Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM
3. 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.
- 27 -
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 an increase 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 are exposed to
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 Chicago Mercantile
Exchange 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 $8.4 million and $1.8 million related to the changes in the fair values
of these contracts for the three months ended March 31, 2026 and 2025, respectively.
We prepared a sensitivity analysis
as of March 31, 2026 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 Chicago Mercantile Exchange prices for the year and does not factor in future contracted volumes. The results of
this analysis for the three months ended March 31, 2026, 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
62.9
Gallons
$
(6.8
)
Corn
14.1
Bushels
$
(6.2
)
- 28 -
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.