Item 1. Business
Item 1. Business.
Business Overview
We are a leading producer and marketer of specialty
alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States.
We operate five alcohol production facilities.
Three of our production facilities are located in the Midwestern state of Illinois and two of our facilities are located in the Western
states of Oregon and Idaho. We have an annual alcohol production capacity of 350 million gallons. We market all of the alcohols produced
at our facilities as well as fuel-grade ethanol produced by third parties. In 2021, we marketed approximately 480 million gallons combined
of our own alcohols as well as fuel-grade ethanol produced by third parties, and over 1.2 million tons of essential ingredients on a
dry matter basis. Through our recent acquisition of Eagle Alcohol Company LLC, or Eagle Alcohol, we now specialize in break bulk distribution
of specialty alcohols.
We report our financial and operating performance in three segments:
(1) marketing and distribution, which includes marketing and merchant trading for company-produced alcohols and essential ingredients
on an aggregated basis, and third party fuel-grade ethanol, (2) Pekin production, which includes the production and sale of alcohols and
essential ingredients produced at our Pekin, Illinois campus, or Pekin Campus, and (3) Other production, which includes the production
and sale of renewable fuel and essential ingredients produced at all of our other production facilities on an aggregated basis, none of
which are individually so significant as to be considered a reportable segment.
Our mission is to expand our business as a leading
producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our
specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential
ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and
economies of scale and by capturing a greater portion of the value stream.
Production Segments
We produce specialty alcohols, renewable fuel and essential ingredients,
focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable
Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals,
hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic
beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and
distillers grains used in commercial animal feed and pet foods. Our Renewable Fuels products include fuel-grade ethanol and distillers
corn oil used as a feedstock for renewable diesel fuel.
We produce our alcohols and essential ingredients
at our production facilities described below. Our production facilities located in the Midwest are in the heart of the Corn Belt, benefit
from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international
markets via truck, rail or barge. Our production facilities located on the West Coast are near their respective fuel and feed customers,
offering significant timing, transportation cost and logistical advantages.
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We restarted our Magic Valley facility in November 2021 and we are
now operating all of our production facilities. As market conditions change, we may increase, decrease or idle production at one or more
operating facilities or resume operations at any idled facility.
Annual Production Capacity
(estimated, in gallons)
Production Facility
Location
Fuel-Grade Ethanol
Specialty Alcohol
Pekin Campus
Pekin, IL
110,000,000
140,000,000
Magic Valley
Burley, ID
60,000,000
—
Columbia
Boardman, OR
40,000,000
—
Marketing and Distribution Segment
We market all of the alcohols and essential ingredients
we produce at our facilities. We also market fuel-grade ethanol produced by third parties. Beginning in January 2022, we now break bulk
and distribute specialty alcohols from our own production as well as from third-party producers.
We have extensive and long-standing customer relationships,
both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors
of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of
personal health/consumer health and personal care hygiene products, and global trading firms.
Our renewable fuel customers are located throughout the Western and
Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our
customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little
effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities.
We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol producers. We arrange for transportation, storage
and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western
United States as well as in the Midwest from a variety of sources.
We market our essential ingredient feed products
to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as
a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market
essential ingredients from other producers.
See “Note 4 – Segments” to our
Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments.
Company History
We are a Delaware corporation formed in February
2005. Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO”. Our Internet website address is http://www.altoingredients.com.
Information contained on our website is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission
and other Securities and Exchange Commission filings are available free of charge through our website as soon as reasonably practicable
after the reports are electronically filed with, or furnished to, the Securities and Exchange Commission.
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Business Strategy
Our goal is to expand our business as a leading
producer and marketer of specialty alcohols and essential ingredients. The key elements of our business and growth strategy to achieve
this objective include:
● Focus on our customer
relationships. We have repositioned our business to focus on specialty alcohols and essential
ingredients. As a result, our business is service-oriented and focused on specialty products
compared to a price-oriented business focused on commodity products. We strive to make our
business ever more customer-centric to enable our premium services to support premium prices
and new differentiated and higher-margin products.
● Increase
our break bulk capabilities. Through our acquisition of Eagle Alcohol, we plan
to further diversify our business to focus on break bulk distribution of specialty alcohols.
With the specialty alcohols we produce and purchase from other suppliers, we now can store,
denature, package and resell alcohol in smaller sizes, including tank trucks, totes and drums,
that garner a premium price to bulk specialty alcohols. We deliver to customers in the beverage,
food, pharmaceutical and related-process industries using our own trucking fleet and common
carriers.
● Expand
product offerings. We are pursuing initiatives to broaden our product offerings to appeal
to a wider range of customers and uses in our key markets. For example, we have secured ISO
9001, ICH Q7 and EXCiPACT certifications at all of our Pekin Campus production facilities. These certifications appeal to customers with stringent
quality demands and enable us to offer alcohol certified for use as an active pharmaceutical
ingredient, or API, and as an excipient—an inactive component of a drug or medication,
such as solvents, carriers or tinctures—in the pharmaceutical industry. We are reviewing
additional certifications and product positioning within our key markets to expand the range
of customers we serve and the uses our products support.
● Implement new equipment and technologies. We are evaluating and plan to implement new equipment and technologies to increase
our production yields, improve our operating efficiencies and reliability, reduce our overall carbon footprint, diversify our products
and revenues, and increase our profitability as financial resources and market conditions justify these investments.
● Evaluate
and pursue strategic opportunities . We are examining opportunities to expand our business
such as joint ventures, strategic partnerships, synergistic acquisitions and other opportunities.
We intend to pursue these opportunities as financial resources and business prospects make
these opportunities desirable.
Competitive Strengths
We are the largest producer of specialty alcohols
in the United States. We believe that our competitive strengths include:
● Our
customer and supplier relationships . We have extensive and long-standing close customer
and supplier relationships, both domestic and international, for our specialty alcohols and
essential ingredients. We have an excellent reputation for developing specialty alcohols
under stringent quality control standards, particularly at our Pekin Campus. Our quality
management systems are supported by ISO 9001, ICH Q7 and EXCiPACT certifications which are
viewed by our customers as important attestations of our quality control standards.
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● Barriers
to entry . Our production facilities use specialized equipment, technologies and processes
to achieve stringent quality controls, higher yields and efficient
production of alcohols and essential ingredients. Our specialized equipment, technologies
and processes, together with our quality management certifications, strict regulatory requirements,
and close customer and supplier relationships create significant barriers to entry to new
market participants.
● Our
experienced management . Our senior management team has a proven track record with significant
operational and financial expertise and many years of experience in the alcohol production
industry. Our senior executives have successfully navigated a wide variety of business and
industry-specific challenges and deeply understand the business of successfully producing
and marketing specialty alcohols and essential ingredients.
● The
strategic location of our Midwest production facilities . We operate three distinct but
integrated production facilities at our Pekin Campus in the Midwest. We are able to participate
from that location in the largest regional specialty alcohol market in the United States
as well as international markets. In addition:
● Our
Midwest location enhances our overall hedging opportunities with a greater correlation to
the highly-liquid physical and paper markets in Chicago.
● Our
Midwest location provides excellent logistical access via rail, truck and barge. In particular,
barge access via the Illinois River to the Mississippi River enables us to efficiently bring
our products to international markets.
● The
relatively unique wet milling process at one of our production facilities at our Pekin Campus
allows us to extract the highest use and value from each component of the corn kernel. As
a result, the wet milling process generates a higher level of cost recovery from corn than
that produced at a dry mill.
● Our
Midwest location allows us deep market insight and engagement in major fuel-grade ethanol
and feed markets, thereby improving pricing opportunities.
We believe that these competitive strengths will
help us attain our goal of expanding our business as a leading producer and marketer of specialty alcohols and essential ingredients.
Overview of Our Key Markets and Market Opportunity
We produce specialty alcohols, fuel-grade ethanol
and essential ingredients, focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ;
and Renewable Fuels .
Health, Home & Beauty
Our products for the health, home and beauty markets
include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. We offer a variety
of specialty alcohols for the health, home and beauty markets, depending on usage and regulatory requirements, including API-grade, United
States Pharmacopeia, or USP, -grade ethyl alcohols, and industrial-grade ethyl alcohol.
In 2020, we expanded our range of available product
offerings within the health, home and beauty markets through quality management systems certifications. We have ISO 9001, ICH Q7 and EXCiPACT certifications at each of our
Pekin Campus production facilities, all of which are viewed as important attestations of quality control standards. In particular, our ICH Q7 certification qualifies our specialty alcohols for use as an API, and our EXCiPACT certification
qualifies our specialty alcohols for use as an excipient in the pharmaceutical industry. These certifications enable us to offer products
to a wider group of customers and generally at more profitable margins.
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Food & Beverage
Our products for the food and beverage market
include specialty alcohols used in alcoholic beverages, flavor extracts and vinegar as well as corn germ used for corn oils and carbon
dioxide, or CO 2 , used for beverage carbonation and dry ice. The principal specialty alcohol we offer for alcoholic beverages
and vinegar is our grain neutral spirits, or GNS, alcohol.
We believe the key drivers in the food and beverage
market include consumer preferences for the social currency of brand authenticity and heritage; consumers seeking unique and personalized
experiences; younger adults drawn to the caché of luxury brands, including super-premium spirits; improved consumer access to
spirits products; the growth of craft distillers; and the ability to meet wide-ranging consumer preferences through a broad diversity
of spirits categories and cocktails.
Essential Ingredients
Our essential ingredients products include dried
yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods. The raw
materials for our essential ingredients products are generated as co-products from our production of alcohols. These co-products are
further manufactured, altered and refined into our essential ingredients products, including for special customer applications.
Many of our essential ingredients are used in
a variety of food products to affect their nutrition, including protein and fat content, as well as other product attributes such as
taste, texture, palatability and stability. Our high quality and high purity manufacturing enable our customers to use some of our essential
ingredients in human foods while others are used in pet foods and animal feed. See “—Overview of Distillers Grains Market”.
We expect the essential ingredients market to
grow significantly due to global demand for higher-grade protein feed, such as feed used in fisheries and other applications.
Renewable Fuels
Our renewable fuels products include fuel-grade
ethanol used as transportation fuel and distillers corn oil used as a biodiesel feedstock. Our renewable fuels business is supported
by our own production of fuel-grade ethanol as well as fuel-grade ethanol produced by third parties.
Renewable fuels, primarily fuel-grade ethanol,
are used for a variety of purposes, including as octane enhancers for premium gasoline and to enable refiners to produce greater quantities
of lower octane blend stock; for fuel blending to extend fuel supplies and reduce reliance on crude oil and refined products; and to
comply with a variety of governmental programs, in particular, the national Renewable Fuel Standard, or RFS, which was enacted to promote
alternatives to fossil fuels. Under the RFS, the mandated use of all renewable fuels rises incrementally and peaks at 36.0 billion gallons
by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. The RFS allows the Environmental Protection
Agency, or EPA, to adjust the annual requirement based on certain facts and circumstances. See “—Governmental Regulation”.
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According to the Renewable Fuels Association, the domestic fuel-grade
ethanol industry produced 15.0 billion gallons of ethanol in 2021, up from 13.8 billion gallons in 2020. According to the United States
Department of Energy, total annual gasoline consumption in the United States is approximately 123.5 billion gallons and total annual fuel-grade
ethanol consumption represented approximately 11% of this amount in 2020. We anticipate that increased transportation and economic activity
as the coronavirus pandemic subsides together with continued limited opportunities for gasoline refinery expansions and the growing importance
of reducing CO 2 emissions through the use of renewable fuels will generate additional growth in the demand for fuel-grade ethanol.
Overview of Alcohol Production Process
Alcohol production from starch- or sugar-based
feedstock is a highly-efficient process. Modern alcohol production requires large amounts of corn, or other high-starch grains, and water
as well as chemicals, enzymes and yeast, and denaturants including unleaded gasoline or liquid natural gas, in addition to natural gas
and electricity.
Dry Milling Process
In the dry milling process, corn or other high-starch
grain is first ground into meal, then slurried with water to form a mash. Enzymes are added to the mash to convert the starch into dextrose,
a simple sugar. Ammonia is added for acidic (pH) control and as a nutrient for the yeast. The mash is processed through a high temperature
cooking procedure, which reduces bacteria levels prior to fermentation. The mash is then cooled and transferred to fermenters, where
yeast is added and the conversion of sugar to alcohol and CO 2 begins.
After fermentation, the resulting “beer”
is transferred to distillation, where the alcohol is separated from the residual “stillage”. The resulting alcohol is concentrated
to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing 100% alcohol levels,
in a molecular sieve system. For fuel-grade ethanol, the resulting anhydrous alcohol is then blended with approximately 2.5% denaturant,
which is usually gasoline, and is then ready for shipment to renewable fuels markets.
The residual stillage is separated into a coarse
grain portion and a liquid portion through a centrifugation process. The soluble liquid portion is concentrated to about 40% dissolved
solids by an evaporation process. This intermediate state is called condensed distillers solubles, or syrup. The coarse grain and syrup
portions are then mixed to produce wet distillers grains, or WDG, or can be mixed and dried to produce dried distillers grains with solubles,
or DDGS. Both WDG and DDGS are high-protein animal feed products.
Wet Milling Process
In the wet milling process, corn or other high-starch
grain is first soaked or “steeped” in water for 24 – 48 hours to separate the grain into its many components. After
steeping, the grain slurry is processed first to separate the grain germ, from which the grain oil can be further separated. The remaining
fiber, gluten and starch components are further separated and sold.
The steeping liquor is concentrated in an evaporator.
The concentrated product, called heavy steep water, is co-dried with the fiber component and is then sold as gluten feed. The gluten
component is filtered and dried to produce gluten meal.
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The starch and any remaining water from the mash
is then processed into alcohol or dried and processed into corn syrup. The fermentation process for alcohol at this stage is similar
to the dry milling process.
Overview of Distillers Grains Market
Distillers grains are produced as a co-product
of alcohol production and are valuable components of feed rations primarily to dairies and beef cattle markets, both nationally and internationally.
Our plants produce both WDG and DDGS. WDG is sold to customers proximate to the plants and DDGS is delivered by truck, rail and barge
to customers in domestic and international markets. Producing WDG also allows us to use up to one-third less process energy, thus reducing
production costs and lowering the carbon footprint of our production facilities.
Historically, the market price for distillers
grains has generally tracked the value of corn. We believe that the market price of WDG and DDGS is determined by a number of factors,
including the market value of corn, soybean meal and other competitive ingredients, the performance or value of WDG and DDGS in a particular
feed formulation and general market forces of supply and demand, including export markets for these co-products. The market price of
distillers grains is also often influenced by nutritional models that calculate the feed value of distillers grains by nutritional content,
as well as reliability of consistent supply.
Customers
We market and sell through our wholly-owned subsidiary, Kinergy Marketing
LLC, or Kinergy, all of the alcohols we produce. Kinergy also markets fuel-grade ethanol produced by third parties. We market and sell
through our wholly-owned subsidiary, Alto Nutrients, LLC, all of the essential ingredients we produce. We also now sell break bulk quantities
through Eagle Alcohol to customers in the beverage, food, pharma and related-process industries.
We have extensive and long-standing customer relationships,
both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors
of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of
personal health/consumer health and personal care hygiene products, and global trading firms.
Our renewable fuel customers
are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who
blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the
logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol
volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party
fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol
producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through
our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of
sources.
We market our essential ingredient feed products
to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as
a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market
essential ingredients from other producers.
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Our Pekin Campus production segment generated
$498.2 million, $330.4 million and $343.6 million in net sales for the years ended December 31, 2021, 2020 and 2019, respectively, from
the sale of alcohols. Our Pekin Campus production segment generated $189.5 million, $130.3 million and $139.0 million in net sales for
the years ended December 31, 2021, 2020 and 2019, respectively, from the sale of essential ingredients.
During 2021, 2020 and 2019, our Pekin Campus production
segment sold an aggregate of approximately 213.0 million, 193.9 million and 218.5 million gallons of alcohols and 875,000, 829,000 and
913,000 tons of essential ingredients, respectively, on a dry matter basis.
Our other production segment generated $107.9
million, $137.7 million and $455.3 million in net sales for the years ended December 31, 2021, 2020 and 2019, respectively, from the
sale of alcohols. Our other production segment generated $31.1 million, $40.9 million and $130.0 million in net sales for the years ended
December 31, 2021, 2020 and 2019, respectively, from the sale of essential ingredients.
During 2021, 2020 and 2019, our other production
segment sold an aggregate of approximately 37.6 million, 78.0 million and 272.5 million gallons of alcohols and 361,000, 619,000 and
1,908,000 tons of essential ingredients, respectively, on a dry matter basis.
Our marketing segment generated $381.2 million,
$257.7 million and $356.9 million in net sales for the years ended December 31, 2021, 2020 and 2019, respectively, from the sale of all
alcohols.
During 2021, 2020 and 2019, we produced or purchased
from third parties and resold an aggregate of 479.6 million, 536.3 million and 819.4 million gallons of alcohols to approximately 99,
65 and 109 customers, respectively. For 2021, 2020 and 2019, sales to our three largest customers, Shell Trading US Company, Chevron
Products USA and Valero Energy Corporation represented an aggregate of approximately 23%, 17% and 33%, of our net sales, respectively.
For 2021, 2020 and 2019, sales to each of our other customers represented less than 10% of our net sales.
Suppliers
Production Segments
Our production operations depend upon various
raw materials suppliers, including suppliers of corn, natural gas, electricity and water. The cost of corn is the most important variable
cost associated with our alcohol production. We source corn for our plants using standard contracts, including spot purchase, forward
purchase and basis contracts. When resources are available, we seek to limit the exposure of our production operations to raw material
price fluctuations by purchasing forward a portion of our corn requirements on a fixed price basis and by purchasing corn and other raw
materials futures contracts and options.
During 2021, 2020 and 2019, purchases of corn
from our two largest suppliers represented an aggregate of approximately 14%, 25% and 41% of our total corn purchases, respectively,
for those periods. Purchases from each of our other corn suppliers represented less than 10% of total corn purchases in each of 2021,
2020 and 2019.
Marketing Segment
Our marketing operations cover alcohols and essential
ingredients we produce but also depend upon various third-party producers of fuel-grade ethanol. In addition, we provide transportation,
storage and delivery services through third-party service providers with whom we have contracted to receive fuel-grade ethanol at agreed
upon locations from our third-party suppliers and to store and/or deliver the ethanol to agreed-upon locations on behalf of our customers.
These contracts generally run from year-to-year, subject to termination by either party upon advance written notice before the end of
the then-current annual term.
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During 2021, 2020 and 2019, we purchased and resold
from third parties an aggregate of approximately 204 million, 163 million and 213 million gallons, respectively, of fuel-grade ethanol.
During 2021, 2020 and 2019, purchases of fuel-grade
ethanol from our three largest third-party suppliers represented 76%, 62% and 53%, respectively, of our total third-party ethanol purchases
for each of those periods. Purchases from each of our other third-party ethanol suppliers represented less than 10% of total third-party
ethanol purchases in each of 2021, 2020 and 2019.
Production Facilities
We operate five production facilities. Three of
our production facilities are located in the Midwestern state of Illinois and two of our facilities are located in the Western states
of Oregon and Idaho. We have a combined annual alcohol production capacity of 350 million gallons. As market conditions change, we may
increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. The tables below
provide an overview of our five production facilities.
Pekin Campus Production Facilities
Pekin
Wet Facility
Pekin
Dry Facility
Pekin
ICP Facility
Location
Pekin, IL
Pekin, IL
Pekin, IL
Operating status
Operating
Operating
Operating
Approximate maximum annual alcohol production
capacity (in millions of gallons)
100
60
90
Approximate maximum annual specialty alcohol production capacity
(in millions of gallons)
74
—
66
Production milling process
Wet
Dry
Dry
Primary energy source
Natural Gas
Natural Gas
Natural Gas
Western Production Facilities
Magic Valley
Facility
Columbia
Facility
Location
Burley, ID
Boardman, OR
Operating status
Operating*
Operating
Approximate maximum annual fuel-grade ethanol
production capacity (in millions of gallons)
60
40
Production milling process
Dry
Dry
Primary energy source
Natural Gas
Natural Gas
* Restarted operations in November 2021.
Commodity Risk Management
We employ various risk mitigation techniques.
For example, we may seek to mitigate our exposure to commodity price fluctuations by purchasing forward a portion of our corn and natural
gas requirements through fixed-price or variable-price contracts with our suppliers, as well as entering into derivative contracts for
fuel-grade ethanol, corn and natural gas. To mitigate fuel-grade ethanol inventory price risks, we may sell a portion of our production
forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks by entering into exchange-traded futures
contracts and options. Proper execution of these risk mitigation strategies can reduce the volatility of our gross profit margins.
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Specialty alcohols have relatively low price volatility
and are usually priced at significant premiums to fuel-grade ethanol. The market price of fuel-grade ethanol is volatile, however, and
subject to large fluctuations. Given the nature of our business, we cannot effectively hedge against extreme volatility or certain market
conditions. For example, fuel-grade ethanol prices, as reported by the Chicago Board of Trade, or CBOT, ranged from $1.48 to $3.75 per
gallon during 2021, from $0.81 to $1.62 per gallon during 2020 and from $1.25 to $1.70 per gallon during 2019; and corn prices, as reported
by the CBOT, ranged from $4.84 to $7.73 per bushel during 2021, from $3.03 to $4.84 per bushel during 2020 and from $3.41 to $4.55 per
bushel during 2019.
Marketing Arrangements
We market all the alcohols and essential ingredients
produced at our facilities. In addition, we have exclusive fuel-grade ethanol marketing arrangements with two third-party ethanol producers,
Calgren Renewable Fuels, LLC and Pelican Renewables, LLC, to market and sell their entire fuel-grade ethanol production volumes. Calgren
Renewable Fuels, LLC owns and operates a fuel-grade ethanol production facility in Pixley, California with annual production capacity
of 55 million gallons. Pelican Renewables, LLC, owns and operates a fuel-grade ethanol production facility in Stockton, California with
annual production capacity of 60 million gallons.
Competition
We are the largest producer of specialty alcohols
in the United States.
Other significant producers of specialty alcohols
in the United States are Archer-Daniels-Midland Company, MGP Ingredients, Inc., Grain Processing Corporation, CIE and Greenfield Global
Inc., which collectively make up a significant majority of the total installed specialty alcohol production capacity in the United States
along with many smaller producers.
The largest producers of fuel-grade ethanol in
the United States are POET, LLC, Valero Renewable Fuels Company, LLC, Archer-Daniels-Midland Company and Green Plains Inc., collectively
with approximately 36% of the total installed fuel-grade ethanol production capacity in the United States. In addition, there are many
mid-sized fuel-grade ethanol producers with several plants under ownership, smaller producers with one or two plants, and several fuel-grade
ethanol marketers that create significant competition. Overall, we believe there are over 200 fuel-grade ethanol production facilities
in the United States with a total installed production capacity of approximately 17.5 billion gallons and many brokers and marketers
with whom we compete for sales of fuel-grade ethanol and its co-products.
Our fuel-grade ethanol also competes on a global
market against production from other countries, such as Brazil, which may have lower production costs than United States producers. Lower
feedstock input costs such as sugarcane used in Brazil as compared to corn used in the Unites States may give foreign producers a competitive
advantage. In addition, fuel-grade ethanol from sugarcane feedstock qualifies as an advanced biofuel, unlike corn ethanol, allowing required
parties to economically satisfy an advanced biofuel standard. Moreover, new products and production technologies are under continuous
development, many of which, if adopted by competitors, could harm our ability to compete.
We believe that our competitive strengths include
our customer and supplier relationships, the barriers to entry to our most profitable lines of business—including our modern technologies
at our production facilities—our experienced management, and the strategic location of our Midwest production facilities. We believe
that these advantages will help us to attain our goal to expand our business as a leading producer and marketer of specialty alcohols
and essential ingredients. See “—Competitive Strengths”.
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Governmental Regulation
Our business is subject to a wide range of
federal, state and local laws and regulations directed at protecting public health and the environment, including those promulgated
by the Occupational Safety and Health Administration, or OSHA, the U.S. Food and Drug Administration, or FDA, the EPA, and numerous
state and local authorities. These laws, their underlying regulatory requirements and their potential enforcement, some of which are
described below, impact, or may impact, nearly every aspect of our operations, including our production of alcohols (including
distillation), our production of essential ingredients, our storage facilities, and our water usage, wastewater discharge, disposal of hazardous wastes and emissions, and other matters pertaining to our existing and proposed business by
imposing:
● restrictions
on our existing and proposed operations and/or the need to install enhanced or additional
controls;
● special
requirements applicable to food and drug additives;
● the
need to obtain and comply with permits and authorizations;
● liability
for exceeding applicable permit limits or legal requirements, in some cases for the remediation
of contaminated soil and groundwater at our production facilities, contiguous and adjacent
properties and other properties owned and/or operated by third parties; and
● other
specifications for the specialty alcohols and essential ingredients we produce and market.
In addition, some governmental regulations are
helpful to our production and marketing business. The fuel-grade ethanol industry in particular is supported by federal and state mandates
and environmental regulations that favor the use of fuel-grade ethanol in motor fuel blends in North America. Some of the governmental
regulations applicable to our production and marketing business are briefly described below.
Food and Drug Regulation
Our products for the Health, Home & Beauty,
Food & Beverage and some Essential Ingredients markets are subject to regulation by the FDA as well as similar state agencies. Under
the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA regulates the processing, formulation, safety, manufacture, packaging, labeling
and distribution of food ingredients, vitamins and cosmetics. Many of the FDA’s and FDCA’s rules and regulations apply directly
to us as well as indirectly through their application in our customers’ products. To be properly marketed and sold in the United
States, a relevant product must be generally recognized as safe, approved and not adulterated or misbranded under the FDCA and relevant
regulations issued under the FDCA. The FDA has broad authority to enforce the provisions of the FDCA. Failure to comply with the laws
and regulations of the FDA or similar state agencies could prevent us from selling certain of our products or subject us to liability.
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Renewable Fuels Energy Legislation
Under the RFS, the mandated use of all renewable
fuels, including fuel-grade ethanol, rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are
required from conventional, or corn-based, ethanol. Under the provisions of the Energy Independence and Security Act of 2007, the EPA
has the authority to waive the mandated RFS requirements in whole or in part. To grant a waiver, the EPA administrator must determine,
in consultation with the Secretaries of Agriculture and Energy, that there is inadequate domestic renewable fuel supply or implementation
of the requirement would severely harm the economy or environment of a state, region or the United States as a whole.
Various bills in Congress introduced from time
to time are also directed at altering existing renewable fuels energy legislation, but none has passed in recent years. Some legislative
bills are directed at halting or reversing expansion of, or even eliminating, the renewable fuel program, while other bills are directed
at bolstering the program or enacting further mandates or grants that would support the renewable fuels industry.
The EPA has allowed fuel and fuel-additive manufacturers
to introduce into commercial gasoline that contains greater than 10% fuel-grade ethanol by volume, up to 15% fuel-grade ethanol by volume,
or E15, for vehicles from model year 2001 and beyond. Commercial sale of E15 has begun in a majority of states, and the EPA has enacted
a rule allowing for year-round use of E15.
Various states including California, Oregon and
Washington, and other regions such as the Canadian province of British Columbia, have implemented low-carbon fuel standards focused on
reducing the carbon intensity of transportation fuels. Blending fuel-grade ethanol into gasoline is one of the primary means of attaining
these goals.
Additional Environmental Regulations
In addition to the governmental regulations applicable
to the alcohol production and marketing industry described above, our business is subject to additional federal, state and local environmental
regulations, including regulations established by the EPA and state regulatory agencies related to water quality and air pollution control.
We cannot predict the manner by which, or extent to which, these regulations will harm or help our business or the alcohol production
and marketing industry in general.
Human Capital Resources
As of March 11, 2022, we had approximately
417 employees, including 415 full-time employees. Our human capital resources objectives include attracting and retaining
well-qualified and highly skilled and motivated employees and executives. Our compensation program is designed to attract, retain
and motivate these personnel. We use a mix of competitive salaries and other benefits to attract and retain employees and
executives. As of March 11, 2022, approximately 45% of our employees were represented by a labor union and covered by a collective
bargaining agreement. We have never had a work stoppage or strike and we consider our relations with our employees to be good.
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