Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various market risks, including
changes in commodity prices, as discussed below. Market risk is the potential loss arising from adverse changes in market rates and prices.
In the ordinary course of business, we may enter into various types of transactions involving financial instruments to manage and reduce
the impact of changes in commodity prices. We do not have material exposure to interest rate risk. We do not expect to have any exposure
to foreign currency risk as we conduct all of our transactions in U.S. dollars.
We produce and distribute specialty alcohol, fuel-grade
ethanol and essential ingredients. Our business is sensitive to changes in the prices of ethanol and corn. In the ordinary course of business,
we may enter into various types of transactions involving financial instruments to manage and reduce the impact of changes in ethanol
and corn prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
We are subject to market risk with respect to ethanol
and corn pricing. Ethanol prices are sensitive to global and domestic ethanol supply; crude-oil supply and demand; crude-oil refining
capacity; carbon intensity; government regulation; and consumer demand for alternative fuels. Our ethanol sales are priced using contracts
that are either based on a fixed price or an indexed price tied to a specific market, such as Chicago Ethanol (Platts) or the Oil Price
Information Service. Under these fixed-priced arrangements, we are exposed to risk of a decrease in the market price of ethanol between
the time the price is fixed and the time the alcohol is sold.
We satisfy our physical corn needs, the principal
raw material used to produce alcohol and essential ingredients, based on purchases from our corn vendors. Generally, we determine the
purchase price of our corn at or near the time we begin to grind. Additionally, we also enter into volume contracts with our vendors to
fix the purchase price. As such, we are also subject to market risk with respect to the price of corn. The price of corn is subject to
wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect
to agriculture and international trade and global supply and demand. Under the fixed price arrangements, we assume the risk of a decrease
in the market price of corn between the time the price is fixed and the time the corn is utilized.
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Essential ingredients are sensitive to various
demand factors such as numbers of livestock on feed, prices for feed alternatives and supply factors, primarily production of ethanol
co-products by ethanol plants and other sources.
As noted above, we may attempt to reduce the market
risk associated with fluctuations in the price of ethanol or corn by employing a variety of risk management and hedging strategies. Strategies
include the use of derivative financial instruments such as futures and options executed on the CME and/or the New York Mercantile Exchange,
as well as the daily management of physical corn.
These derivatives are not designated for special
hedge accounting treatment, and as such, the changes in the fair values of these contracts are recorded on the balance sheet and recognized
immediately in cost of goods sold. We recognized net gains of $11.0 million, net losses of $8.0 million and net gains of $19.3 million
related to the change in the fair values of these contracts for the years ended December 31, 2024, 2023 and 2022, respectively.
We prepared a sensitivity analysis as of December
31, 2024 to estimate our exposure to ethanol and corn. Market risk related to these factors was estimated as the potential change in pre-tax
income resulting from a hypothetical 10% adverse change in the prices of our expected ethanol and corn volumes. The analysis uses average
CME prices for the year and does not factor in future contracted volumes. The results of this analysis for the year ended December 31,
2024, which may differ materially from actual results, are as follows (in millions):
Commodity
Volume
Unit of Measure
Approximate
Adverse Change to
Pre-Tax Income
Ethanol
294.5
Gallons
$ 31.6
Corn
66.5
Bushels
$ 28.2
Item 8. Financial Statements and Supplementary Data.
Reference is made to the financial statements,
which begin at page F-1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.