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, 2023 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 ☐
If securities are registered pursuant to Section
12(b) of the Act, indicated by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previous issued financial statements. Yes ☐ No ☑
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive offices during the relevant recovery period pursuant to §240.10D-1(b). 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, 2022, the
aggregate market value of the registrant’s outstanding Common Stock held by non-affiliates of the registrant (for purposes of this
calculation, 2,124,645 shares beneficially owned by directors and executive officers of the registrant were treated as being held by affiliates
of the registrant), was $493,699,933.
There were 17,390,019 shares of the registrant’s Common Stock outstanding as of March 29, 2023
Documents Incorporated by Reference
Portions of REX American Resources Corporation’s
definitive Proxy Statement for its Annual Meeting of Shareholders on June 15, 2023 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, commodity market
risk, ethanol plants operating efficiently and according to forecasts and projections, logistical interruptions, changes in the international,
national or regional economies, the impact of inflation, the ability to attract employees, 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. We refer to our fiscal year by reference to the year immediately preceding
the January 31 fiscal year end date. For example, “fiscal year 2022” means the period February 1, 2022 to January 31, 2023.
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 owned and, until November 18, 2021, operated a refined coal facility. As we have
ceased operating the refined coal facility, we began classifying the financial results of the operating segment as discontinued operations.
We now have one reportable segment, ethanol and by-products.
General Overview
We reported net income attributable to REX common
shareholders of $27.7 million in fiscal 2022 compared to approximately $52.4 million in fiscal 2021. Our ethanol business had reduced
profits in fiscal 2022 compared to fiscal 2021 as a result of lower crush spreads in fiscal 2022. The two largest drivers of ethanol profitability
are corn and ethanol pricing, both of which experienced significant volatility within the year. Chicago Board of Trade corn prices per
bushel ranged from a low of $5.64 in July 2022 to a high of $8.18 in April 2022. S&P Global Platts ethanol pricing per gallon ranged
from a low of $1.99 in February 2022 to a high of $2.88 in June 2022.
The form and structure of our ethanol investments
are tailored to the specific needs and goals of each project and the local farmer group or investor with whom we partner. We generally
participate in the oversight 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, 2023. The following table
is a summary of our ethanol entity ownership interests at January 31, 2023:
Entity REX’s Current Ownership Interest
One Earth Energy, LLC 75.8%
NuGen Energy, LLC 99.7%
The three entities own a total of six ethanol
production facilities, which in aggregate shipped approximately 691 millions gallons of ethanol over the twelve-month period ended January
31, 2023. REX’s effective ownership of gallons shipped, for the twelve-month period ended January 31, 2023, by the ethanol production
facilities in which we have ownership interests was approximately 271 million gallons.
Our ethanol operations are highly dependent on
commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil and natural gas, and availability of
corn. 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, the amount of corn stored on farms, weather, federal policy, foreign trade and international disruptions caused by wars or
conflicts. Because the market prices of ethanol and distillers grains are not always directly related to corn prices (for
example, demand for crude and other energy and related prices, the export market demand for ethanol and distillers grains, soybean meal
prices, and the results of federal policy decisions and trade negotiations), at times ethanol and distillers grains prices may
not follow movements in corn prices. In an environment of higher corn prices or lower ethanol or 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
2.9 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 and natural gas purchase contracts, forward ethanol, distillers grains and non-food grade
corn oil sale contracts, and commodity futures 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.
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 owned a refined coal facility. We began
operating the refined coal facility immediately after the acquisition. As the plant was no longer eligible to receive federal production
tax credits beginning on November 18, 2021, we ceased operations on that date and subsequently sold the facility. We began classifying
this operation as discontinued operations in the third quarter of fiscal 2021.
Through our affiliate, One Earth Energy, LLC,
we are in the exploratory stage of a carbon sequestration project near the One Earth Energy ethanol plant. A test well has been drilled
to a total depth of approximately 7,100 feet, in which almost 2,000 feet of Mt. Simon Sandstone was encountered, which represents the
region’s primary carbon storage resource. Three-dimensional seismic testing has been performed, as well as geological modeling for
predicting the movement of injected carbon and the plume area to determine maximum injection pressure, reservoir quality and storage capacity
for the potential wells. We have applied for a Class VI injection well permit for three wells with the U.S. Environmental Protection Agency
(“EPA”). In addition, we have signed a construction contract to capture, dehydrate, and compress carbon to a state suitable
for sequestration for the One Earth Energy ethanol plant. We are currently working on an engineering design study for a short pipeline
to deliver carbon from the ethanol plant to the sequestration site. Although we have made meaningful progress, we continue to complete
documents required from various government agencies and obtain other approvals with no assurances of ultimate success. If successful,
we believe we would qualify for tax credits under section 45Q of the Internal Revenue Code (“45Q”) and section 45Z of the
Internal Revenue Code (“45Z”) as outlined in the Inflation Reduction Act.
During fiscal year 2013, we entered into a joint
venture to file and defend patents for eSteam technology. The patented technology is an enhanced method of heavy oil recovery involving
zero emissions downhole steam generation. To date, we have not successfully had a field operation nor demonstrated that the technology
is commercially feasible. We own 60% and our partner owns 40% of the entity named Future Energy, LLC, an Ohio limited liability company.
We have no current plans to operate this technology and are maintaining patents in limited countries.
We plan to seek and evaluate various investment
opportunities including energy related, carbon sequestration, agricultural and 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 the fermentation process that is used in
producing alcohol. 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 15.4 billion gallons of ethanol in 2022, compared to 15.0 billion gallons in
2021. Approximately 1.4 billion gallons were exported from the United States in 2022. According to the RFA, the United States ethanol
industry consists of 199 plants in 25 states with an annual capacity of approximately 17.9 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. There were
mandated volumes established as part of the RFS II for conventional and advanced biofuels through the year 2022. After 2022, RFS volumes
are to be determined by the EPA in coordination with the Secretaries of Energy and Agriculture. The mandated volumes for conventional
biofuel were to reach 15.0 billion gallons in 2015 and maintain that level until 2022.
The EPA has proposed conventional renewable fuel
volumes of 15.0 billion gallons for 2023 and 15.25 billion gallons for both 2024 and 2025. Additionally, the proposal for 2023 also restores
the remaining 250 million gallons previously waived in 2016.
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 acquire and 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 88 refinery exemptions for 2016-2018 compliance years, undercutting
the statutory renewable fuel volumes by a total of 4.3 billion gallons. The EPA has not granted any small refinery waivers for 2019-2022
and has continued that stance in the proposed volumes for 2023-2025. There remain multiple ongoing legal challenges on how the EPA has
handled the small refinery waivers.
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. However, in July 2021, the U.S. Court of Appeals for the D.C. Circuit
overturned the EPA ruling and stated the EPA had exceeded its authority. Then in April 2022, the EPA issued an emergency waiver to allow
the sale of E-15 through May 20, 2022, and ultimately extended the waiver multiple times to allow for E-15 to be used throughout the remainder
of the 2022 summer months. Certain Midwest states petitioned the EPA to allow year round sales of E-15 in their states. On March 1, 2023,
the EPA proposed a rule to allow this to occur in eight states beginning in 2024. A public comment period on the proposed rule will be
open for 45 days.
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
than gasoline that has not been oxygenated and thus reduce emissions from motor vehicles. 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 Facility
On August 10, 2017, we purchased, through a 95.35%
owned subsidiary, the entire ownership interest of an entity that owned a refined coal facility. We began operating the refined coal facility
immediately after the acquisition. Using licensed technology, our plant applied two separate chemicals to convert feedstock coal into
refined coal, which was sold to the end user of the refined coal. The refined coal operating results were subsidized by federal production
tax credits through November 18, 2021, subject to meeting qualified emissions reductions as governed by Section 45 of the IRC. We ceased
operating the facility on November 18,
2021 and subsequently sold the facility. We began to report these results as discontinued operations
in the third quarter of 2021.
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%.
Facilities
As of our fiscal year end, our consolidated ethanol
entities owned a combined 1,342 acres of land and two facilities that shipped a combined quantity of approximately 266 million gallons
of ethanol in fiscal year 2022. We also own our corporate headquarters office building, consisting of approximately 7,500 square feet,
located in Dayton, Ohio.
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, 2023,
we had 122 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, all 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
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 grew
from approximately 1.5 billion gallons of domestic annual ethanol production in 1999 to a peak of approximately 16.1 billion gallons in
2018. In 2022 and 2021, the industry produced approximately 15.4 and 15.0 billion gallons, respectively, with the reduction from the peak
year reflecting industry conditions and reduced demand. 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, foreign production,
the value of the U.S. dollar, and general domestic and foreign economic, market and regulatory factors, including, but not limited to,
the impacts from the Russian-Ukraine conflict. 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 production 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. The corn harvest near our NuGen facility
for 2022 was negatively impacted by dry weather and we expect will impact the
supply of corn until the 2023 harvest. 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, distillers grains,
and non-food grade corn oil 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. Further, our
results may be impacted by a mismatch of gains or losses associated with the positions during a reporting period when the physical commodity
purchase or sale has not yet occurred. 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, including,
but not limited to, the impacts from the Russian-Ukraine conflict. 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 17.9 billion gallons per year. Under RFS II, there were mandated volumes through 2022 for
conventional and advanced biofuels. After 2022, RFS volumes are to be determined by the EPA in coordination with the Secretaries of Energy
and Agriculture. The EPA has proposed conventional renewable fuel volumes of 15.0 billion gallons for 2023 and 15.25 billion gallons for
2024 and 2025. In addition, the proposal for 2023 also restores the remaining 250 million gallons previously waived in 2016. The implied
excess capacity over the EPA proposed volumes 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 1.4 billion
gallons of ethanol in 2022, up from approximately 1.2 and approximately 1.3 billion gallons in 2021 and 2020, respectively. In 2022 and
2021, approximately 11.4
and 11.6 million metric tons, respectively, of distillers grains were exported, which represented approximately
34% and 36%, respectively, of U.S production. If producers and exporters of ethanol and distillers grains are subject to trade restrictions,
or additional duties are imposed on exports, it may make it uneconomical to export these products. The industry has experienced various
trade policy disputes, tariffs and investigations in foreign countries that have adversely impacted the international demand for our products.
Reduced international demand could lead to further oversupply and reduce pricing.
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.
Consumer demand for gasoline may be impacted by
emerging transportation trends, such as electric vehicles. Most automobile manufacturers have made varying levels of commitments to phase
out internal combustion engine production, such as General Motors with a target date of 2035 to phase out the production of gasoline and
diesel-powered vehicles and Nissan targeting the early 2030s to convert their entire fleet to electric vehicles. There also have been
pledges to ban the sale of internal combustion engines in countries such as Japan and the United Kingdom by 2035, as well as a statewide
ban in California, which several states are imitating. If realized, these bans would accelerate the decline of liquid fuel demand and
by extension demand for ethanol, biodiesel and renewable diesel. Recent federal legislation seeks to address the ever-increasing demand
for electric vehicle infrastructure. Reduced demand for ethanol could cause our results of operations to be materially impacted.
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.
We may not successfully develop our planned
carbon sequestration facility near the One Earth Energy ethanol plant.
The Company has committed significant time and
resources towards a carbon sequestration project near the One Earth Energy ethanol plant. The completion of this project requires numerous
government and landowner approvals. If we are not successful in obtaining all these approvals, we may not be able to complete this project
and could result in a write off of our commitments and investments.
If we are not successful on this project, our
ethanol plant could be at a disadvantage in the industry as our inability to sequester our carbon could result in a higher carbon intensity
(CI) score than our competitors if they are able to sequester their carbon. If we are unable to reduce our CI score, we may not be able
to participate in the state and federal clean fuel programs, including federal tax credits outlined in the Inflation Reduction Act.
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, or if, 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. 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 with RFS II 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. After 2022, RFS volumes are to be determined by the EPA in coordination with the Secretaries of Energy and
Agriculture. 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.
The EPA has proposed conventional renewable fuel
volumes of 15.0 billion gallons for 2023 and 15.25 billion gallons for both 2024 and 2025. Additionally, the proposal for 2023 also restores
the remaining 250 million gallons previously waived in 2016.
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 88 total Small
Refinery Exemptions (“SREs”) for 2016 through 2018 totaling approximately 4.3 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 SREs 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 SREs should be based solely on whether compliance with RFS II creates such hardship, not whether compliance and other issues create
the hardship. Two of the refiners appealed the decision to the U.S. Supreme Court, and on January 25, 2021, the Supreme Court partially
ruled in favor of the small refiners, but only as to the interpretation of “extension” of a waiver.
Flexible fuel vehicles (“FFVs”) 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. In recent years, automobile manufactures have backtracked in the production of FFVs for the U.S.
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 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, as an efficient producer,
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 negatively impacts consumers by causing prices to increase for dairy, meat and other foodstuffs.
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. 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 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 equipment or take other steps in order to comply with future laws
or regulations. Compliance with future laws or regulations with respect to emissions of carbon dioxide, or if we choose to expand capacity
at certain of our plants, compliance with then-current regulations of carbon dioxide, could be costly and may prevent us from operating
our plants as profitably, which may have a negative impact on our financial performance. We also face the risk of ethanol production above
our grandfathered capacity not qualifying for RINs if the plants do not meet certain emission requirements.
The California Air Resources Board (“CARB”)
adopted a Low Carbon Fuel Standard (“LCFS”) requiring a 10% reduction in GHG emissions from transportation fuels. An Indirect
Land Use Charge is included in this lifecycle GHG emission calculation. This standard could have an adverse impact on the market for corn-based
ethanol in California if corn-based ethanol fails to achieve lifecycle GHG emission reductions and in other states if they adopt similar
standards. This could have a negative impact on our financial performance.
Our ethanol business may become subject to
various environmental and health and safety and property damage claims and liabilities.
Operation of our ethanol business exposes the
business to the risk of environmental and health and safety claims and property damage claims, such as failure to comply with environmental
regulations. These types of claims could also be made against our ethanol business based upon the acts or omissions of other persons.
Serious claims could have a material negative impact on our results of operations, financial position and future cash flows.
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 were 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 above actions led to reduced demand for ethanol. Although most restrictions have been lifted, if in the future the virus continues
to mutate or other viruses surface, it 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, largely due to the impact of the pandemic.
Our business is not diversified.
Our financial results depend heavily on our ability
to operate our ethanol plants profitably. Our lack of diversification could have a material negative impact on our results of operations,
financial position and future cash flows should our ethanol plants operate unprofitably.
We may not be able to meet commitments to produce
and sell ethanol.
We may, at times, sell our products with forward
contracts. If we are unable to produce the products due to economic conditions, business interruption, or other factors, we may incur
additional costs or have to obtain commodities at unfavorable prices to meet our contractual commitments. This could have a material adverse
effect on our results of operations.
We may not be able to meet commitments to purchase
commodities.
We may, at times, purchase certain commodities
with forward contracts without a corresponding quantity of ethanol sold via forward contracts at known prices. Should ethanol and by-product
prices decline to levels that would lead to significant unprofitable results of operations, we may incur additional costs and/or losses
to meet our contractual commitments. This could have a material adverse effect on our results of operations.
Our revenue from the sale of distillers grains
depends upon its continued market acceptance as an animal feed.
Distillers grains is a by-product from the fermentation