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.
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 $8.1 million, net gains of $11.0 million and
net losses of $8.0 million related to the change in the fair values of these contracts for the years ended December 31, 2025, 2024 and
2023, respectively.
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We prepared a sensitivity
analysis as of December 31, 2025 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, 2025, 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
262.1
Gallons
$ 27.4
Corn
55.4
Bushels
$ 24.3
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.