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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

o  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal quarter ended April 30, 2010

o  Transition report under Section 13 or 15(d) of the Exchange Act of 1934.

Commission file number 00051277

GRANITE FALLS ENERGY, LLC

(Name of small business issuer in its charter)

320-564-3100
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) 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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of June 1, 2010 there were 30,656 membership units outstanding.

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INDEX

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

GRANITE FALLS ENERGY, LLC

Condensed Balance Sheets

Notes to the Unaudited Condensed Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC

Condensed Statements of Operations

Notes to the Unaudited Condensed Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC

Condensed Statements of Operations

Notes to Unaudited Condensed Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC

Condensed Statements of Cash Flows

Notes to the Unaudited Condensed Financial Statements are an integral part of this Statement.

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed balance sheet as of October 31, 2009 is derived from audited financial statements. The unaudited interim condensed financial statements of Granite Falls Energy, LLC (the “Company”) reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations and cash flows. The results for the three and six month periods ended April 30, 2010 are not necessarily indicative of the results that may be expected for a full fiscal year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its annual report for the year ended October 31, 2009 filed on Form 10-K with the SEC.

Nature of Business

Granite Falls Energy, LLC (“GFE” or the “Company”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil near Granite Falls, Minnesota and sells these products throughout the continental United States. GFE’s plant has an approximate annual production capacity of 50 million gallons.

Accounting Estimates

Management uses estimates and assumptions in preparing these condensed financial statements in accordance with generally accepted accounting principles in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property, plant, and equipment, realizability of accounts receivable, valuation of derivatives and inventory, and analysis of long-lived assets impairment. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

Revenue Recognition

The Company generally sells ethanol and related products pursuant to marketing agreements.  Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable, and collectability is reasonably assured.  Title is generally assumed by the buyer at the Company’s shipping point.

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Ethanol marketing fees and commissions totaled approximately $207,000 and $177,000 for the three month periods ended April 30, 2010 and 2009, respectively. Ethanol marketing fees and commissions totaled approximately $386,000, and $326,000 for the six month periods ended April 30, 2010 and 2009, respectively.  Distillers grain marketing fees and commissions totaled approximately $36,000 and $30,000 for the three month periods ended April 30, 2010 and 2009, respectively.  Distillers grain marketing fees and commissions totaled approximately $78,000 and $70,000 for the six month periods ended April 30, 2010 and 2009, respectively.

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

Derivative Instruments

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings.  If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in the statement of operations.

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives.  Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales.” Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

2.  RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations.  The Company’s revenues are derived from the sale and distribution of ethanol, distillers grains, and corn oil to customers primarily located in the U.S.  Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market.  For the three month period ended April 30, 2010, ethanol sales averaged 85% of total revenues and corn costs averaged 65% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn.  The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.

The Company has a revenue concentration in that its revenue is generated from the sales of just three products, ethanol, distillers grains, and corn oil.

3.  INVENTORY

Inventories consist of the following:

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

The Company performs a lower of cost or market analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol.

4.  DERIVATIVE INSTRUMENTS

In order to reduce the risk caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements of corn, natural gas, and denaturant in the Company’s ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter markets. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. Gains and losses from ethanol related derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of revenue. Gains and losses from corn, natural gas, and denaturant derivative instruments, including unrealized changes in the fair value of these positions, are included in the results of operations and are classified as a component of costs of goods sold.

As of April 30, 2010, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 90,000 bushels that were entered into to hedge forecasted corn purchases through July 2010. As of April 30, 2010, the total notional amount of the Company’s outstanding natural gas derivative instruments was approximately 26,000 million British thermal units (MMBTU) that were entered into to hedge forecasted natural gas purchases through May 2010. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

The following tables provide details regarding the Company’s derivative instruments at April 30, 2010, none of which are designated as hedging instruments

In addition, as of April 30, 2010 the Company maintains approximately $28,853 of restricted cash related to margin requirements for the Company’s derivative instrument positions.

The following tables provide details regarding the Company’s derivative instruments at October 31, 2009, none of which are designated as hedging instruments

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

In addition, as of October 31, 2009 the Company maintains approximately $510,673 of restricted cash related to margin requirements for the Company’s derivative instrument positions.

The following tables provide details regarding the gains and (losses) from Company’s derivative instruments in statements of operations, none of which are designated as hedging instruments:

5.  REVOLVING LINE OF CREDIT

The Company has a Loan Agreement with a bank. Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $6,000,000 available and is secured by substantially all of the Company’s assets. The interest rate on the revolving line of credit is at 0.25 percentage points above the prime rate as reported by the Wall Street Journal, with a minimum rate of 5.0%. The interest rate on the revolving line of credit at April 30, 2010 was 5.0%, the minimum rate under the terms of the agreement. At April 30, 2010 and October 31, 2009, the Company had no outstanding balance on this line of credit. The Company is required to maintain a savings account balance with the Bank totaling 10% of the maximum amount available on the line of credit to serve as collateral on this line of credit.  At April 30, 2010 and October 31, 2009, this amount totaled $600,000, and is included in restricted cash.

The Company also has letters of credit totaling $413,853 with the bank as part of a credit requirement of Northern Natural Gas.

6.  LONG-TERM DEBT

Long-term debt consists of the following:

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

The estimated maturities of long term debt at April 30, 2010 are as follows:

EDA Loans:

On February 1, 2006, the Company signed a Loan Agreement with the City of Granite Falls, MN (“EDA Loan Agreement”) for amounts to be borrowed from several state and regional economic development authorities. The original amounts are as follows:

Amounts borrowed under the EDA Loan Agreements are secured by a second mortgage on all of the assets of the Company.  On March 24, 2010, the RLF loan was paid in full and there were no prepayment penalties assessed.

8. MEMBERS’ EQUITY

The Company has one class of membership units.   The units have no par value and have identical rights, obligations and privileges.  Income and losses are allocated to all members based upon their respective percentage of units held. As of April 30, 2010 and October 31, 2009, the Company had 30,656 membership units issued and outstanding.

In November 2009, the Company declared a cash distribution of $150 per unit or $4,598,400 for unit holders of record as of November 19, 2009. The distribution was paid on December 16, 2009.

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

9. FAIR VALUE

Various inputs are considered when determining the value financial instruments.   The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below.

·                  Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

·                  Level 2 inputs include the following:

·                  Quoted prices in active markets for similar assets or liabilities.

·                  Quoted prices in markets that are not active for identical or similar assets or liabilities.

·                  Inputs other than quoted prices that are observable for the asset or liability.

·                  Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.

·                  Level 3 inputs are unobservable inputs for the asset or liability.

The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

The fair value of the derivative instruments are based on quoted market prices in an active market.

The fair value of the derivative instruments are based on quoted market prices in an active market.

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GRANITE FALLS ENERGY, LLC

Notes to Unaudited Condensed Financial Statements

April 30, 2010

10. COMMITMENTS AND CONTINGENCIES

Construction Management and Operations Management Agreement

On August 1, 2008, the Company and Glacial Lakes Energy, LLC (“GLE”) executed a settlement agreement and mutual release related to the dispute with GLE over the termination of the Operating and Management Agreement. The Company has agreed to pay GLE a contingent amount of 2% of net income of the Company, as defined per the agreement, for each of the fiscal years ending October 31, 2008 and 2009 and 1.5% of net income of the Company, as defined per the agreement, for the fiscal year ending October 31, 2010. As of April 30, 2010 and October 31, 2009, the Company accrued approximately $49,000 and $14,000, respectively, for the contingent amounts due under this agreement.

11.  LEGAL PROCEEDINGS

From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes.  We are not currently a party to any material pending legal proceedings and we are not currently aware of any such proceedings being contemplated.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month period ended April 30, 2010, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the condensed financial statements and notes and the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009.

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements. These forward-looking statements include any statements that involve known and unknown risks and relate to future events and our expectations regarding future performance or conditions. Words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:

·                  Changes in the availability and price of corn and natural gas;

·                  Changes in our business strategy, capital improvements or development plans;

·                  Our ability to profitably operate the ethanol plant and maintain a positive spread between the selling price of our products and our raw materials costs;

·                  Results of our hedging transactions and other risk management strategies;

·                  Decreases in the market prices of ethanol and distillers grains;

·                  Ethanol supply exceeding demand; and corresponding ethanol price reductions;

·                  Changes in the environmental regulations that apply to our plant operations and changes in our ability to comply with such regulations;

·                  Changes in the availability of credit and our ability to generate sufficient liquidity to fund our operations, debt service requirements and capital expenditures;

·                  Changes in plant production capacity or technical difficulties in operating the plant;

·                  Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

·                  Lack of transport, storage and blending infrastructure preventing ethanol from reaching high demand markets;

·                  Changes in federal and/or state laws (including the elimination of any federal and/or state ethanol tax incentives);

·                  Changes and advances in ethanol production technology;

·                  Effects of mergers, consolidations or contractions in the ethanol industry;

·                  Competition from alternative fuel additives;

·                  The development of infrastructure related to the sale and distribution of ethanol;

·                  Our inelastic demand for corn, as it is the only available feedstock for our plant;

·                  Our ability to retain key employees and maintain labor relations; and

·                  Volatile commodity and financial markets.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking

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statements by these cautionary statements.

Overview

Granite Falls Energy, LLC (“Granite Falls” or the “Company”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers grains, and crude corn oil for sale. Our plant has an approximate annual production capacity of 50 million gallons, and our environmental permits allow us to produce ethanol at a rate of 49.9 million gallons of undenatured ethanol on a twelve month rolling sum basis.

Our operating results are largely driven by the prices at which we sell our ethanol, distillers grains, and crude corn oil as well as the other costs related to production. The price of ethanol has historically fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distillers grains has historically been influenced by the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future, although recent volatility in the commodities markets makes historical price relationships less reliable. Our largest costs of production are corn, natural gas, depreciation and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors and the outcome of our risk management strategies. Prices for natural gas, manufacturing chemicals and denaturant are tied directly to the overall energy sector, crude oil and unleaded gasoline.

As of the date of this report, we have 35 full time employees. Ten of these employees are involved primarily in management and administration. The remaining employees are involved primarily in plant operations. We do not currently anticipate any significant change in the number of employees at our plant.

There have been a number of recent developments in legislation that impacts the ethanol industry.  One such development concerns the federal Renewable Fuels Standard (“RFS”).  The ethanol industry is benefited by the RFS which requires that a certain amount of renewable fuels must be used in the United States each year.  In February 2010, the EPA issued new regulations governing the RFS.  These new regulations have been called RFS2.  The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions.  Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program.  RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases.  Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program.  The scientific method of calculating these greenhouse gas reductions has been a contentious issue.  Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect.  However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program.  Further, certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane.  This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market.  If this were to occur, it could reduce demand for the ethanol that we produce.

In addition to RFS2 which included greenhouse gas reduction requirements, in 2009, California passed a Low Carbon Fuels Standard (“LCFS”).  The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to RFS2.  Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly disadvantages corn based ethanol.  Management believes that these new regulations will preclude corn based ethanol from being used in California.  California represents a significant ethanol demand market.  If ethanol producers are unable to supply ethanol to California, it could significantly reduce demand for the ethanol produce.  Currently, several lawsuits have been filed challenging the California LCFS.

Ethanol production in the United States is benefited by various tax incentives.  The most significant of these tax incentives is the federal Volumetric Ethanol Excise Tax Credit (“VEETC”).  VEETC provides a volumetric ethanol excise tax credit of 45 cents per gallon of ethanol blended with gasoline.  VEETC is scheduled to expire on

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December 31, 2010.  If this tax credit is not renewed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace.  On December 31, 2009, the biodiesel blenders’ tax credit was allowed to expire.  Recently, Congress passed legislation to reinstate the biodiesel credit until December 31, 2010.  However, the bills passed by the House and Senate must be reconciled and the final bill must be signed by the President before the biodiesel blenders’ tax credit will be reinstated.  If the VEETC that benefits the ethanol industry is allowed to expire, it could negatively impact demand for ethanol and may harm our financial condition.

The Small Ethanol Producer Tax Credit (“SEPTC”) is another tax incentive allowing small ethanol producers a 10 cent per gallon federal income tax credit on up to 15 million gallons of production, annually. The credit, which is capped at $1.5 million per year per producer, is only available to ethanol producers with an annual production capacity of no more than 60 million gallons per year. The SEPTC expires December 31, 2010, along with the VEETC.  In March 2010 a bill called the Renewable Fuels Reinvestment Act of 2010 was introduced to the United States House of Representatives to extend the SEPTC and VEETC for 5 years.

Another federal policy in jeopardy is the secondary tariff on imported ethanol.  This is a 54 cent per gallon tariff on ethanol imports from certain countries.  This tariff was designed to offset the blender’s credit (“VEETC”) that is applied to ethanol regardless of its country of origin.  The secondary tariff on imported ethanol is scheduled to expire in January 2011.  However, the proposed Renewable Fuels Reinvestment Act of 2010 contains provisions extending the 54 cent per gallon tariff for five years.  If this tariff is allowed to expire, imported ethanol could have a significant negative impact on ethanol prices and our profitability.

Results of Operations for the Three Months Ended April 30, 2010 and 2009

The following table shows the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited statements of operations for the three months ended April 30, 2010 and 2009:

Revenues

Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil.

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The following table shows the sources of our revenue for the three months ended April 30, 2010.

The following table shows the sources of our revenue for the three months ended April 30, 2009:

The following table shows additional data regarding production and price levels for our primary inputs and products for the three months ended April 30, 2010 and 2009:

Revenues.

In the three month period ended April 30, 2010, ethanol sales comprised approximately 85.4% of our revenues and distillers grains sales comprised approximately 13.0% percent of our revenues, while corn oil sales comprised approximately 1.6% of our revenues. For the three month period ended April 30, 2009, ethanol sales comprised approximately 81.1% of our revenue, and distillers grains sales comprised approximately 17.7% of our revenue, without including ethanol derivatives, while corn oil sales comprised approximately 1.2% of our revenues.

Management believes that distillers grains represent a smaller proportion of our revenues during the three months ended April 30, 2010 compared to the same period of 2009 as a result of lower distillers grains prices we received during our second fiscal quarter of 2010 compared to the same period of 2009 as a result of continued distress in the livestock markets and an abundant supply of feed products.

The average ethanol sales price we received for the three month period ended April 30, 2010 was approximately 7.6% higher than our average ethanol sales price for the comparable 2009 period. Management anticipates that the price of ethanol may remain steady or increase during the third quarter of our 2010 fiscal year as a result of slowly improving worldwide economics and the expectation of increased domestic gasoline consumption as we move into the summer driving season.

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Management also anticipates that our results of operations for our 2010 fiscal year will continue to be affected by volatility in the commodity markets. If plant operating margins remain low for an extended period of time, management anticipates that this could significantly impact our liquidity, especially if our raw material costs increase. Management believes the industry will need to continue to grow demand and further develop an ethanol distribution system to facilitate additional blending of ethanol and gasoline to offset the increased supply brought to the marketplace by additional production. Going forward, we are optimistic that ethanol demand will continue to grow and ethanol distribution will continue to expand as a result of the positive blend economics that are currently available to the gasoline refiners and blenders.

The price we received for our dried distillers grains decreased during the three month period ended April 30, 2010 compared to the same period of 2009.  We anticipate that the market price of our dried distillers grains will continue to be volatile as a result of changes in the price of corn and competing animal feed substitutes such as soybean meal as well as volatility in distillers grains supplies related to changes in ethanol production. Economic distress in the livestock industry has resulted in decreased demand for animal feed, including distillers grains, which may result in a weaker distillers grain market during our third quarter of the 2010 fiscal year.

For the quarter ended April 30, 2010 we independently marketed our corn oil as a biodiesel feedstock and as a supplement for animal feed. Corn oil sales accounted for approximately 1.6% of our revenues during our quarter ended April 30, 2010.  On April 29, 2010, we executed a Corn Oil Marketing Agreement with Renewable Products Marketing Group, Inc. (“RPMG”).  Pursuant to the agreement, RPMG will market all of the corn oil we expect to produce.  The initial term of the agreement is for one year.  The agreement automatically renews for additional one year terms unless either party gives 180 days notice that the agreement will not be renewed.  We have the option to cancel the agreement within 90 days of the effective date.  We agreed to pay RPMG a commission based on each pound of our corn oil that is sold by RPMG.

In June 2010 we signed an amendment to our Distillers Grain Marketing Agreement with CHS.  Prior to signing the amendment, we independently marketed a portion of our distillers grains to local markets.  On June 1, 2010 CHS began marketing all our distillers grains except for certain distillers grains that are sold through Montevideo Intermodal.   We expect that under the new agreement CHS will be marketing approximately 95% of our distillers grains on a regular basis, and the balance will be sold though Montevideo Intermodal.

We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. As ethanol prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our revenues due to the timing of the changes in value of the derivative instruments relative to the price and volume of the ethanol being hedged.

Cost of Sales

Our costs of goods sold as a percentage of revenues were approximately 92.2% for the three month period ended April 30, 2010 compared to approximately 102.6% for the same period of 2009.  Our two largest costs of production are corn (65.2% of cost of goods sold for our three months ended April 30, 2010) and natural gas (9.7% of cost of goods sold for our three months ended April 30, 2010).  Our cost of goods sold decreased  to $20,508,000 for the three months ended April 30, 2010 from $22,090,000 in the three months ended April 30, 2009.  Our per bushel corn costs decreased by approximately 5.8% for the three months ended April 30, 2010 as compared to the same period for our 2009 fiscal year.  Our decreased cost of corn was the primary factor driving down our costs of goods sold.

For the three month period ended April 30, 2010, we experienced a decrease of approximately 4.0% per MMBtu in natural gas costs compared to the same period of 2009.  We attribute this significant decrease in natural gas costs to the excess supply in the natural gas market.  We expect the market price for natural gas to remain low in the near term as we continue to endure the worldwide economic slowdown and the resulting decreased energy demand.

We occasionally engage in hedging activities with respect to corn, natural gas or denaturant. We recognize the gains or losses that result from the changes in the value of our derivative instruments in cost of goods sold as the changes

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occur. As corn, natural gas and denaturant prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Operating Expense

Our operating expenses as a percentage of revenues were lower for the three month period ended April 30, 2010 than they were for the same period ended April 30, 2009. These percentages were approximately 2.1%  and 2.4% for the three months ended April 30, 2010 and 2009, respectively. This decrease in operating expenses is primarily due to increased operating efficiencies and a concerted effort by management and staff to lower our operating expenses.  We expect that going forward our operating expenses will remain relatively steady.

Operating Income (Loss)

Our income from operations for the three months ended April 30, 2010 was approximately 5.8% of our revenues compared to a loss of approximately 5.0% of our revenues for the three months ended April 30, 2009. For the three months ended April 30, 2010, we reported operating income of approximately $1,267,000 and for the three months ended April 30, 2009, we had an operating loss of approximately $1,078,000. This significant increase in our operating income is primarily due lower corn prices and higher ethanol prices.

Other Income (Expense)

We had total other income (net) for the three months ended April 30, 2010 of approximately $31,000 compared to other expense (net) of approximately $7,000 for the three months ended April 30, 2009.  Our other expense (net) for our 2009 fiscal quarter ended April 30, 2009 was higher as a result our interest expense for that period.

Interest Expense and Interest Income

Interest expense for the three months ended April 30, 2010, was less that one tenth of one percent of our revenue and totaled approximately $1,500, compared to approximately $26,800 interest expense for the three months ended April 30, 2009.  The interest expense incurred during the three months ended April 30, 2010 is attributable to our low interest loans obtained through state and regional economic development authorities. This decrease in interest expense is due to a decrease in the outstanding balance we carried on our revolving line of credit at Minnwest Bank during part of our second quarter ended April 30, 2010 compared to the same period in 2009. As of April 30, 2010, we had no outstanding balance on this line of credit.

Results of Operations for the Six Months Ended April 30, 2010 and 2009

The following table shows the results of our operations and the approximate percentage of revenues, costs of sales, operating expenses and other items to total revenues in our unaudited statements of operations for the six months ended April 30, 2010 and 2009: