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Green Plains Renewable Energy, Inc. (NASDAQ:GPRE)

Q4 2010 Earnings Call

March 3, 2011 11:00 am ET

Executives

Todd Becker – President, Chief Executive Officer and Director

Jerry Peters – Chief Financial Officer and Assistant Secretary

Steve Bleyl – Executive Vice President of Ethanol Marketing

Jeff Briggs – Chief Operating Officer

Jim Stark – Vice President, Investor and Media Relations

Analysts

Lucy Watson – Jefferies & Company, Inc.

Michael Cox – Piper Jaffray & Co

Farha Aslam - Stephens Inc.

Ian Horowitz – Rafferty Capital Markets

Matt Farwell – Imperial Capital, LLC

Matthias Ederer - Goldman Sachs

Brent Rystrom - Feltl and Company

Operator

Good day ladies and gentlemen, and welcome to the Green Plains Renewable Energy Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Mr. Jim Stark. You may begin.

Jim Stark

Thanks Amy. Good morning and welcome to our fourth quarter and full year 2010 earnings call. Todd Becker, President and CEO; Jerry Peters, our CFO; Jeff Briggs, our Chief Operating Officer, and Steve Bleyl, our Executive Vice President of Ethanol Marketing are on the call today. We are here to discuss our fourth quarter and full year financial results of 2010 and recent developments for Green Plains Renewable Energy.

We have prepared a slide presentation for you to follow along with as we go through our comments today. You can find this presentation on our website www.gpreinc.com on the Investor page under the Events and Presentations link. Our comments today will contain forward-looking statements and forward-looking statements are any statements made that are not historical facts.

These forward-looking statements are based on the current expectations of Green Plains’ management team and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Green Plains’ actual results could differ materially from management’s expectations.

Please refer to page two of the website presentation and our 10-K and other periodic SEC filings for information about factors that could cause the outcomes to be different. The information presented today is time-sensitive and is accurate only at this time. Any portion of this presentation that is rebroadcast, retransmitted or redistributed at a later date, we do not plan to have updates to as we go forward.

I would now like to turn the call over to Todd Becker.

Todd Becker

Thanks, Jim. Glad you could join us on the call this morning, and we have a number of topics to cover today, so let’s get right to it. We experienced good improvement with safety last year; both our total reportable incident rate and lost time were down versus the prior year. Operating our plants in a safe environment remains a priority to us, and I’m pleased with the progress we made in 2010.

We had a strong finish to 2010 ending the year with $2.1 billion of revenue, $48 million of net income and $1.51 in diluted earnings per share. That makes for two consecutive profitable years for our young company, and we plan on remaining profitable as we continue to expand our platform.

All of our segments had a solid year that contributed or generated $109 million of operating income before corporate expenses, totaled EBITDA for 2010 was approximately $130 million.

We were successful in expanding our ethanol production platform last year both organically and through acquisitions by adding 200 million gallons, which is a 42% increase in capacity. 157 million gallons of that capacity came from the Global Ethanol acquisition and 43 million gallons of that capacity was added through our process improvements and debottlenecking. That 43 million gallons was done at a cost of less than $0.10 a gallon of capex or capital expenditures. I will discuss these improvements later in the call.

For the coming year, we expect our eight plants to produce approximately 680 million gallons of ethanol. And once the Otter Tail acquisition is completed, which should be later this month, we will be at 740 million gallons annual run rate.

We increased our grain storage capacity by 63% in 2010, and this is an area we are keenly focused on growing further in the coming years. We are planning to both build and acquire more grain assets strategically located in proximity to our ethanol production plants, but would not be averse to looking at Agribusiness growth outside of our ethanol plant territories.

The Agribusiness segment underperformed our expectations last year and we have made changes to the structure of this business unit. I believe we can improve the income contribution significantly as we are improving our returns on grain handling and reducing our operating expenses.

With that said though, the Tennessee acquisition was a great strategic fit and it’s performing very well. Marketing and Distribution saw steady improvement year-over-year with the operating income contribution from this segment increasing to $11.2 million in 2010 or more than three times greater than 2009.

We expect this segment to have significant growth this year with net corn oil earnings recognized in this business segment. Remember, the corn oil equipment at the plants is owned by the Marketing and Distribution segment. And those cash flows, after keeping the ethanol plants whole for lost distillers grain revenues, flows freely to the parent.

By the end of the year, we had four plants on line producing corn oil, but most were just starting up, so we had limited production during the quarter of 5 million pounds of product.

Today, we are deployed at five of our eight plants. The three remaining plants should be completed in the second quarter. And once the Otter Tail acquisition is closed, we will move to install corn oil extraction at that plant very quickly.

Once all of the plants have the technology deployed, we expect to produce over 100 million pounds of corn oil on an annual basis, and with current prices in the corn oil market, we expect to generate at least $30 million of incremental operating income annually, paying back our investment in less than eight months.

Since the project was implemented, we have seen corn oil prices as high as $0.55 a pound on a gross basis. From that, you’ll need to deduct a small amount of operating costs and to make whole to the subsidiaries for the value of the lost distillers grains to get to a net price realized. This product typically trades at a discount to soy oil, which we do not expect to change and is used in both biodiesel production and seed markets.

We continue to diversify our business, and as we noted in the earnings release yesterday, we expect to generate $50 million of total operating income annually from corn oil production, agribusiness operations, and marketing and distribution services, essentially income from non-crush sources.

We believe this additional operating income provides our overall company with a solid platform of recurring cash flows to manage through the dynamics of the commodity processing business and help us minimize the impact of margin contractions from ethanol production over time.

We ended the year with a strong cash position of $261 million. We generated positive cash flows from operations and raised $170 million of debt and equity capital last year to fund our growth. We also substantially increased our short-term borrowing capacity by $110 million at both our Trade Group and Agribusiness operations to support the growing working capital needs of both businesses.

Our risk management team did a great job last year of executing our business strategy. We generated $127 million of operating income before depreciation and amortization in our Ethanol Production segment in 2010. This is a $60 million improvement over 2009 and equates to $0.23 per gallon produced.

At the end of the year, we have locked in margins on 95 million gallons of ethanol production for the next 12 months. In addition, we had unpriced physical index sales on for the next year of over 25 million gallons. But since that time, we have moved to lock away most of the first quarter focusing as well on the second and fourth quarter where the best margins are on the curve.

Now, I’d like to turn the call over to Jerry to review our financials in more detail, and I’ll cover industry topics and our current outlook for the company.

Jerry Peters

Thanks, Todd. Good morning everyone. As Jim mentioned, there is a slide presentation that walks you through our year-over-year and quarter-over-quarter comparisons. I’ll add some color to the drivers of the changes in those side-by-side comparisons.

Starting on slide five, this slide shows at a glance the progress we made during 2010. Our increase in ethanol production volumes along with increased prices for commodities drove revenues substantially higher. The fourth quarter reflects the addition of the Global Ethanol plants late in October.

EBITDA shown here on a trailing 12-month basis continued to trend higher reaching $129.6 million for calendar year 2010.

Our net leverage ticked up to 3.1 times EBITDA from a low of 2.3 times in the second quarter mainly because of the Global acquisition. With the close of this acquisition late in 2010, we had a partial year of incremental EBITDA against the full debt load included in the numerator. Including a full year of operations of these plants along with our scheduled debt payments should allow us to continue to improve our net leverage ratio going forward.

On a consolidated basis, slide six shows a quick summary of our income statement for the fourth quarter and full year 2010 compared to the periods in 2009. Looking at the fourth quarter, revenues increased $320 million or 73% over the prior year. We produced nearly 40 million gallons more ethanol quarter-over-quarter, which again was primarily the result of the two Global Ethanol plants added in October of 2010 as well as the continued process improvements made at our existing plants.

The revenue increase was also driven by higher revenues from our Agribusiness segment, which was the result of doubling the grain sold in the fourth quarter to 21.6 million bushels. The Tennessee grain operations, which were added in the second quarter of 2010 account for most of the increase between these periods.

Consolidated gross profit was up 16%, which was a $7 million increase over the fourth quarter of 2009. This increase is attributable to higher ethanol production volumes, both organic and through acquisitions and nice growth in profits from our Marketing and Distribution segment.

I also think it’s important to remember we are comparing against the fourth quarter of 2009, a period of cyclically strong ethanol production margins. Earnings before income taxes on a consolidated basis were up 3% in 2010 compared with a quarterly number of $24.3 million. Income tax increased significantly in the fourth quarter of 2010 compared to the same period in 2009. The change in our income tax was not unexpected as it reflects our transition from the startup of our plants a few years ago to profitable operations in 2009 and in 2010.

As I’ve discussed in the past, we had previously provided valuation allowances against the tax assets that were generated prior to 2009. During 2009 and 2010, we were able to realize a benefit from the reversal of these allowances resulting in minimal taxes recorded in 2009 and an effective tax rate of 27% in 2010.

Going forward for 2011, we expect our effective tax rate to be pretty close to the full statutory federal rate although we probably will realize a continuing benefit from various state tax deductions and credits.

Earnings per share for the fourth quarter of 2010 reflects more shares outstanding as a result of stock issued in conjunction with the Global acquisition, our March 2010 equity offering and the implied shares that will be outstanding assuming the convertible notes were actually exchanged for stock.

And by the way, we’ve provided a bridge in the earnings release yesterday that walks you through the diluted earnings per share effect of the $90 million convertible debt issued in the fourth quarter.

Under GAAP, we’re required to present diluted earnings per share under an as-if converted approach. So we add back to net income the interest and amortization expense net of tax related to the converts which was about $700,000 for the fourth quarter.

The number of shares associated with the converts determined on a daily weighted average basis for the quarter was $4.028 million. Going forward, this will add a total of 6.3 million shares to our weighted average shares outstanding. The net income add back before tax is about $6.7 million in interest and amortization expense.

Our financial position is strong and getting stronger. The progress we’ve made during 2009 is significant with acquisitions, liquidity and working capital growth increasing our total assets by over $550 million during the year. To finance that growth, we’ve increased our total debt by $212 million on a net basis after considering approximately $50 million in principal payments that were made during 2010 on our existing debt.

With all this growth, we’ve managed to maintain our capital structure by increasing stockholders’ equity by $187 million. In the first quarter of 2010, we issued 6.3 million shares of stock in a public offering and also used 4.4 million shares in the Global acquisition. We believe this issuance of equity will position us very well for our next stage of growth.

I’d like to review some key metrics in terms of liquidity and our capital structure. Our liquidity position now stands at $261 million in total cash and equivalents with approximately $56 million available under committed loan agreements, bringing our available liquidity to approximately $317 million at the end of 2010.

I’d like to note here that in our Agribusiness segment, we generally build liquidity in the fourth quarter to meet significant payments made early in January as many of our grain customers defer cash receipts against their contracts until the new tax year.

As a result, cash flow was just down seasonally as we paid farmers for the grain purchased early in 2011. Our total ethanol plant debt increased by a net $50.5 million or 12% over the prior year, but our ethanol production capacity increased by 42%.

As a result, gross ethanol plant debt per gallon, before considering our cash balances dropped by 21% to $0.68 per gallon. Our lenders appreciate the job we’ve done in consistently meeting all of our debt obligations. These relationships are providing benefits in becoming a preferred purchaser of plants as the lenders work through difficulties with other plants such as the Otter Tail situation.

With about $800 million in enterprise value and $130 million of EBITDA, we are currently trading at a 6.3 times multiple on EBITDA. We believe this level does not reflect the overall value we’ve created in our platform and are working hard to consistently deliver results and provide greater transparency of that value to the marketplace.

Now I’d like to turn the call back over to Todd for his comments on the industry and our current outlook.

Todd Becker

Thanks, Jerry. Today, ethanol is the cheapest motor fuel in the world even with $7 corn, and we are still profitable. In December, the industry exported over 72 million gallons of our fuel as American ethanol is in demand around the world. Our ethanol is very competitive to other sources of ethanol from outside America without the tax credit.

At this point, we have three plants capable of producing ethanol to export specifications with the fourth coming on later this quarter. At times, we realize a quality premium for making this specification for the export market.

In addition, four of our plants now qualify for low CI or carbon intensity, which can be shipped into California under the new low carbon fuel standard implemented at the beginning of the year. For now, we realize a slight premium for this quality as well.

With this ability to produce premium-quality ethanol and the operational improvements that allow us to continually lower our production cost, we believe Green Plains can maintain a low cost position in the marketplace. Ethanol is also the cheapest motor fuel in the United States. The chart on page 10 demonstrates that over the last four years, there’s only been a six-month period of time where ethanol was not priced at a discount to gasoline. Looking at the forward curve, ethanol remains at discount to gasoline through 2013.

Putting all these factors together, we’re still bullish on the outlook for U.S ethanol. More importantly, during 2009 and 2010, our first two full years of operations, we were profitable as well as now have remained profitable for seven straight quarters managing successfully through margin volatility and cyclical downturns. Margin trends for 2011 certainly remain dynamic. Margins for the year are still better on the back end of the curve. Over the last five days, we have started to see a margin expansion as demand both globally and domestically is picking up.

As I mentioned in my opening comments, we expect to remain profitable in 2011 as well. Margin management remains our central theme, and we believe it allows us to outperform in margin contracting environments without allocating risk capital or operating outside our established VaR, Value at Risk limits. There are a lot of moving parts in the equation, and I’m confident our risk managers are very capable to execute our 2011 strategy.

But with uncertainties come opportunities. We anticipate completing the Otter Tail acquisition by the end of March. This plant is in a great location for feedstock and the plant is fully functioning and should be quickly integrated into our platform. We should again realize immediate savings in production costs because of our strategic sourcing initiatives that allow us to use our scale on purchasing non-commodity inputs. This is already demonstrated in our quick integration of the Global assets, eliminating over $8 million of overhead costs and several million dollars in operating costs.

In addition, our operational improvement initiatives to increase production levels and yield provided for great performance of our production facilities this year. The quality of the U.S. corn crop with lower moisture and higher test weights has also driven yields higher. Why is this important? We won’t necessarily make more ethanol. What we will do is use less corn and reduce our costs of goods sold.

As I have said and will continue to say, we are a growth company. The opportunity for consolidation continues to be very active in the ethanol production space, and as we noted in the earnings release yesterday, we plan to aggressively pursue expanding all of our segments in 2011. We’re very excited about our BioProcessAlgae Phase II venture.

The commercial-scale project is completed and fully inoculated and producing algae. It is our belief that these are the largest and only commercial-scale algae reactors taking CO2 directly from an industrial plant and producing products. We are working with local universities and developing relationships for the downstream use of algae. As development occurs, we will keep you informed as to our progress and validation of this technology.

In closing, I want to thank our employees for their hard work and dedication in making 2010 a very successful year. I also want to thank our shareholders who continue to support our long-term view and strategy for growing shareholder value. We will continue to do what we do best by focusing on safety, operational excellence and risk management, all while we continue to deploy capital effectively to grow our business.

Our goal has always been to de-risk the Ethanol Production segment to make sure we outperform during a margin contraction environment. Between operational enhancements, corn quality, ability to make high-value product for Californian and export corridors, higher realized values of distillers grain versus corn values and non-crush expanded operating income, we are on the road to achieving this bold goal, and building the best-in-class company deriving value from the quality of our assets, all while we are focusing on creating sustainable long-term shareholder value.

I want to thank everybody for calling in today, and now I’m going to ask the moderator to start the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Laurence Alexander of Jefferies & Company. Your line is open.

Lucy Watson – Jefferies & Company, Inc.

Good morning. This is Lucy Watson on for Laurence today.

Todd Becker

Hi, Lucy.

Lucy Watson – Jefferies & Company, Inc.

Hi, a quick question regarding M&A. Would you mind just discussing the current environment for both ethanol production and grain storage assets, and specifically, are you seeing willing sellers and do valuations seem reasonable?

Todd Becker

Yeah, I mean it’s interesting. On the M&A side, for ethanol, we continue to see opportunities come our way, and we’re really focused on location, technology and price. And so, we will continue to focus on that. Right now, I think what we’re seeing is a more active environment.

Some plants that maybe were independent in the past are understanding what the benefit of scale is, and we provide those benefits to them with the ability to use our cash, stock and debt to purchase these plants. I think it still puts us in a good competitive advantage. These are not easy plants to buy. It takes quite a while to do that, and it may take, you might have to spend a year with a plant just to get it done, but we think with our patience that we have, we’ve been able to scale our business up at a reduced cost relative to other transactions we’ve seen in the market.

We’ve seen plants trade as high as between $1.25 and $1.40 a gallon as of late for good location, good technology production facilities. And we think that our ability to purchase plants below that gives us a competitive advantage, a strategic advantage and a cost advantage. And I think we’ll continually be able to look at that those transactions because of our ability to provide stock, cash and debt. And I think that just tells you that for high-quality assets, there is always a bid from high-quality buyers out there, and that is always plays into our overall valuation thoughts as well.

In terms of the Agribusiness assets that are out there, we’re starting to see kind of frothy valuations in terms of purchasing assets from even, from a year, year and a half ago. It feels a bit like back in 2007 and 2008, when the Agribusiness sector was very much in vogue as well.

And so, while we might have some interesting opportunities there’s lots of competition for Agribusiness assets today coming from not just domestic players, from global players. And some of the multiples that are being thrown around aren’t anything today that we would be interested in doing. But we think we’re going to have opportunities selectively to pick up assets that complement our business.

Lucy Watson – Jefferies & Company, Inc.

Okay, great. And just another quick one, how much ethanol did you export in 2010 and what would be your outlook for exports in 2011? And I guess just as a quick follow-up to that, how much of your capacity in those three plants that meet ethanol export specs or I guess could you quantify that amount and what would that amount be with the fourth plant?

Todd Becker

Yes. In terms of overall platform exports in 2010, a lot of our plants were still coming on later in the year. We saw overall the U.S. exports somewhere around 400 million gallons. And we expect with December exports and some of the demand that we’re seeing, it could double in 2011 in terms of the export markets today based on our parity to other sources of supply.

In terms of our own production, with the four plants, they would be capable of around 250 million gallons to 280 million gallons of production. But we realize very much so that we’re not going to take a third of the U.S. export market out of our three plants.

So I mean we’re going to get a piece of that. So it’s not going to be 280 million gallons at a premium, it’s going to be our goal to do a percentage of the export demand, and we’ll just have to wait and see what that is. The plants run a little bit slower, but you get a premium for that, and it covers a lot of those expenses, and you get a premium for the quality. So we focus on it, we try to sell it and we’re starting to see a lot more interest in it. But today, we can’t give you a real guidance on what we expect to sell for 2011.

Lucy Watson – Jefferies & Company, Inc.

Thank you.

Operator

Thank you. Our next question comes from Michael Cox of Piper Jaffray. Your line is open.

Michael Cox – Piper Jaffray & Co

Hi, good morning. Congratulations on a great quarter, guys.

Todd Becker

Thanks.

Michael Cox – Piper Jaffray & Co

My first question is on the margin outlook. I was wondering if you could talk a little bit about the variability you’re seeing on the forward curve and potentially what impact E15 might have as you see it through the course of the year.

Todd Becker

Yes. The curve has certainly been no less than volatile and dynamic over the last couple months. We’ve started to see an expansion here as of late. The best margins are still in the fourth quarter. In, especially in October, November because of the new crop corn that will be coming on and the inverted market that we’re seeing in the corn futures. But we have seen an expansion of margins even in the last five days for Q2 and even March because we’re kind of coming out of the winter doldrums that we experienced last year. And as I typically have said, there’s not a lot of seasonality of margins.

For two years in a row, we’ve seen the seasonality hit the first quarter. That has been very similar to kind of lower demand, a bit of a lower margin structure and then coming out of the first quarter with an expanding driving season coming, as well as now working through the inventories with higher exports, we have seen a bit of tightness now developing in the market. And we’ll see where that goes to. It’s going to be a battle.

The market’s job today is to try to destruct demand for corn in the United States to try and grow some more carryout even though it is adequate and could take care of all our needs and we will not run out of corn this year. I think the market would like to see some demand destruction across some of the sectors that use corn. We haven’t ever taken our plants off at full throttle, while we’ve got ahead of Q1, and locked lot of the margins the way there, as we indicated. And we focused on Q4 as well, but what we’re seeing is kind of right now. In the Q2, the market has expanded, it’s flat to Q3, and the best margins are still in Q4.

Michael Cox – Piper Jaffray & Co

Okay, that’s very helpful. The corporate G&A line item ticked up in the fourth quarter, should we expect that $7 million run rate going forward or is there some maybe M&A expenses incurred?

Todd Becker

We accrued incentives in the fourth quarter and that’s when you basically see the final pool get hit. So, it ticked up last year in the fourth quarter as well for incentives. Is that...

Jerry Peters

Yes, that’s right. That shouldn’t that fourth-quarter number isn’t an indicative run rate going forward. I’d look more at the full-year rate. And then as we bring on production, might tick up slightly as we add a small amount of staff to cover that incremental back-office activity. But full-year should be a better run rate to look at.

Michael Cox – Piper Jaffray & Co

Okay. And my last question is on the Agribusiness segment, you talked about some changes there to boost the profit structure. Could you maybe elaborate a little bit on what you’ve put in place?

Todd Becker

Yeah. We had some management changes. We’re driving a lot more in terms of going after higher volumes in our Iowa assets. Our Tennessee assets actually performed very, very well. And we’re going to look for that type of performance out of our Iowa assets, which actually have more storage space. But there is also the fertilizer and agronomy segment definitely had some volatility around earnings over the last couple of years. We’re trying to limit that volatility as well and look at that cost structure up there in general. And so we think we could buy more in Iowa.

We can think we can sell more fertilizer and chemicals in Iowa, increase our volumes, reduce some operating cost structures and drive more profitability up there. I mean those Iowa assets in 100-mile radius are in an area that produces over 1 billion bushels of corn. And we felt like the last couple of years, those have underperformed from an origination standpoint and we’re going to aggressively going after to build market share up in that area.

Might take a little while to realize all that, but we are very much focused on those great assets that we think we could, you know, 50% to 100% greater volume increases than what we’re seeing today. So just going to take a little while, but the data supports it and some of our initiatives have supported it as well.

In addition, I think what’s really, what we focused on this year was coming out of harvest to earn the carry, and in the past, those assets really didn’t earn. We didn’t come out full, we were selling our, some of our inventories in the past to local demand. And we basically came out full out of harvest with corn and beans, and started to earn the carry up there as well, and it really comes to our ability to increase our lines for working capital as well as fund through corporate cash as well to make sure that we can earn the revenue on those assets.

Michael Cox – Piper Jaffray & Co

Okay. And one last modeling question if I could, a few moving pieces on the share count, what is your expectation for the fully diluted share count for 2011?

Jerry Peters

Well, I think if you take, we have about 36.1 million shares outstanding as of December, 31, and that of course wouldn’t include the convert. So you need to add in the convert, about 6.2 million or 6.3 million shares on the convert. And then the rest of it, the other dilutive share of the option grants and that aren’t terribly significant, I think no big changes there.

Michael Cox – Piper Jaffray & Co

Okay, great. Thank you very much.

Todd Becker

Thank you, Michael.

Operator

Thank you. Our next question comes from Farha Aslam of Stephens Inc. Your line is open.

Farha Aslam – Stephens Inc.

Hi, good morning.

Todd Becker

Good morning.

Jerry Peters

Good morning.

Farha Aslam – Stephens Inc.

Todd, did you say that you expect exports out of the U.S. to double in 2011 versus 2010?

Todd Becker

It’s a possibility actually. With the run rate we saw in December, January should be, might be down a little bit. But we are seeing really good export demand to all the typical markets. In addition, we have seen interest out of the Brazilian market with their increasing gasoline usage and the tightness of ethanol, there’s a chance that we will be exporting ethanol to Brazil as well.

And I think when you kind of look at our, if you take a look at wholesale ethanol prices in the United States versus gas prices around the world versus oil prices and versus what’s going on, I think that we have a lot of interest in what, even without the tax credit is extremely low-priced fuel relative to their replacements. And that’s what we’ve seen the pickup as well, but really a lot of it is driven by global growth, especially Brazilian growth on motor fuel and driving. We’ve seen, Brazil is up, we think they’re going to be up 4.4% on fuel demand for 2011. And with the current sugar market down there, we don’t think they’ll be able to satisfy all the ethanol demand.

We’re looking at that market as well. So I think we have a chance that we could push towards that 700 million or 800 million gallon market, because there really is no other competition in the world that can compete today with U.S. ethanol from a price perspective. Brazilian ethanol cannot compete in the world market with the U.S. ethanol today.

Farha Aslam – Stephens Inc.

And that 800 million gallons, does that include ethylene exports to Europe or is that excluding the ethylene exports?

Steve Bleyl

It’s exclusive...

Todd Becker

It’s just pure fuel grade ethanol, pure fuel grade. And that includes Canada as well, we’ve seen the impact, and this 72 million for December, correct me if I’m wrong, Steve, but that did not include 15 million going to Canada for December.

Steve Bleyl

Did not. That was strictly off the Gulf Coast.

Todd Becker

Right. We actually exported more for December, but, because that number did not include Canada.

Farha Aslam – Stephens Inc.

Okay. And currently, you do not produce any export quality ethanol. But you’re going to convert plants to export quality?

Todd Becker

No, no. Currently we have three plants that can make export quality.

Farha Aslam – Stephens Inc.

But you don’t produce it right now.

Todd Becker

No, we produce it when the market pays us to produce it over what we can get in the local markets.

Farha Aslam – Stephens Inc.

Is it hard to switch from export grade to domestic grade?

Todd Becker

Not in our plants, not in the plants that we’ve converted over. We can, what do you do is you, Jeff, do you want to talk about what happens in the export grade?

Jeff Briggs

Definitely, you have to be licensed, number one...

Todd Becker

With?

Jeff Briggs

With the TCD, which is what we know of as the old ATF because the denaturant product was actually not adding the natural gasoline to make it a denaturant product. And then secondarily it’s drier. The market for the export to Europe, it’s a much drier product, meaning there is less water content in it. And so, the ability to make a drier product is simply essentially using more capacity in your plant. To do that takes a little bit more energy. You run a little slower, but in the right margin environment, it presents itself and you can certainly do that.

There’s a variety of export specs out there, both European, Asian, Canadian, and we certainly look at those all the time and whatever the market gives us, we certainly hit those. We also benefit quite a bit from replacement for some other suppliers that do ship some ethanol overseas. And we end up replacing some of their domestic volume as well.

Todd Becker

And what we’ve seen is the other players that export, they’ve got to replace your domestic volume and then they come to us for their replacement. So net, net we do always, there is some benefit in to us even when we don’t export.

Farha Aslam – Stephens Inc.

Okay. And so what do you expect U.S. production of ethanol to be for 2011, overall for the industry?

Todd Becker

I think it’s going to range from that kind of 13.3 to 13.8 type of number, those plants, as I said, they’re going to come on, but now they’re in delays. There’s couple plants that have gone down and potentially will go into bankruptcy in the destination markets. So I think up and down number is, that 13.5 to 13.7 type number. So if you kind of take a look at the mandate for ‘11, which is...

Jerry Peters

12.6.

Todd Becker

12.6. And if we can export 600 million to 800 million or 700 million to 800 million gallons, that gets us there without any incremental blending from other obligated parties. And that’s why we’ve started to see some tightness here and, the correlation broke down early in the first quarter between corn and ethanol.

And now we’re starting to see that correlation come back into play and margins expand here as of late, on an EBITDA basis, $0.06 to $0.08 a gallon in the last weeks, but there was no lower levels. We had our first quarter release, so we didn’t necessarily experience those lower levels.

Farha Aslam – Stephens Inc.

Okay. And then currently, the ethanol inventory, how many days of inventory do we have in the U.S.?

Todd Becker

I think it’s coming down. We’ve definitely built the inventory. We were up into the mid-20s. And I think we’re coming down into the lower 20s. So we’re still working on some inventories, but there is definitely tightness, Steve, is there some regional tightness that you’re starting to see?

Steve Bleyl

Yeah, there is incremental blending that’s picking up that with the spread are about with the rates, or just with gasoline in general with the price jump up here lately, so...

Todd Becker

Anybody that can blend ethanol today, Farha, is blending ethanol. They’ve got the tax credit and they’ve got somewhere between $0.20 and $0.40 a gallon, if not greater than that discount to gasoline. And anybody that can blend is blending and the market is wide open across the United States for blending today. And now we’re going to see, with the weather changing, we had a pretty bad winter in a lot of places and same thing as last year.

We really saw the downtick in demand. And it wasn’t just ethanol demand. There was some gas demand. And we had markets that, like a Birmingham that shut down for two days because of weather. Atlanta shut down because of weather literally on gas demand, which then shot down ethanol. We’re starting to see, because of the weather clearing out, those markets start fully blending again. So we’re fully open across the whole U.S. on blending today. And then the ARB is open as well, and the export markets against Brazil and into Brazil is open as well.

So we anticipate that demand is going to remain strong here through the summer driving season. Third quarter still a, end of the crop year for corn will still be an interesting quarter, but then we get fully into the fourth quarter, the blend margin is still fully intact, margins expand into the low 20s, is what we’re kind of seeing right now on an EBITDA per gallon basis in our platform.

And we’re starting to see that, again everything remained open although through the end of the year. So while we might see some interesting times, I think more in the third quarter than in the second quarter just because of the end of the year carryout tightness, I think in general people are still going to wanted by ethanol all throughout the year deployment until we start to run over gasoline and that we had a long way to go for that.

Farha Aslam – Stephens Inc.

The comments are really helpful. One final question, in terms of corn, historically you’ve been very disciplined in terms of only buying corn and hedging ethanol on the other side and keeping that balance pretty tight. Are you maintaining that kind of hedge discipline or have you taken any opportunities with options, et cetera, to cover for any potential kind of spike in corn?

Todd Becker

First of all, our discipline remains absolutely the same. We’re not approaching our risk management any differently than when we started the business. In fact, what’s interesting is our value at risk, our VaR limit, remains the same today from when we’re operating three plants to when we’re operating nine plants, and we’re operating within those parameters. We buy corn. We sell ethanol. We do it first physically. We then do it financially. We do use options.

Occasionally we may do, we may use calls or call spread to, and then use that as a protection if the market completely blows higher, but that’s not any significant piece of our risk management strategy. We are really focused on financially hedging our risks and it has worked very, very well for us. The key for that though for is you can’t utilize that strong balance sheet. And because we have a strong balance sheet, we’re able to lock financial risk.

Look, I mean the markets definitely interesting this year, much more than, we don’t see the visibility in the curve like we saw last year. We’re going to have to work into that. We’re starting to see a bit of margin expansion in the middle of six months, which we thought would be the tightest period of the year. We’re starting to see some visibility there. We’re going to lock some margins away. That along with kind of premiums for low OCI export opportunities, those types of things, we think we have some opportunities.

We’ve got to let those play out a little bit. We have locked away some second quarter volume that we saw when the margins expanded, but these are daily margin expansion. When the margins expand on one day, we’ll move very quickly to lock part of our second quarter away and the same thing in the fourth quarter.

Farha Aslam – Stephens Inc.

Right. Thank you very much.

Todd Becker

Thank you.

Operator

Thank you. Our next question comes from Ian Horowitz of Rafferty Capital. Your line is open.

Ian Horowitz – Rafferty Capital Markets

Good morning, guys.

Todd Becker

Good morning.

Ian Horowitz – Rafferty Capital Markets

Couple mechanical questions. First of all, the marketing and distribution, are we still there, where there any net additions in the quarter in terms of partners?

Todd Becker

No, no new marketing contracts in the quarter.

Ian Horowitz – Rafferty Capital Markets

Okay. So then, I mean I’m calculating then kind of a pretty significant implied utilization rate for the partners, actually right now kind of without really understanding when Global came on, it looks like that their utilization rates were a bit higher than your nameplate. Is that correct?

Todd Becker

Well, part of it’s because Global came on and that add to the marketing and distribution segment.

Ian Horowitz – Rafferty Capital Markets

Yeah.

Todd Becker

We had good terminal capacity in the fourth quarter as well in our terminal business, which is included in there as well. We did see some upticks in production at some of the plants that we market for as well, and as well as our plant, if you look at our total production was up as well for the quarter. So net-net you put all this together and the revenues or the operating income was definitely improved because of those reasons.

Ian Horowitz – Rafferty Capital Markets

Right, okay. It may just be a mechanical issue that I can go through at a later date. Jerry, you said tax rate for ‘11 is going to come out a little more towards normal rates. I mean should we expect something significantly higher in the first quarter and then kind of throughout the remainder of the year?

Jerry Peters

Yes, I think kind of that full statutory rate, maybe slightly off for state taxes but that full statutory rate starting first quarter going through the full year.

Ian Horowitz – Rafferty Capital Markets

Okay. And then for corn oil, I don’t know who wants to answer this one. You talked about kind of a run rate of 30 million pounds for 2011. Again, can we just kind of give some indication of the timing of that in terms of ramping that up?

Todd Becker

Yes. First of all, our run rate, based on what we’re putting in, will be a 100 million pounds plus annually. It will probably be greater than that in the end. What we’re saying is that our net operating income incremental impact will be at least $30 million based on current market prices. How we look at it is basically it trades, you can think about like soy oil, the traded discount with soy oil. We have to keep our plants hold for the loss of DDG weight, because every pound of corn oil you take out, almost nine times of that pound is reduced in your DDGs. So basically you have to deduct that off as well.

In addition, you have to look at extraction rates. Our extraction rate that we’re putting in into our models are all around 0.4 pounds per bushel. So if you think about if we grind 250 million bushels of corn it will be about 100 million pounds. Now we will continue to focus up. We think we can get to potentially 0.5 pound on kind of our first installations. There isn’t a commercially available extraction at this point to go after more oil that we’re looking at today.

There are some out there that are early stage that maybe you get to more oil, out of the DDGs but you don’t want to degrade your quality of DDGs either and you don’t want to take too much weight off of that because it doesn’t remain out paid. But we haven’t seen anything today that would tell us that in a commercial scale and that’s how we want to make sure. We don’t want to try anything out. We want to make sure it works.

At a commercial scale today, we haven’t seen anything that would tell us that there is any next generation systems that will extract more oil out at a reasonable price, reasonable cost and an ability to scale it right now. So, we’re not focused on getting more oil out. We’re focused on kind of our first generation implementation. We’re really excited about it. I mean it’s interesting it trade through different markets for this oil.

Some of it trades into biodiesel because at this type of oil discount to soy oil, which is kind of a 10% to 15% discount to soy oil, it makes a biodiesel plant profitable, if you can actually run your plant, as well as it’s also a very good substitute for fats as well on the animal sector. And there are even other people that are looking at using it into potential crude production. So, there’s interesting applications for this, is still being developed, but the market is deep enough to handle our volume and I think we’re very excited.

Ian Horowitz – Rafferty Capital Markets

So that was the follow-up question. So, forgive me, but what is the 100 million pounds of corn oil kind of compared to the rest of the market?

Todd Becker

Oh, it’s very, very small. It’s 13 million gallons, right. So you think 13 million, a 100 million pounds divided by 7.5 or so and it’s 13 million gallon. So you kind of put in a gallon perspective, it’s not a lot, but it does provide quite a bit of revenue for us, because of the uses for it.

Ian Horowitz – Rafferty Capital Markets

Yes, absolutely. And I mean this is not a Green Plains question, but just more of a macro question. Especially as you go out and look at M&A opportunities, is there any front-end systems currently in place, are being discussed or is that kind of off the table and we’re going to stay kind of on the back-end with the crude corn oil?

Todd Becker

We’re staying on the back-end right now. There have been some front-end systems installed in some ethanol plants, some working better than others. We are looking at, I think where you’ll see the kind of the next, I think we’re focused on the back-end now, but I mean really where you’re going to see kind of the next phase of development in this industry is kind of the use of enzymes and chemicals to get more of that residual sugar and make ethanol out of it. And, Jeff, you want to comment on it real quick as well?

Jeff Briggs

Yes. We’re always looking at different trials for different enzymes, different products, focusing on trying to expand our yield. There are a variety of, I don’t want to call it snake oil, but there’s folks out there that are always trying to get new types of technology on the front-end, things on the back-end. Like corn oil, we want to focus on solutions that work. We’re not interested in a lot of R&D. This company has always been focused on as we’d like to say cash earned, not cash burned. And so we’re very focused on buying systems that work, getting revenue from them, and make sure they contribute to the bottom line. It doesn’t mean that we want to do some investigation and some research and things like that, but we’re certainly focused on systems that have real proven application on a commercial scale basis.

Todd Becker

And we have trials, I would say we have a trial at every one of our plants on something different right now, maybe several trials. So we’re always looking at what somebody has to sell. But to date, we haven’t seen anything that would tell us that somebody is cracking the code on enzymes and yield, but it’s getting better. We’re starting to see some better products out there. But nobody in our mind has cracked the code yet at commercial scale.

Ian Horowitz – Rafferty Capital Markets

Okay. You guys gave some pretty good color on your outlook for ethanol for the upcoming year. I didn’t quite see, can you just comment a little bit on outlook for the Agribusiness segment? I mean we’re supposed to be seeing some pretty record acres and some pretty high demand for big yielding acres. What are you guys witnessing or seeing is anything at all or is it too early to tell kind of in terms of buyer demand for crop nutrients and for their products?

Todd Becker

Look, the acreage number that’s being turned around is in the 92 range. And that’s kind of becoming more standard from, everybody from seed companies to analysts to just about everybody you can imagine. If you take a look at the profitability of planting corn versus just about anything else today, you’re going to plant corn. And you’ll probably plant a lot of it. And then of course it’s going to come down, can we yield? Last year I think the yield was very disappointing in United States for a lot of reasons.

We are seeing very good investment in nutrients, very good investment in fertilizer, chemicals. The farmer is really thinking about it. You obviously want to protect your $7 corn and $6 corn new crop very well, make sure you invest in that crop because it’s highly profitable right now. I think we’ll see pretty good acres. I think we can push towards that upper end. We always start there. We’ve got to make sure we finish there and so I’m still always skeptical of just going right through the highest number. But I think we’re going to have a great opportunity to grow a good crop. It obviously shows itself in the structural U.S. corn futures market. We’re able to buy corn in new crop today and a lot of it. And I think we’ll have the structure for next year set up to carry the crop as well.

So what we need as I tell people what we kind of need is one crop cycle to kind of take care of all these, a lot of the problems. We’re not going to grow a huge amount in the carryout number next year, but we’ve got to make sure that this crop performs. So I don’t think we’re going to see any kind of tampering of the underlying volatility in this market until we know that we’ve got a crop made. But it should be pretty big.

Ian Horowitz – Rafferty Capital Markets

Great. One last question, I’ll get back in queue. With the way that the blending margin opportunity is right now and the way we produced, I mean seeming to produce in 2010, is it your expectation that the 2010 RIN will basically just go currently, I mean right now unused?

Jerry Peters

They will be used, go ahead

Ian Horowitz – Rafferty Capital Markets

More from a logistic standpoint, right, not from a financial standpoint.

Jerry Peters

We’ve seen an uptick over the last week actually, you see them start to tick up a little bit. I think there’s just been some announcements of plants starting to slow down maybe a little bit. So I think you start to see that. If there’s any kind of spots on some of these plants that may not run, I think you’ll see RINs tick up with them.

Todd Becker

Yes, what’s happening, Ian, what we’re seeing is that people are very nervous about the third quarter and the buyers, because some plants are slowing down, some plants are in trouble. Some of the destination markets are not performing as well and might look at needing to shutdown. And when you kind of look at it, with a 600 million bushel of periodic corn and the last time we were here at this price the farmer held 500 million bushels on par. And so we have to depend, number one, the farmer to sell. We have to make sure we have the corn coming in and make sure we have very good origination in the third quarter.

I think the market will easily get through the second quarter. I think where the market is very, very nervous about where they are going to get their enough gallons, because of the blending margin and because of the ability to make money is third quarter. We’re looking out there. We’re trying to buy physical corn. And every time we buy physical corn, we’ll sell physical ethanol. And so that’s basically our focus, but I think the market is nervous about the third quarter production.

Jerry Peters

D&A, the rental relieved the obligation from that obligated party, but their concern is that they have set their network up for physical blending must blend of ethanol. That’s their concern.

Todd Becker

And you know that is about. That’s about CBOB, right. So there is a lot of refiners that have gone.

Ian Horowitz – Rafferty Capital Markets

This is the issue that was going on with Steve like in the fall? You and I talked about, what was this? This was an issue that happened before, right?

Steve Bleyl

As people started turning, flipping their networks over, so that they had CBOB set up. Yes, so they are now set for blending, so the rent release are obligation, but they still have the concern on the physical availability.

Todd Becker

So you can’t buy the ethanol in the third quarter, but you’ve got to your refineries set up. It takes 60 to 90 days to get that back to a conventional but then by that it would be a new crop.

Ian Horowitz – Rafferty Capital Markets

Right, okay.

Todd Becker

So it needs to get produced. Okay?

Ian Horowitz – Rafferty Capital Markets

Thanks, guys. I appreciate it.

Todd Becker

Thanks. Yes.

Operator

Thank you. Our next question comes from Matt Farwell of Imperial Capital. Your line is open.

Matt Farwell – Imperial Capital, LLC

Hi, good morning. Given the high test weight and the lower moisture content of the corn, I’m just curious, the primary offset on the corn feedstock, or are there other input costs that are affected?

Todd Becker

No it’s the primary impact is on your corn feedstock. We think the industry is averaging closer to 2.8%, but then the USDA is 2.71% that they use in the SNDs. And that obviously add back some corn, but we won’t see it because it usually falls through the feed and residual number at the USDA. But we are seeing across, from what we understand, with the higher test weight, lower moisture, yields this year could be up between kind of 0.05% and 0.10% is what we’re thinking across the board.

Matt Farwell – Imperial Capital, LLC

Can you help quantify how that sort of improves the EBITDA margin on a very low margin business?

Todd Becker

Yes, because basically what you do is you’re using less corn to make the same amount of ethanol. So let’s just say, for example, our platform needs to use 245 million bushels of corn. It’s a rough number. It’s in the range. With a yield improvement from kind of 278 million bushels to a 280 million bushels or 282 million bushels, you’re going to use 5 million bushels to 7 million bushels less corn across the platform. That will generate a $7, $35 million reduction in cost of goods sold, which then over the platform is about a nickel a gallon. Now, you might have to use that to make your margin. But in general, it just keeps you in the game longer if you have higher yields and you could use that then to make sure that your plants continue to run in full throttle.

Matt Farwell - Imperial Capital, LLC

What you mean by making your margin, that’s what I’m asking you.

Todd Becker

Well, you might have to give up, you might have to use some of that in a tighter margin environment. So let’s say at these prices when last year same margins might be $0.10 a gallon and at the same price relationship now with that extra reduction in cost of goods sold, because the yield maybe margins are $0.15 a gallon or let’s say for a plant at zero a gallon, not ours, let’s just say for a plant that goes down to zero a gallon, they might actually get $0.05 a gallon under the same economics this year, because of higher yield.

Matt Farwell - Imperial Capital, LLC

Okay. So, sort of macro look, but given the backwardated corn futures, there’s tremendous operating leverage in this model to a decline in corn. At the same time, we have to maintain land allocation to corn at these levels. So I’m just curious, could you comment on expectations on how the curve may develop as the harvest progresses?

Todd Becker

Yes, I mean basically, once we get into harvest, the old backwardated curve should be gone. Once July, Sep, Sep, July, Dec, Sep, these are all backwardated or inverted. And once we get into harvest that inversion should go away if we grow our crop and go back to straight full career market on, basically U.S. becomes a residual supplier to the world again on corn. Got to prove that out, Matt, and I think until that we’re going to see some serious volatility on these, on the inverses that we see.

I mean if you go back to, well, we always go back and look at similar years that July, Dec blew out pretty hard from even where we’re at today. But then that failed, eventually we have to figure out. Are you going to use futures to, is your futures going to be your cheapest replacement for physical corn? And that has to prove itself out yet today. The basic structure in United States is still telling us you don’t need futures as your last resort to buy your physical corn. Remember, the futures can always converge into physical. And today, the structure of the U.S. physical market is telling you that you don’t need that to happen, but there’s anticipating that that could happen and that’s why the risk premium on the backwardation.

So I think in general as we get through and we understand that are the acres there. Are we going to plant it, how is the weather, and once we start to see, we start to track through the summer and get through the too hot, too dry, too cold, too wet season as how we’re going to make a crop. And then we’ll really see the impact in Sep, Dec. I don’t think we’ll see any impact today in July, Dec. I think we’ll stay very, very firm on that spread through the crop cycle until we prove them we’re going to grow our crop.

Matt Farwell - Imperial Capital, LLC

Do you think, do you have sort of stocks to use bogey that may signal that the market is going to be well supplied?

Todd Becker

I think stocks to use will remain tight for at least another year. I mean right now we’re at that 5% range and the last time we hit $7 corn, I think we were in double-digit stocks to use still or high single-digits. Even with a growth in the carryout, 164 yield on 92 million acres, we’re going to grow our carryout to 200 million bushels, 300 million bushels, 400 million bushels and so it’s going to have to come down the yield. Even growing our carryout 200 million bushels, 300 million bushels, 400 million bushels stock to use will still be in a single digit-range.

Then we think overall that we’re still behind higher prices relative to the long-term physical means, but hopefully we can get back from this far right hand tail, far right hand of the curve tail that we’re dealing with right now. So if we see at least some ability to grow our carryout next year we should see a significant break in prices, but it’s going to have to proven out.

Matt Farwell - Imperial Capital, LLC

Okay. And then just last question on the low CI markets. Do those markets have inferior net backs due to transportation costs or is the premium that you’re getting and in fact an origin premium per gallon?

Todd Becker

There is no inferior return to the plant. In fact it’s say, typically we get a premium for that and that plant, it comes from plants that would have the ability to shift from the California market to the western markets or to the southern market, even to the eastern markets. So it’s really a function of, there is, we won’t sell it.

We typically haven’t needed to sell it at any discount or the same that bag that typically is a, it’s not that bag, at the same price it’s the, typically a premium for the price, but it heads in that direction.

So we haven’t seen, there is no transportation issue from that perspective. So these plants are all kind of twin plants. For example, Central City can go to California and Steve can go south, he can go east, he can go just about any local as well. So if they want it and buy and sometimes some plant they actually have to buy it away from the eastern markets to get the low CI. Is that correct?

Steve Bleyl

Correct. You’re seeing enough supply for CI right now for 2011 sort of values.

Todd Becker

Values, yes, I mean more plants are coming out. We saw some of the benefit in ‘10. That’s why we said, it’s a marginal benefit, but when it’s there, we’ll ship it.

Matt Farwell - Imperial Capital, LLC

Great.

Todd Becker

We don’t have to ship it.

Matt Farwell - Imperial Capital, LLC

Thanks for the color.

Todd Becker

Thanks, Matt.

Operator

Thank you. Our next question comes from Ederer Matthias of Goldman Sachs. Your line is open.

Matthias Ederer - Goldman Sachs

Hi, good afternoon. Great quarter, guys.

Todd Becker

Thank you.

Matthias Ederer - Goldman Sachs

A much more basic of a question. I’m trying to, with the help of your guidance on your non-ethanol operating income, trying to back into your free cash flow for 2011. Now, you said $50 million should come from non-ethanol. Given your consistent performance in ethanol on the now $750 million performance between $0.20 to $0.25 per gallon, I’m trying to forecast your free cash flow and kind of get out what you’re paying in cash interest for next year and how much capex you’re expecting for next year.

Jerry Peters

Yeah, I think the highest, the maintenance capex is a pretty small number. I mean that for the current year, our total capex actually was about $20 million. That probably included about $12 million of different growth projects, so that should give you some idea kind of going forward in terms of maintenance capex. We will spend some growth capex as well, obviously.

Matthias Ederer - Goldman Sachs

Sure.

Jerry Peters

Our cash interest on an annual basis, of course spreads on interest rates, but somewhere in the $30 million to $35 million range on the total portfolio. So I guess the way I look at is we’ve got about, for full year 2011, we should have about $80 million to $84 million of total debt service.

Matthias Ederer - Goldman Sachs

Okay. But that includes amortization, right?

Jerry Peters

Yes.

Todd Becker

That includes principal and all.

Matthias Ederer - Goldman Sachs

Okay, so excluding amortization, it’s more in the $30 million to $35 million context, right?

Jerry Peters

Right. And again that is not just ethanol debt. That’s total consolidated debt.

Matthias Ederer - Goldman Sachs

Understood, understood. So that, so is it kind of in the right ballpark to think about your free cash flow in the ballpark of $120 million to $130 million on a run rate basis once the non-ethanol business, i.e., the corn oil is fully ramped up?

Todd Becker

Well, it depends what you want to use for your margins. I mean margins are not, in the front-end of this curve are not in the 20s. So it depends on how you want to use your annualized margins. And so while you get to the back-end of the curve and you can certainly see some visibility in the 20s. You don’t see that on the front-end of the curve. So it may not be quite that high.

Matthias Ederer - Goldman Sachs

Understood, that’s helpful. Thank you very much.

Todd Becker

Okay.

Operator

Thank you. We have time for one more question. And our question comes from Brent Rystrom of Feltl. Your line is open.

Brent Rystrom - Feltl and Company

Thank you. A couple quick questions for you guys. Any particular thoughts on the E85 sales? We’re seeing a lot of visibility, particularly in the upper Midwest here for E85 taking off the last couple of weeks. How is that impacting you guys?

Todd Becker

It’s still a minimal piece of our demand base. I mean there is, Minnesota obviously sells probably the most, one of the most, one of the biggest states in the U.S. and is still somewhat minimal. Steve, it’s a year?

Steve Bleyl

Yes, it’s just not that, it just sort of move the needle at all on the piece of it.

Brent Rystrom - Feltl and Company

Okay.

Todd Becker

I think somebody asked earlier on the E15 as well. I’ll just give you just the 30 second on that. I think it took 30 years to get the E10, basically full, kind of full availability and that when I even add 10% yet across the field supply. So this E15 is going to be a multi-year project that I think it’s not going to be anything in the next six to 12 that has any impact to demand at all. It’s going to be further out as we develop markets and get through a lot of, still a lot of the regulatory hurdles that we’re dealing with.

Brent Rystrom - Feltl and Company

Okay. Out of curiosity, you mentioned either acquiring or developing storage assets. What is the lead time? Is it a year, year and a half from the point you decide to build something to actually having a storage asset up and running?

Todd Becker

No, actually what we’re looking at is, we’re not looking at any new greenfield sites

Brent Rystrom - Feltl and Company

Okay.

Todd Becker

Right at this moment. What we’re looking at is additional storage at our facilities. If we look the contracts out in the next 30 days, we’ll have that storage up by harvest this year.

Brent Rystrom - Feltl and Company

Okay. Todd, when you look at the harvest this year with all the acreage, with the likely, the chances yields should be good. The more likely risk is probably the timing on planting really versus the acres, wouldn’t you say, as far as if we get the crop in early enough that we can manage that window a little bit better as far as the carryout?

Todd Becker

Yes, absolutely. Early crop would be better. We don’t need planting delay this year because we’ve got to be very careful on this September timeframe. We’re starting to see, in southern crops are getting planted Monday. That’s when they are going to start. So they are going to get out early. We need clear planting season here all the way through it. We could not have some major snow storms hit us in the month of March. We get this crop planted and we go off to a good start I think that’s key because this August, Sep time period is going to be quite an interesting market in the U.S. corn market and we need to get out at early.

Brent Rystrom - Feltl and Company

And from everything I can see, and I think this is really important for you guys, when you look at the corn in storage right now, it’s much stronger in the western part of the corn belt, which should favor you and it’s weaker in the eastern corn belt. Is that a fair assessment?

Todd Becker

Yes. I mean I’m still thinking. Yes, we have, we’re not having any trouble buying corn today. In fact, we’re still buying June, July corn across all of our plants, but more so in the west than in the east. I mean the farmer definitely has plenty of stocks on farm. He sees the high prices. He sees the current market versus the forward market.

And he’s letting, starting to let some go before he gets into the field. The risk here is if you don’t have your physical body, you’re going to lose them for about 40 days between corn and soybean planting. So we’ve done a very good job at the company, making sure we have plenty of physical coverage because the margins have been there for us and they continue to there for us and they continue to run our plants full throttle. We don’t see any impact right now that we would need to slowdown any of our plants today.

Brent Rystrom - Feltl and Company

Okay. Two quick questions and I’ll sign off after this, so you can end the call. The first is, looking at some of the stuff that came out of the NCBA the last couple of weeks as far as cattle producers looking like they’re going to go long on bred heifers, which seems kind of counterintuitive with where corn prices are. Wondering what your thoughts are as far as demand disruption looking at the cattle industry in particular. And then also wondering, when you look at what’s happening with Coca-Cola’s PET technology, as far as using sugar-based ethanol for their new PET bottles, is that an opportunity for you guys long-term or is there a reason corn-based ethanol doesn’t show up in PET technology?

Todd Becker

Well, I mean from the, in terms of PET technology, I think there is going to be plenty of industrial uses going forward for ethanol and some of that is still being developed today. Right now, we can’t even get our head around how there’s going to be any extra sugar-based Brazilian ethanol to sell to other than a vehicle in Brazil based on the fact that they’re going to have to import oil, let alone import ethanol. So while they’re using a better ingredient to make that, I’m not sure that that’s going to be widely available. They may just be staying away from it because it has corn in it.

In terms of the cattle, it’s very interesting because we talked to a lot of cattle feeders, in fact we have one on our board and there is a huge impact on cattle feeding from DDGs. And I think they’d often get lost. If you take a look at, DDGs at $7 corn are much more attractive to a cattle feeder than at $3.50 corn because of the price differential. So take a look at, we have seen expanded use of the storage grains, in cattle over 50%, in chickens up to 12% which a couple years ago was 4% and 3% and in hogs. And if you take a look at the ratio and you calculate it, $7 corn we’re trading over 80% the value of corn on the storage grains, which is still equivalent to about a $2 discount equivalent on corn.

So when they feed the DDGs and you look at that against the cattle crush, while it may look not raised they’re still seeing opportunities to make money feeding cattle. As well as we get impacted for the fact that people think we’re keeping food prices high but we get no credit for the fact that we’re keeping feed prices much lower than what the cattle and the chicken and the hogs would have to feed.

So, in general, we’ve also heard, and I think this is really important is that we think a lot of the sectors came in long corn or long DDGs. And so they have some ability and staying power to continue to buy some of this front-end animal type products, so they can continue to feed and because they have a good position on. And I think that’s probably more than anything that’s impacting it.

I think it’s the same thing kind of with ethanol because I think we see the marginal plants that kind of run out of their first quarter hedges as they are grinding ethanol and they get into kind of the narrower margin structure and the destination marginal plants. I think you’ll see that that impact them as well. So I think the markets in general between animals, between industrial and between ethanol, I think the markets are working through some long hedges that came in with, that’s not us. We just continue to buy corn, sell ethanol but I think in general the market came along the first quarter and part of the second quarter.

Brent Rystrom - Feltl and Company

Thank you, guys.

Todd Becker

All right. Thank a lot. I appreciate it.

Operator

I’ll hand the call back to Todd Becker.

Todd Becker

Yes, appreciate everybody being on today. We’re really excited about our future. We have done great things to continue to grow a low-cost platform. I think we showed that we can perform through margin volatility all throughout 2009 and 2010. We anticipate 2011 will be no less than some fun and challenging times and we are really excited about all the non-ethanol income that we’re going to produce and then see the opportunities on the forward curve as we get into late ‘11 and ‘12 for continuous great growth in our prospects for the company. So we appreciate you guys coming on today. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

Todd Becker

Thank you.

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