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, 2024
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, 2023, the
aggregate market value of the registrant’s outstanding Common Stock held by non-affiliates of the registrant (for purposes of this
calculation, 2,222,857 shares beneficially owned by directors and executive officers of the registrant were treated as being held by affiliates
of the registrant), was $565,698,474.
There were 17,503,745 shares of the registrant’s
Common Stock outstanding as of March 28, 2024.
Documents Incorporated by Reference
Portions of REX American Resources Corporation’s
definitive Proxy Statement for its Annual Meeting of Shareholders on June 11, 2024 are incorporated by reference into Part III of this
Form 10-K.
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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, distillers corn oil, gasoline and natural gas, commodity market
risk, ethanol plants operating efficiently and according to forecasts and projections, logistical interruptions, success in permitting
and developing the planned carbon sequestration facility near the One Earth Energy ethanol plant, 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 2023” means the period February 1, 2023 to January 31, 2024.
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
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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 $60.9 million in fiscal 2023 compared to approximately $27.7 million in fiscal 2022. Our ethanol business had increased
profits in fiscal 2023 compared to fiscal 2022 as a result of higher crush spreads in fiscal 2023. 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 $4.40 in January 2024 to a high of $6.85 in February 2023. S&P Global Platts ethanol pricing
per gallon ranged from a low of $1.52 in January 2024 to a high of $2.67 in June 2023.
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, 2024. The following table
is a summary of our ethanol entity ownership interests at January 31, 2024:
Entity Location REX's Current Ownership Interest
One Earth Energy, LLC Gibson City, IL 75.8%
NuGen Energy, LLC Marion, SD 99.7%
The three entities own a total of six ethanol
production facilities, which in aggregate shipped approximately 716 million gallons of ethanol over the twelve-month period ended January
31, 2024. REX’s effective ownership of gallons shipped, for the twelve-month period ended January 31, 2024, by the ethanol production
facilities in which we have ownership interests was approximately 290 million gallons.
Our ethanol operations are highly dependent on
commodity prices, especially prices for corn, ethanol, distillers grains, distillers 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 can impact ethanol and distillers grains prices), at
times ethanol and distillers grains prices may not follow movements in corn prices and, in an environment of higher corn prices or lower
ethanol or distillers grains prices, reduce the overall margin structure at the plants. As a result, at times, we may operate our plants
at negative or minimally positive operating margins.
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We expect our ethanol plants to produce approximately
2.9 gallons of denatured ethanol for each bushel of corn processed in the production cycle. We refer to the actual gallons of denatured
ethanol produced per bushel of corn processed as the realized yield. We refer to the difference between the price per gallon of ethanol
and the price per bushel of corn (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 corn and natural gas purchase contracts, forward ethanol, distillers grains and distillers 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 corn 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 ethanol 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.
One
Earth Sequestration, LLC, a wholly owned subsidiary of One Earth Energy, LLC, is in the developmental 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 is the geological formation that is 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. In October 2022, we applied for a Class VI injection well permit for three wells with the
U.S. Environmental Protection Agency (“EPA”). In addition, we have begun construction of a facility to capture,
dehydrate, and compress carbon dioxide from the One Earth Energy ethanol plant to a state suitable for sequestration. We expect to
complete construction by July 31, 2024, at which time testing of the facility could commence, upon completion of other
infrastructure. In October 2023, we submitted an application with the Illinois Commerce Commission to build a short pipeline to
deliver carbon dioxide from the ethanol plant to the sequestration site. We continue to pursue obtaining a county special-use zoning
permit. Although we have made meaningful progress and significant investments in this project, we continue to complete required
documentation for various government agencies and obtain permits and other approvals with no assurances of ultimate success.
We also intend to concurrently expand the One
Earth ethanol plant. We recently received a permit to increase production from 150 million gallons of ethanol per year to 175 million
gallons of ethanol per year. Once we achieve that level of production, planned for the first quarter of 2025, we intend to apply for a
200 million gallon per year permit from the EPA. Finally, we continue to work to identify ways to reduce our carbon intensity (“CI”)
score at the One Earth plant with the intention of maximizing tax credits available under the Inflation Reduction Act. The Inflation Reduction
Act created a new Clean Fuel Production Credit, available for calendar years 2025 – 2027, which established a credit of approximately
$0.02 per ethanol gallon per CI
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point reduction below a 50 CI score threshold
to incentivize further increases in plant efficiencies within the industry.
We expect the total cost of these projects
to be approximately $165 million to $175 million, which we currently plan to pay from our available
cash. As of January 31, 2024, we had spent $25.8 million since inception and were contractually committed to spend an additional
$22.6 million toward the carbon sequestration project. If the carbon sequestration project is successful, we believe we would
qualify for tax credits under section 45Q of the Internal Revenue Code (“45Q”), based on tons of carbon sequestered, and
section 45Z of the Internal Revenue Code (“45Z”), based on gallons
of ethanol produced, as outlined in the Inflation Reduction Act. As of January 31, 2024, we
had spent $12.8 million since inception and were contractually committed to spend an additional $12.3 million toward plant capacity
expansion and ongoing efforts to reduce our CI scoring.
NuGen Energy, LLC, our majority owned ethanol plant in Marion, South Dakota,
signed an agreement to be part of Summit Carbon Solutions’ carbon capture and storage pipeline. Should Summit Carbon Solutions be
able to obtain all necessary permits and approvals, the agreement would allow NuGen to share in the economic benefits of tax credits through
the sale of the carbon dioxide output of its ethanol production facility for sequestration, as well as reduce its net carbon emissions.
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 15.6 billion gallons of ethanol in 2023, compared to 15.4 billion gallons in
2022. Approximately 1.4 billion gallons were estimated to have been exported from the United States in 2023. According to the RFA, the
United States ethanol industry consists of 198 plants in 24 states with an annual capacity of approximately 18.0 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 set conventional renewable fuel volumes
of 15.0 billion gallons for 2023 through 2025. Additionally, in 2023, the EPA restored 250 million gallons previously waived.
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,
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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 to how the EPA has handled the small refinery waivers, including on November 22, 2023, a ruling by the Fifth U.S. Circuit
Court of Appeals (the “Court”) against the EPA on six SREs the EPA had previously denied. The Court remanded those six petitions
back to the EPA and each refinery will continue to operate under temporary SREs granted to them by the Court.
Ethanol Production
The plants in
which we have invested 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 distillers corn oil produced
at our facilities. Distillers 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. The EPA issued emergency waivers to allow the sale of E-15 for the
summer months in both 2022 and 2023. Eight Midwest states (Illinois, Iowa, Minnesota, Missouri, Nebraska, Ohio, South Dakota, and Wisconsin)
petitioned the EPA to allow year-round sales of E-15 in their states. The EPA has approved this request beginning in 2025.
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.
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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%.
The federal production tax credits received through
ownership of this facility remain under IRS audit.
Facilities
As of our fiscal year end, our consolidated ethanol
entities owned a combined 1,477 acres of land and two facilities that shipped a combined quantity of approximately 286 million gallons
of ethanol in fiscal year 2023. 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, discretionary stock award programs, training initiatives, and growth opportunities within
our Company. At January 31, 2024, we had 117 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 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.
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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 2023 and 2022, the industry produced approximately 15.6 and 15.4 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, distillers grains, distillers
corn oil and gasoline, and availability of corn. 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.
The gross margin at our ethanol
plants depends principally on the spread between ethanol, distillers grains, distillers corn oil, 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 returns on ethanol
investments are highly sensitive to corn 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
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and foreign economic, market
and regulatory factors, including, but not limited to, the impacts from the Russian-Ukraine conflict as well as other conflicts and political
unrest, both foreign and domestic. 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 impacted 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.
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 distillers 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 distillers 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, export market, 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.
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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.
Pricing of distillers corn oil is primarily driven
by the demand from renewable diesel, biodiesel, and to some extent, sustainable aviation fuel markets. Distillers corn oil is marketed
as a low-carbon feedstock to be used in these markets which may see expanded demand due to the extended blending tax credit, credits included
in the Inflation Reduction Act and growing Low Carbon Fuel Standard (“LCFS”) markets, resulting in an impact to distillers
corn oil demand. With a lower CI score, distillers corn oil may see improved pricing compared to heating oil and soybean oil, which it
has traditionally tracked closely in price. Alternatively, other feedstocks such as cooking oil and animal fats, with lower CI scoring,
could be preferred over distillers corn oil. A decrease in the price of or demand for distillers corn oil could negatively impact our
results of operations.
Inflation could impact the
cost and/or availability of material, labor and other input, which could adversely affect our operations.
We have experienced inflationary impacts on key
production inputs, labor costs consisting of both wages and other labor-related costs, services, equipment and other inputs. These inflationary
pressures could continue or worsen in future periods and may be beyond our control. We may not be able to pass these increased costs along
to our customers through the products we sell. As a result, inflation and higher prices could negatively impact 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 distillers corn oil to decrease.
According to the RFA, domestic
ethanol production capacity is approximately 18.0 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 set conventional renewable fuel volumes of 15.0 billion gallons for 2023 through 2025. In addition, for 2023
they restored 250 million gallons previously waived. 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.
A decrease in demand for ethanol
may result in excess capacity, 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.
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In addition, because ethanol
production produces distillers grains and distillers corn oil as by-products, increased ethanol production will also lead to increased
supplies of distillers grains and distillers corn oil. An increase in the supply of distillers grains and distillers corn oil, without
corresponding increases in demand, could lead to lower prices or an inability to sell our ethanol plants’ distillers grains and
distillers corn oil production. A decline in the price of distillers grains or distillers corn oil could have a material adverse effect
on the results of our business, financial condition, and results of 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 an estimated 1.4 billion
gallons of ethanol in 2023, up from approximately 1.3 and approximately 1.2 billion gallons in 2022 and 2021, respectively. In 2023 and
2022, an estimated 10.8 and 11.4 million metric tons, respectively, of distillers grains were exported, which represented approximately
34% of U.S production each year. 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 hybrid and electric vehicles. Numerous automobile manufacturers have announced plans to phase
out internal combustion engine production by the mid-2030s. 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
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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. 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 and start-up 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 significant 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 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.
Carbon capture and sequestration projects are
subject to federal, state, and local regulations.
In addition to our planned carbon sequestration
facility near our One Earth Energy ethanol plant, we have signed an agreement to deliver our carbon from the NuGen Energy facility to
an outside party. These projects may not result in any realized benefit due to delays or suspended operations. Investments being made
in these projects are based on regulatory guidelines, such as modeling for CI reductions, that may be adjusted outside of our control
and could deviate from our current strategy. Federal guidelines within the IRA could be changed to no longer include corn-based ethanol
from being eligible for certain tax incentives. Delays in the issuance or regulations or the elimination of clean fuel and other incentives
at the federal, state or local level could adversely affect our business. New legislation limiting our ability to sequester
carbon could be adopted at the federal, state or local levels.
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.
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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 set conventional renewable fuel volumes
of 15.0 billion gallons for 2023 through 2025 Additionally, for 2023, the EPA restored 250 million gallons previously waived.
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. In recent years, the EPA had
largely denied small refiner waivers. However, on November 22, 2023, the Fifth U.S. Circuit Court of Appeals (the “Court”)
ruled against the EPA on six SREs the EPA had previously denied. The Court remanded those six petitions back to the EPA and each refinery
will continue to operate under temporary SREs granted to them by the Court. These and further SREs could lead to decreased RIN values
and ethanol pricing.
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 lowered 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.
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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, such as on the export
market, 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 discharge, 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
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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 at full capacity or 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.