UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2021 COMMISSION
FILE NO. 001-09097
REX AMERICAN RESOURCES CORPORATION
(Exact name of registrant as specified in
its charter)
Registrant’s telephone number, including
area code (937) 276-3931
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $.01 par value REX New York Stock Exchange
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☑
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer ☐Accelerated filer☑
Non-accelerated filer ☐ Smaller
reporting company ☐
Emerging growth company ☐
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. Yes ☑ No ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☑
At the close of business on July 31, 2020
the aggregate market value of the registrant’s outstanding Common Stock held by non-affiliates of the registrant (for purposes
of this calculation, 722,957 shares beneficially owned by directors and executive officers of the registrant were treated as being
held by affiliates of the registrant), was $373,238,332.
There were 5,992,002 shares of the registrant’s
Common Stock outstanding as of April 9, 2021.
Documents Incorporated by Reference
Portions of REX American Resources Corporation’s
definitive Proxy Statement for its Annual Meeting of Shareholders on June 16, 2021 are incorporated by reference into Part III
of this Form 10-K.
Forward-Looking
Statements
This Form 10-K contains or may contain
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements can be identified
by use of forward-looking terminology such as “may,” “expect,” “believe,” “estimate,”
“anticipate” or “continue” or the negative thereof or other variations thereon or comparable terminology.
Readers are cautioned that there are risks and uncertainties that could cause actual events or results to differ materially from
those referred to in such forward-looking statements. These risks and uncertainties include the risk factors set forth from time
to time in the Company’s filings with the Securities and Exchange Commission and include among other things: the effect of
pandemics such as COVID-19 on the Company’s business operations, including impacts on supplies, demand, personnel and other
factors, the impact of legislative and regulatory changes, the price volatility and availability of corn, distillers grains, ethanol,
non-food grade corn oil, gasoline and natural gas, logistical delays, our ethanol and refined coal plants operating efficiently
and according to forecasts and projections, changes in the international, national or regional economies, weather, results of income
tax audits, changes in income tax laws or regulations, the impact of U.S. foreign trade policy, changes in foreign currency exchange
rates and the effects of terrorism or acts of war. The Company does not intend to update publicly any forward-looking statements
except as required by law. Other factors that could cause actual results to differ materially from those in the forward-looking
statements are set forth in Item 1A.
Available
Information
REX makes available free of charge on its
Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. REX’s
Internet website address is www.rexamerican.com. The contents of the Company’s website
are not a part of this report.
PART
I
Item 1. Business
References to “we”,
“us”, “our”, “REX” or “the Company” refer to REX American Resources Corporation
and its majority owned subsidiaries.
Fiscal Year
All references in this report to a particular
fiscal year are to REX’s fiscal year ended January 31. For example, “fiscal year 2020” means the period February
1, 2020 to January 31, 2021. We refer to our fiscal year by reference to the year immediately preceding the January 31 fiscal year
end date.
Corporate History and Background
REX was incorporated in Delaware in 1984
as a holding company. Our principal offices are located at 7720 Paragon Road, Dayton, Ohio 45459. Our telephone number is (937)
276-3931.
In 2006, we started investing in ethanol
production facilities. We are currently invested in three ethanol production entities – One Earth Energy, LLC (“One
Earth”), NuGen Energy, LLC (“NuGen”), and Big River Resources, LLC (“Big River”). We own a majority
interest in One Earth and NuGen. We also own a majority interest in an entity that owns and operates a refined coal facility. We
have two reportable segments: i) ethanol and by-products; and ii) refined coal.
General Overview
Net income attributable to REX common shareholders
was approximately $3.0 million in fiscal year 2020 compared to approximately $7.4 million in fiscal year 2019. Both fiscal years
2020 and 2019 benefitted from reductions in our effective tax rate resulting from the impact of federal production tax credits
associated with our refined coal operations and from the impact of research and experimentation credits associated with our ethanol
and by-products operations. However, as refined coal production declined significantly in fiscal year 2020 compared to fiscal year
2019, the benefit of the related tax credits also declined.
Our fiscal year 2020 operations and commodity
prices in general were significantly impacted by the coronavirus (“COVID-19”) pandemic. In an effort to contain the
virus, there have been various and prolonged restrictions on travel, public gatherings and work from home orders throughout the
world. This has resulted in reduced demand for gasoline and ethanol. Corn pricing was also impacted by this lower demand for ethanol
and resulting reduced ethanol production, although China increased its imports of U.S. corn during the latter part of fiscal year
2020 causing corn prices to increase. In the early periods of the Covid-19 pandemic, CBOT ethanol pricing declined sharply to approximately
$0.84 per gallon while CBOT corn pricing declined to a low of approximately $3.03 per bushel. These and other market factors led
to the shutdown of our NuGen ethanol plant from late March 2020 to late June 2020 and the shutdown of our One Earth ethanol plant
from late March 2020 to late May 2020. CBOT ethanol and corn prices were at their highest levels during fiscal year 2020 at the
end of January 2021 as the ethanol price was approximately $1.64 per gallon and the corn price was approximately $5.47 per bushel.
The form and structure of our ethanol investments
were tailored to the specific needs and goals of each project and the local farmer group or investor with whom we partnered. We
generally participate in the management of our projects through our membership on the board of managers of the limited liability
companies that own the plants. We provide management oversight and direction with respect to most aspects of plant operations for
our consolidated ethanol companies. We have equity investments in three entities engaged in the production of ethanol as of January
31, 2021. The following table is a summary of our ethanol investments at January 31, 2021 (gallons in millions):
Big River Resources, LLC:
Big River Resources W Burlington, LLC 101.0 10.3% 10.4
Big River United Energy, LLC 116.1 5.7% 6.6
Big River Resources Boyceville, LLC 55.3 10.3% 5.7
Our ethanol operations are highly dependent
on commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil and natural gas. As a result
of price volatility for these commodities, our operating results can fluctuate substantially. The price and availability of corn
is subject to significant fluctuations depending upon several factors that affect commodity prices in general, including crop conditions,
weather, federal policy and foreign trade. Because the market prices of ethanol and distillers grains are not always directly related
to corn prices, at times ethanol and/or distillers grains prices may lag movements in corn prices. In an environment of higher
corn prices or lower ethanol/distillers grains prices, the overall margin structure at the plants could be reduced. As a result,
at times, we may operate our plants at negative or minimally positive operating margins.
We expect our ethanol plants to produce
approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. We refer to the actual
gallons of denatured ethanol produced per bushel of grain processed as the realized yield. We refer to the difference between the
price per gallon of ethanol and the price per bushel of grain (divided by the realized yield) as the “crush spread.”
Should the crush spread decline, it is possible that our ethanol plants will generate operating results that do not provide adequate
cash flows for sustained periods of time. In such cases, production at the ethanol plants may be reduced or stopped altogether
in order to minimize variable costs at individual plants.
We attempt to manage the risk related to
the volatility of commodity prices by utilizing forward grain purchase, forward ethanol, distillers grains and non-food grade corn
oil sale contracts, and commodity futures and swap agreements, as management deems appropriate. We attempt to match quantities
of these sales contracts with an appropriate quantity of grain purchase contracts over a given period of time when we can obtain
an adequate gross margin resulting from the crush spread inherent in the contracts we have executed. However, the market for future
ethanol sales contracts generally lags the spot market with respect to ethanol prices. Consequently, we generally execute fixed
price contracts for no more than four months into the future at any given time and we may lock in our corn or ethanol price without
having a corresponding locked in ethanol or corn price for short durations of time. As a result of the relatively short period
of time our fixed price contracts cover, we generally cannot predict the future movements in our realized crush spread for more
than four months; thus, we are unable to predict the likelihood or amounts of future income or loss from the operations of our
ethanol facilities. We utilize derivative financial instruments, primarily exchange traded commodity future and swap contracts,
in conjunction with certain of our grain procurement activities and commodity marketing activities.
On August 10, 2017, we purchased, through
a 95.35% owned subsidiary, for approximately $12.0 million, the entire ownership interest of an entity that owns a refined coal
facility. We began operating the refined coal facility immediately after the acquisition. We expect that the refined coal operating
results will be subsidized by federal production tax credits through November 2021, subject to meeting qualified emissions reductions
as governed by Section 45 of the Internal Revenue Code (“IRC”). In order to maintain compliance with Section 45 of
the IRC, we are required to test every six months, through an independent laboratory, the effectiveness of our process with respect
to emissions reductions. Annually, the IRS publishes the amount of federal income tax credit earned per ton of refined coal produced
and sold for a given calendar year, which for 2020 is approximately $7.30 per ton. The tax credits can be earned for refined coal
produced and sold by our facility through November 18, 2021. We expect to cease refined coal production operations on or before
November 18, 2021.
During fiscal year 2013, we entered into
a joint venture with Hytken HPGP LLC (“Hytken”) to file and defend patents for eSteam technology relating to heavy
oil and oil sands production methods, and to attempt to commercially exploit the technology to generate license fees, royalty income
and development opportunities. The patented technology is an enhanced method of heavy oil recovery involving zero emissions downhole
steam generation. To date, we have paid and expensed approximately $2.5 million to purchase our ownership interest and fund patent
and other expenses. We have not successfully demonstrated that the technology is commercially feasible. We own 60% and Hytken owns
40% of the entity named Future Energy, LLC (“Future Energy”), an Ohio limited liability company. Future Energy is managed
by a board of three managers, two appointed by us and one by Hytken.
We plan to seek and evaluate various investment
opportunities including energy related, carbon dioxide related, agricultural or other ventures we believe fit our investment criteria.
We can make no assurances that we will be successful in our efforts to find such opportunities.
Ethanol Industry
Ethanol is a renewable fuel produced by
processing corn and other biomass through a fermentation process that creates combustible alcohol that can be used as a fuel additive
to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended
and, to a lesser extent, as a gasoline substitute. The majority of ethanol produced in the United States is made from corn because
of its wide availability and ease of convertibility from large amounts of carbohydrates into glucose, the key ingredient in producing
alcohol that is used in the fermentation process. Ethanol production can also use feedstocks such as grain sorghum, switchgrass,
wheat, barley, potatoes and sugarcane as carbohydrate sources. Most ethanol plants have been located near large corn production
areas, such as Illinois, Indiana, Iowa, Minnesota, Nebraska, Ohio and South Dakota. Railway access and interstate access are vital
for ethanol facilities due to the large amount of raw materials and finished goods required to be shipped to and from the facilities.
An adequate supply of natural gas is key to maintaining optimal operating levels.
According to the Renewable Fuels Association
(“RFA”), the United States ethanol industry produced an estimated 13.8 billion gallons of ethanol in 2020, which
represents a decline of approximately 2.0 billion gallons from 2019, primarily due to the impacts of COVID-19. Approximately 1.3
billion gallons were exported from the United States in 2020. According to the RFA, the United States ethanol industry consists
of 208 plants in 25 states with an annual capacity of approximately 17.4 billion gallons of ethanol production.
Domestic demand for ethanol is highly dependent
upon federal and state legislation and regulations. On December 19, 2007, the Energy Independence and Security Act of 2007 (the
“Energy Act of 2007”) was enacted. The Energy Act of 2007 established new levels of renewable fuel mandates, including
two different categories of renewable fuels: conventional biofuels and advanced biofuels. The federal government mandates the use
of renewable fuels under Renewable Fuel Standard II (“RFS II”), established in October 2010. Corn-based ethanol is
considered a conventional biofuel which is subject to a renewable fuel standard (“RFS”) of 15.0 billion gallons annually
through 2022. After 2022, RFS volumes will be determined by the Environmental Protection Agency (“EPA”) in coordination
with the Secretaries of Energy and Agriculture.
The EPA has the authority to waive the
mandates in whole or in part if one of two conditions is met: 1) there is inadequate domestic renewable fuel supply, or 2) implementation
of the mandate requirement severely harms the economy or environment of a state, region or the United States. In 2014, 2015 and
2016, the EPA took action to reduce the volumes for both conventional biofuels and advanced biofuels. The U.S. Federal District
Court for the D.C. Circuit ruled on July 28, 2017 against the EPA related to its decision to lower the 2016 volume requirements.
As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements by 500 million gallons
for 2016 through its waiver authority. To date, the EPA has not reinstated these gallons.
Under RFS II, a small refiner that processes
less than 75,000 barrels of oil per day can petition the EPA for a waiver of their requirement to submit renewable identification
numbers (“RINs”). The EPA, through consultation with the Department of Energy and the Department of Agriculture, can
grant the refiner a full or partial waiver, or deny the waiver. The EPA issued 85 refinery exemptions for 2016-2018 compliance
years, undercutting the statutory renewable fuel volumes by a total of 4.0 billion gallons. In its final rule establishing the
2020 renewable fuel volume obligations, the EPA stated it will reallocate gallons lost to exemptions, based on a rolling three
year average of what the Department of Energy has recommended, and extend this to the 2019 compliance year. On average, these recommendations
have represented only about half of the waivers the EPA has granted. The U.S. Court of Appeals for the 10th Circuit
recently vacated decisions by the EPA to
extend exemptions of renewable fuel obligations
to three small refineries. The Court ruled the extensions should not have been granted because the three refineries were not already
in possession of exemptions. In addition, the Court ruled the economic hardship should be determined by whether complying with
RFS II created the hardship solely, not compliance with RFS II amongst other factors. The oil refiners appeal was denied. Two of
the refiners appealed the decision to the U.S. Supreme Court, and in January 2021, the Supreme Court agreed to hear the case.
Ethanol Production
The plants
we have invested in are designed to use the dry milling method of producing ethanol. In the dry milling process, the entire corn
kernel is first ground into flour, which is referred to as “meal,” and processed without separating out the various
component parts of the grain. The meal is processed with enzymes, chemicals and water, and then placed in a high-temperature cooker.
It is then transferred to fermenters where yeast is added and the conversion of sugar to ethanol begins. After fermentation, the
resulting liquid is transferred to distillation columns where the ethanol is separated from the remaining “stillage”
for fuel uses. The anhydrous ethanol is then blended with a denaturant, such as natural gasoline, to render it undrinkable and
thus not subject to beverage alcohol tax. With the starch elements of the corn consumed in the above described process, the principal
by-product produced by the dry milling process is dry distillers grains with solubles, or DDGS. DDGS is sold as a protein used
in animal feed, which recovers a portion of the corn value not absorbed in ethanol production. Depending on market and operating
conditions, we may also sell modified distillers grains, or wet distillers grains, by removing less liquid content compared to
DDGS. We also generate revenues from the sale of non-food grade corn oil produced at our facilities. Non-food grade corn oil is
sold to the animal feed market, as well as biodiesel and other chemical markets.
The Primary Uses of Ethanol
Blend component. Today,
much of the ethanol blending in the U.S. is done to meet the RFS. Most regular gasoline is produced using blendstock with an octane
rating of 84, which is then increased to 87 (the minimum octane rating required in most states) by adding 10% ethanol according
to the RFA. The industry is attempting to expand ethanol blending above the current 10% for most vehicles in use. The EPA has approved
the use of 15% ethanol (“E-15”), which has an octane rating of 88, in gasoline for cars, SUV’s and light duty
trucks made in 2001 and later. Previously, the EPA had not granted E-15 the same Reid vapor pressure (“RVP”) waiver
as E-10 so it could only be sold from September 16 through May 31 for those vehicles in most markets. In May 2019, the EPA finalized
regulatory changes to allow the same RVP waiver for E-15 for the summer months that it allows for E-10. This may remove a significant
barrier to wider sales of E-15, although E-15 sales are still limited by the lack of infrastructure at retail locations to dispense
E-15.
Clean air additive. Ethanol
is employed by the refining industry as a fuel oxygenate, which when blended with gasoline, allows engines to combust fuel more
completely and reduce emissions from motor vehicles, than gasoline that has not been oxygenated. Ethanol contains 35% oxygen, which
results in more complete combustion of the fuel in the engine cylinder. Oxygenated gasoline is used to help meet certain federal
and air emission standards.
Octane enhancer.
Ethanol increases the octane rating of gasoline with which it is blended. Octane is a measure of fuel performance. Ethanol is used
by gasoline suppliers as an octane enhancer both for producing regular grade gasoline from lower octane blending stocks and for
upgrading regular gasoline to premium grades.
Legislation
The United States ethanol industry is highly
dependent upon federal and state legislation. See Item 1A. Risk Factors for a discussion of legislation affecting the U.S. ethanol
industry.
Refined Coal Overview
On August 10, 2017, we purchased, through
a 95.35% owned subsidiary, the entire ownership interest of an entity that owns a refined coal facility. We began operating the
refined coal facility immediately after the acquisition. Using licensed technology, our plant applies two separate chemicals to
convert feedstock coal into refined coal, which is sold to the end user of the refined coal. We expect that the refined coal operating
results will be subsidized by federal production tax credits through November 18, 2021, subject to meeting qualified emissions
reductions as governed by Section 45 of the IRC. In order to maintain compliance with Section 45 of the IRC, we are required to
test every six months, through an independent laboratory, the effectiveness of our process with respect to emissions reductions.
Annually, the IRS publishes the amount of federal income tax credit earned per ton of refined coal produced and sold for a given
calendar year, which for 2020 was approximately $7.30 per ton.
Section 45 of the IRC was created by Congress
to encourage the development and use of environmentally sound solutions to control harmful emissions during energy production and
to facilitate and move the United States towards better compliance with global environmental energy standards. The American Jobs
Creation Act of 2004 amended Section 45 of the IRC by adding provisions to incentivize the production of emission reducing refined
coal. To qualify for tax credits under Section 45 of the IRC, a process must reduce coal emissions of nitrogen oxide by 20% and
either sulfur dioxide or mercury by 40%. The tax credits can be earned for refined coal produced and sold by our facility through
November 18, 2021. Absent the tax credits, our refined coal operations would not be profitable.
Facilities
As of our fiscal year end, our consolidated
ethanol entities owned a combined 1,122 acres of land and two facilities that shipped a combined quantity of approximately 217
million gallons of ethanol in fiscal year 2020. We also own our corporate headquarters office building, consisting of approximately
7,500 square feet, located in Dayton, Ohio. We own a refined coal plant that is located on leased property on the site of an electrical
generating station.
Human Capital Resources
The attraction, retention
and development of employees is critical to our success. We accomplish these objectives through a variety of actions, including
our competitive compensation policies, training initiatives and growth opportunities within our Company. At January 31, 2021, we
had 119 employees at our two consolidated ethanol plants and at our corporate headquarters. None of our employees are represented
by a labor union. We expect this employment level to remain relatively stable. We consider our relationship with our employees
to be good.
We took measures to protect
the health and safety of our employees during the COVID-19 pandemic while continuing to meet the needs of our customers. We continue
to monitor the impact of the COVID-19 pandemic on our business, including our employees, and take appropriate actions to mitigate
the impact including emphasizing CDC guidelines.
We conduct regularly
scheduled safety meetings and require all employees to go through safety training. We evaluate employee safety incidents monthly
and investigate such incidents promptly. In addition, we conduct periodic safety audits performed by an independent third party.
A portion of our incentive compensation plan rewards employees for attaining certain safety goals.
We believe we offer market
competitive compensation and benefit programs for our employees. In addition to competitive base wages, employees are eligible
for an incentive compensation program, a Company matched 401(k) plan, healthcare benefits, and paid time off.
Service Marks
We have registered the service marks “REX”,
and “Farmer’s Energy”, with the United States Patent and Trademark Office. We are not aware of any adverse claims
concerning our service marks.
Item 1A. Risk Factors
We encourage you to carefully consider
the risks described below and other information contained in this report when considering an investment decision in REX common
stock. Any of the events discussed in the risk factors below may occur. If one or more of these events do occur, our results of
operations, financial condition or cash flows could be materially adversely affected. In this instance, the trading price of REX
stock could decline, and investors might lose all or part of their investment.
Risks Related to our Ethanol and By-Products
Business
During the early months of 2020, a new
strain of COVID-19 spread into the United States and other countries.
In an effort to contain the spread of this
virus, there have been various government mandated restrictions, in addition to voluntary privately implemented restrictions, including
limiting public gatherings, retail store closures, restrictions on employees working and the quarantining of people who may have
been exposed to the virus. The duration of the resulting downturn in economic activity is unknown. However, it has led to reduced
demand for ethanol. This could lead to prolonged production stoppages at our ethanol plants and could result in an adverse material
impact on the results of operations and on our financial position. We idled our NuGen and One Earth ethanol plants for portions
of fiscal year 2020.
The ethanol industry is changing rapidly
which could result in unexpected developments that could negatively impact our operations.
According to the RFA, the ethanol industry
has grown from approximately 1.5 billion gallons of domestic annual ethanol production in 1999 to approximately 16.1 billion gallons
in 2018. In 2020 and 2019, the industry produced approximately 13.8 and 15.8 billion gallons, respectively, with the reduction
reflecting industry conditions. Thus, there have been significant changes in the supply and demand of ethanol over a relatively
short period of time which could lead to difficulty in maintaining profitable operations at our ethanol plants.
The financial returns on our ethanol
investments are highly dependent on commodity prices, which are subject to significant volatility, uncertainty and regional supply
shortages, so our results could fluctuate substantially.
The financial returns
on our ethanol investments are highly dependent on commodity prices, especially prices for corn, natural gas, ethanol, dried distillers
grains, non-food grade corn oil and unleaded gasoline. As a result of the volatility of the prices for these items, our returns
may fluctuate substantially and our investments could experience periods of declining prices for their products and increasing
costs for their raw materials, which could result in operating losses at our ethanol plants.
Our returns on
ethanol investments are highly sensitive to grain prices.
Corn is the principal
raw material our ethanol plants use to produce ethanol and by-products. As a result, changes in the price of corn can significantly
affect our businesses. Rising corn prices result in higher production costs of ethanol and by-products. Because ethanol competes
with non-corn-based fuels, our ethanol plants may not be able to pass along increased grain costs to our customers. At certain
levels, grain prices may make ethanol uneconomical to produce.
The price of corn is
influenced by weather conditions and other factors affecting crop yields, transportation costs, farmer planting decisions, exports,
the value of the U.S. dollar and general economic, market and regulatory factors. These factors include government policies and
subsidies with respect to agriculture and international trade and global and local demand and supply. The significance and relative
effect of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the production
and/or supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm the business of
our ethanol plants, to include intermittent production slowdowns or stoppages. Increasing domestic ethanol capacity could boost
the demand for corn and result in increased corn prices. International demand for corn could also result in higher corn prices.
Our ethanol plants may also have difficulty, from time to time, in physically sourcing corn on economic terms due to regional supply
shortages, transportation issues, delays in farmer marketing decisions or unfavorable local pricing. Such a shortage or price impact
could require our ethanol plants to suspend operations which would have a material adverse effect on our consolidated results of
operations.
The spread between
ethanol and corn prices can vary significantly.
The gross margin at our
ethanol plants depends principally on the spread between ethanol and corn prices. Fluctuations in the spread are likely to continue
to occur. A sustained narrow or negative spread, whether as a result of sustained high or increased corn prices or sustained low
or decreased ethanol prices, would adversely affect the results of operations at our ethanol plants.
Our risk management
strategies may be ineffective and may expose us to decreased profitability and liquidity.
In an attempt to partially
offset the impact of volatility of commodity prices, we enter into: i) forward contracts to sell a portion of our ethanol and distillers
grains production and to purchase a portion of our corn and natural gas requirements and; ii) commodity futures and swap agreements.
The financial impact of these risk management activities is dependent upon, among other items, the prices involved and our ability
to receive or deliver the commodities involved. Risk management activities can result in financial loss when positions are purchased
in a declining market or when positions are sold in an increasing market. In addition, we may not be able to match the appropriate
quantity of corn contracts with quantities of ethanol, distillers grains and non-food grade corn oil contracts. We vary the amount
and type of risk management techniques we utilize, and we may choose not to engage in any risk management activities. Should we
fail to properly manage the inherent volatility of commodity prices, our results of operations and financial condition may be adversely
affected.
The market for
natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that our ethanol
plants use in their manufacturing process.
Our ethanol plants rely
upon third parties for their supply of natural gas, which is consumed as fuel in the production process. The prices for and availability
of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond the ethanol
plants’ control, such as weather conditions, overall economic conditions, governmental regulation and foreign and domestic
relations. Significant disruptions in the supply of natural gas could impair or completely prevent the ethanol plants’ ability
to economically manufacture ethanol for their customers. Furthermore, increases in natural gas prices may adversely affect results
of operations and financial position at our ethanol plants.
Fluctuations in the selling price
of commodities may reduce profit margins at our ethanol plants.
Ethanol is marketed as a fuel additive
to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended
and, to a lesser extent, as a gasoline substitute. As a result, ethanol prices are influenced by the supply and demand for gasoline,
and our ethanol plants’ results of operations and financial position may be materially adversely affected if gasoline demand
decreases or the price of gasoline declines making ethanol less economical.
Distillers grains compete with other protein
based animal feed products. The price of distillers grains may decrease when the prices of competing feed products decrease. The
prices of competing animal feed products are based in part on the prices of the commodities from which these products are made.
Historically, sales prices for distillers grains have tracked along with the price of corn. However, there have been instances
when the price increase for distillers grains has lagged increases in corn prices.
The production of distillers grains has
increased as a result of increases in dry mill ethanol production in the United States. This could lead to price declines in what
we can sell our distillers grains for in the future. Such declines could have a material adverse effect on our results of operations.
Increased ethanol
production or decreases in demand for ethanol may result in excess production capacity in the ethanol industry, which may cause
the price of ethanol, distillers grains and non-food grade corn oil to decrease.
According to the RFA,
domestic ethanol production capacity is approximately 17.4 billion gallons per year. The EPA set the RFS requirement to be satisfied
by corn-derived ethanol at 15.0 billion gallons for 2019 and 2020. However, the RFS requirements have been reduced through small
refiner waivers (“SRWs”) issued by the EPA. These SRWs were in the amount of approximately 4.0 billion gallons for
85 refinery exemptions of ethanol for 2016 through 2018. There have been no rulings on waiver requests for subsequent years. The
EPA has not yet released a draft rule for the 2021 volumes, despite the fact they typically release a draft mid-year of the preceding
year and finalize the rule by November 30 of the preceding year. Excess capacity in the ethanol industry could have an adverse
effect on the results of our operations. In a manufacturing industry with excess capacity, producers have an incentive to manufacture
additional products for so long as the price exceeds the marginal cost of production (i.e., the cost of producing only the next
unit, without regard for interest, overhead or fixed costs). This incentive could result in the reduction of the market price of
ethanol to a level that is inadequate to generate sufficient cash flow to cover costs.
Excess capacity may also
result from decreases in the demand for ethanol, which could result from a number of factors, including, but not limited to, regulatory
developments and reduced U.S. gasoline consumption. Reduced gasoline consumption could occur as a result of increased prices for
gasoline or crude oil, which could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline
mileage or acquire non-gasoline powered vehicles. In addition, decreased overall economic activity could also lead to reduced gasoline
consumption.
In addition, because
ethanol production produces distillers grains and non-food grade corn oil as by-products, increased ethanol production will also
lead to increased supplies of distillers grains and non-food grade corn oil. An increase in the supply of distillers grains and
non-food grade corn oil, without corresponding increases in demand, could lead to lower prices or an inability to sell our ethanol
plants’ distillers grains and non-food grade corn oil production. A decline in the price of distillers grains or non-food
grade corn oil could have a material adverse effect on the results of our ethanol operations.
The price of ethanol and distillers
grains may decline as a result of trade restrictions or duties on ethanol and distillers grains exports from the United States
or from unfavorable foreign currency exchange rates.
If the United States were to withdraw from
or materially modify certain international trade agreements, our business, financial condition and results of operations could
be materially adversely affected. Ethanol and other products that we produce are sold into various other countries with trade agreements
with the United States. If tariffs were raised on the foreign-sourced goods that lead to retaliatory actions, it could have material
adverse effect on our business, financial condition and results of operations.
The United States exported approximately
1.3 billion gallons of ethanol in 2020, down from approximately 1.5 and approximately 1.7 billion gallons in 2019 and 2018, respectively.
If producers and exporters of ethanol are subject to trade restrictions, or additional duties are imposed on exports, it may make
it uneconomical to export ethanol. Brazil, China and the European Union all have trade barriers or tariffs against fuel ethanol.
In 2013, the European Union imposed a five year tariff of $83.33 per metric ton on U.S. fuel ethanol to discourage competition.
Effective January 1, 2017, China indicated its intention to raise its 5% tariff on U.S. and Brazil fuel ethanol to 30%. On April
1, 2018, China raised their tariff rate to 45%, and later raised it to 70% in the U.S. and China trade war. On September 1, 2017,
Brazil imposed a 20% tariff on U.S. fuel ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter.
The tariff was extended several times but lapsed in December 2020 and a 20% tariff now applies to all U.S. ethanol exported to
Brazil. This could result in an oversupply of ethanol in the United States, which could have a material adverse effect on the results
of our ethanol operations.
In 2020, approximately 11.0 million metric
tons (“mmt”) of distillers grains were exported which represented a record high of 38% of U.S. production. However,
the export market may be jeopardized if foreign governments impose trade barriers or other measures to protect the foreign local
markets. Exports to China were approximately 2% of U.S. global shipments in 2019 versus approximately 51% in 2015, due to punitive
tariffs established beginning January 2017 in effect for 5 years per the RFA. Chinese exports rebounded slightly in 2020 but still
remained depressed compared to earlier years. If producers and exporters of distillers grains are subjected to trade barriers when
selling distillers grains to foreign customers, there may be a reduction in the price of distillers grains in the United States.
In addition, foreign currency exchange rate fluctuations could reduce the demand for United States exports of distillers grains.
Declines in the price we receive for our distillers grains could lead to decreased revenues and may result in our inability to
operate our ethanol plants profitably.
Future demand for ethanol is uncertain
and changes in overall consumer demand for transportation fuel could affect demand.
There are limited markets for ethanol other
than what is federally mandated. Increased consumer acceptance of E15 and E85 fuel is likely necessary in order for ethanol to
achieve significant market share growth beyond federal mandate levels.
We depend on our partners to operate
certain of our ethanol investments.
Our investments currently represent both
majority and minority equity positions. Day-to-day operating control of minority owned plants generally remains with the local
investor group. We do not have the ability to directly modify the operations of these plants in response to changes in the business
environment or in response to any deficiencies in local operations of the plants. In addition, local plant operators, who also
represent the primary suppliers of corn and other crops to the plants, may have interests, such as the price and sourcing of corn
and other crops, that may differ from our interest, which is based solely on the operating profit of the plant. The limitations
on our ability to control day-to-day plant operations could adversely affect plant results of operations.
We may not successfully acquire or develop
additional ethanol investments.
The growth of our ethanol
business depends on our ability to identify and develop new ethanol investments. Our ethanol development strategy depends on referrals,
and introductions, to new investment opportunities from industry participants, such as ethanol plant builders and owners, financial
institutions, marketing agents and others. We must continue to maintain favorable relationships with these industry participants,
and a material disruption in these sources of referrals would adversely affect our ability to expand our ethanol investments.
Any expansion strategy
will depend on prevailing market conditions for the price of ethanol and the cost of corn and natural gas and the expectations
of future market conditions. Additional financing may also be necessary to implement any expansion strategy, which may not be accessible
or available on acceptable terms. In addition, failure to adequately manage the risks associated with additional ethanol investments
could have a material adverse effect on our business.
Our ethanol plants may be adversely
affected by technological advances and efforts to anticipate and employ such technological advances may prove unsuccessful.
The development and implementation of new
technologies may result in a significant reduction in the costs of ethanol production. For instance, any technological advances
in the efficiency or cost to produce ethanol from inexpensive cellulosic sources such as corn stalk, wheat, oat or barley straw
could have an adverse effect on our ethanol plants, because our plants are designed to produce ethanol from corn, which is, by
comparison, a raw material with other high value uses. We cannot predict when new technologies may become available, the rate of
acceptance of new technologies by competitors or the costs associated with new technologies. In addition, advances in the development
of alternatives to ethanol could significantly reduce demand for or eliminate the need for ethanol.
Any advances in technology which require
significant unanticipated capital expenditures to remain competitive or which reduce demand or prices for ethanol would have a
material adverse effect on the results of our ethanol operations.
In addition, alternative fuels, additives
and oxygenates are continually under development. Alternative fuel additives that can replace ethanol may be developed, which may
decrease the demand for ethanol. It is also possible that technological advances in engine and exhaust system design and performance
could reduce the use of oxygenates, which would lower the demand for ethanol. Consumer demand for gasoline may be reduced by transportation
related technological advances such as electric and hybrid vehicles. Several automobile manufacturers have announced target dates
into the 2030s for ceasing production of gasoline vehicles and shifting production to electric vehicles. In addition, countries
such as Japan and the United Kingdom as well as the state of California have pledged to ban the sale of vehicles with internal
combustion engines over time. The Biden administration, in its early stages, appears to have placed an increased emphasis on electric vehicles. Reduced demand for ethanol could cause our results of operations to be materially adversely affected.
The U.S. ethanol industry is highly
dependent upon a myriad of federal and state legislation and regulation and any changes in legislation or regulation could materially
and adversely affect our results of operations and financial position.
The renewable fuel standard program was
authorized under the Energy Policy Act of 2005 and was expanded under the Energy Independence and Security Act of 2007 (EISA).
EISA increased the amount of renewable fuel required to be blended into gasoline and required a minimum usage of corn-derived renewable
fuels of 12.0 billion gallons in 2010, increasing annually by 600 million gallons to 15.0 billion gallons in 2015 through 2022,
with no specified volume subsequent to 2022. The EPA has the authority to assign the mandated amounts of renewable fuels to be
blended into transportation fuel to individual fuel blenders. RFS II has been a primary factor in the growth of ethanol usage.
Over the past several years various pieces of legislation have been introduced to the U.S. Congress that were intended to reduce
or eliminate ethanol blending requirements. To date, none of the bills have been successful but they are an indication of the continued
effort to undermine the EISA.
Under EISA, the EPA has the authority to
waive or modify the mandated RFS II requirements in whole or in part. In order to grant a waiver, the EPA administrator must determine
in consultation with the Secretaries of Agriculture and Energy, that one of the following two conditions has been met: i) there
is inadequate domestic renewable fuel supply or ii) implementation of the requirement would severely harm the economy or environment
of a state, region or the country. In certain past years the EPA has taken action to reduce the mandated gallons called for under
EISA for both conventional and advanced renewable fuels.
Pursuant to RFS II, if mandatory renewable
fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes
through 2022. While conventional ethanol was maintained at 15 billion gallons, 2019 was the second consecutive year the total proposed
RVOs was more than 20% below statutory volumes levels. The EPA Administrator directed his staff to initiate the reset rulemaking
process. However, the EPA announced it would not move forward with a reset rulemaking in 2020. After 2022, volumes will be determined
by the EPA in coordination with the Secretaries of Energy and Agriculture, taking into account such factors as environmental impact,
energy security, future production rates, costs to consumers, infrastructure, impacts on commodity and food prices, job creation
and rural economic development.
Obligated parties use RINs to show compliance
with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with
transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets
and influences the purchasing decisions by obligated parties. As a result of fluctuations in RINs pricing, certain obligated parties
have petitioned the EPA and filed court actions to change the point of obligation or to seek relief from their obligation. The
EPA granted 85 total SRWs for 2016 through 2018 totaling approximately 4.0 billion gallons. This action led to reduced values for
RINs and further action could decrease RIN values and ethanol pricing.
In January 2020, the U.S Court of Appeals
for the 10th Circuit overturned the EPA’s granting of refinery exemptions to three refineries on two separate
grounds. The Court ruled refineries are eligible for SRWs only if such waivers are extensions of waivers granted in previous years.
The refineries did not qualify for waivers in the year prior to the year the EPA granted them. The Court also stated the disproportionate
economic hardship of SRWs should be based solely on whether compliance with RFS II creates such hardship, not whether compliance
and other issues create the hardship. The refiners appeal was denied. Two of the refiners appealed the decision to the U.S. Supreme
Court, and in January 2021, the Supreme Court announced they agreed to hear the case.
Due to the 10th Circuit ruling,
a number of refiners have applied for gap year SRWs in an effort to establish continuous years of relief and to attempt to ensure
they qualify for SRWs going forward. Until the Supreme Court rules on this case, there remains uncertainty regarding volume obligations.
The EPA has not ruled on SRWs for years after 2018.
At the same time the EPA took action (in
2019) to allow the RVP waiver for E-15 for the summer months, it also took RIN market reform action. The reform action requires
public disclosure when RIN holdings exceed specified thresholds by an entity and requires the reporting of additional price and
affiliate data to the EPA.
Flexible fuel vehicles receive preferential
treatment in meeting federally mandated corporate average fuel economy (“CAFE”) standards for automobiles manufactured
by car makers. High blend ethanol fuels such as E-85 result in lower fuel efficiencies. Absent the CAFE preferences, car makers
would not likely build flexible-fuel vehicles. Any change in CAFE preferences could reduce the growth of E-85 markets and result
in lower ethanol prices.
Unfavorable changes in legislation or regulations
could materially and adversely affect our results of operations and financial position.
The inability to generate or obtain
RINs could adversely affect our operating results. Virtually all of our ethanol is sold with RINs that are used by customers
to comply with RFS II. If our production does not meet EPA requirements for RIN generation in the future, we would have to purchase
RINs in the open market or sell our ethanol at substantially lower prices to adjust for the absence of RINs. The price of RINs
varies based on many factors and cannot be predicted. Failure to obtain sufficient RINS or reliance on invalid RINs could subject
us to fines and penalties imposed by the EPA.
Various studies have criticized the
efficiency of ethanol, in general, and corn-based ethanol in particular, which could lead to the reduction or repeal of incentives
and tariffs that promote the use and domestic production of ethanol or otherwise negatively impact public perception and acceptance
of ethanol as an alternative fuel.
Although many trade groups, academics and
governmental agencies have supported ethanol as a fuel additive that promotes a cleaner environment, others have criticized ethanol
production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and as potentially depleting
water resources. Other studies have suggested that corn-based ethanol is less efficient than ethanol produced from switchgrass
or wheat grain and that it negatively impacts consumers by causing prices to increase for dairy, meat and other foodstuffs from
livestock that consume corn.
If these views gain acceptance, support
for existing measures promoting use and domestic production of corn-based ethanol could decline, leading to reduction or repeal
of these measures. These views could also negatively impact public perception of the ethanol industry and acceptance of ethanol
as an alternative fuel.
Federal support of cellulosic ethanol
may result in reduced incentives to corn-derived ethanol producers.
The American Recovery and Reinvestment
Act of 2009 and EISA provide funding opportunities in support of cellulosic ethanol obtained from biomass sources such as switchgrass
and poplar trees. The amended RFS mandates an increasing level of production of non-corn-derived biofuels. These federal policies
may suggest a long-term political preference for cellulosic processes using alternative feedstocks such as switchgrass, silage
or wood chips. Cellulosic ethanol has a smaller carbon footprint than corn-derived ethanol and is unlikely to divert foodstuff
from the market. Our plants are designed as single-feedstock facilities, located in corn production areas with limited alternative
feedstock nearby, and would require significant additional investment to convert to the production of cellulosic ethanol. The adoption
of cellulosic ethanol as the preferred form of ethanol could have a significant adverse effect on our ethanol business.
Our ethanol business is affected by environmental and other
regulations which could impede or prohibit our ability to successfully operate our plants.
Our ethanol production facilities are subject
to extensive air, water and other environmental regulations. We have had to obtain numerous permits to construct and operate our
plants. Regulatory agencies could impose conditions or other restrictions in the permits that are detrimental, or which increase
our costs. More stringent federal or state environmental regulations could be adopted which could significantly increase our operating
costs or require us to expend considerable resources.
Our ethanol plants emit various airborne
pollutants as by-products of the ethanol production process, including carbon dioxide (a greenhouse gas). In 2007, the U.S. Supreme
Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon
dioxide in vehicle emissions. In February 2010, the EPA released its final regulations on the Renewable Fuel Standard program.
We believe our plants are grandfathered up to certain operating capacity, but recent plant expansion requires us to meet a 20%
threshold reduction in greenhouse gas (GHG) emissions from a 2005 baseline measurement to produce ethanol eligible for the RFS
II mandate. To further expand our plant capacity, we may be required to obtain additional permits, install advanced technology
equipment, or reduce drying of certain amounts of distillers grains. We may also be required to install carbon dioxide mitigation