticipates higher natural gas costs per MMBtu during 2021 due to cold weather during the first quarter of our 2021 fiscal year.
We used approximately 18.6% more MMBtus of natural gas during our 2020 fiscal year compared to the same period of 2019 due to increased overall production due to our plant expansion project. Management anticipates that our natural gas consumption during our 2021 fiscal year will increase due to expected increased production during our 2021 fiscal year provided we can operate the ethanol plant at capacity during our 2021 fiscal year.
Operating Expense
Our operating expenses were higher for our 20172020 fiscal year compared to the same period of 20162019 due primarily to increased costs relating to recruiting efforts to fill vacant staff positions within our Company.professional fees and property insurance premiums.
Other Income and Expense
Our interest and other income was highergreater during our 20172020 fiscal year compared to our 20162019 fiscal year due to higher cash on handadditional dividend income from our lender during the 20172020 period. Our equity in the net income of our investments was lowerhigher during our 20172020 fiscal year compared to our 20162019 fiscal year due to lessincreased profitability in the ethanol industry which negatively impacts the income generated by our investments. Our net income of investments was also lowerWe had significantly more interest expense during our 2020 fiscal year compared to our 2019 fiscal year due to a write-downborrowing for our plant expansion project. During the time the expansion was under construction, interest was capitalized. When the expansion became operational, subsequent interest was expensed to our statement of the valueoperations.
Results of our investment in Prairie Gold Venture Partners as it was deemed impaired.Operations
Comparison of the Fiscal Years Ended December 31, 20162019 and 20152018
The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of operations for the fiscal years ended December 31, 20162019 and 2015:2018:
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| 2016 | 2015 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| Income Statement Data | Amount | % | Amount | % | Income Statement Data | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| Revenue | $ | 88,812,550 | 100.0 | $ | 88,997,947 | 100.0 | Revenue | $ | 115,986,821 | 100.0 | $ | 74,703,630 | 100.0 | |||||||||||||||||||||||||||
| Cost of Revenues | 76,097,861 | 85.7 | 81,445,770 | 91.5 | Cost of Revenues | 114,687,231 | 98.9 | 68,619,694 | 91.9 | |||||||||||||||||||||||||||||||
| Gross Profit | 12,714,689 | 14.3 | 7,552,177 | 8.5 | Gross Profit | 1,299,590 | 1.1 | 6,083,936 | 8.1 | |||||||||||||||||||||||||||||||
| Operating Expense | 3,642,087 | 4.1 | 1,827,789 | 2.1 | Operating Expense | 4,060,343 | 3.5 | 3,837,659 | 5.1 | |||||||||||||||||||||||||||||||
| Income from Operations | 9,072,602 | 10.2 | 5,724,388 | 6.4 | ||||||||||||||||||||||||||||||||||||
| Income (Loss) from Operations | Income (Loss) from Operations | (2,760,753) | (2.4) | 2,246,277 | 3.0 | |||||||||||||||||||||||||||||||||||
| Other Income | 2,332,606 | 2.6 | 2,929,142 | 3.3 | ||||||||||||||||||||||||||||||||||||
| Other Income (Expense) | Other Income (Expense) | (1,063,431) | (0.9) | 470,310 | 0.6 | |||||||||||||||||||||||||||||||||||
| Net Income | $ | 11,405,208 | 12.8 | $ | 8,653,530 | 9.7 | ||||||||||||||||||||||||||||||||||
| Net Income (Loss) | Net Income (Loss) | $ | (3,824,184) | (3.3) | $ | 2,716,587 | 3.6 | |||||||||||||||||||||||||||||||||