10QSB

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

For the fiscal quarter ended April 30, 2006.

OR

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 00051277

GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

Minnesota
(State or other jurisdiction of
incorporation or organization) 41-1997390
(I.R.S. Employer Identification No.)

15045 Highway 23 SE
Granite Falls, MN 56241-0216
(Address of principal executive offices)

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

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.

 þ Yes o No

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

State the number of shares outstanding for each of the issuer’s classes of common equity as of the latest practicable date: As of June 1, 2006, there were 31,156 units outstanding.

Transitional Small Business Disclosure Format (Check one): o Yes       þ No

INDEX

PART I — FINANCIAL INFORMATION	3
Item 1. Financial Information	3
Item 2. Management’s Discussion and Analysis or Plan of Operation	14
Item 3. Controls and Procedures	26
PART II – OTHER INFORMATION	27
Item 1. Legal Proceedings	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Submission of Matters to a Vote of Security Holders	27
Item 5. Other Information	27
Item 6. Exhibits	27
Plan of Merger
Lease Agreement
Loan Agreement
Promissory Note
Statutory Mortgage
Joint Powers and Participation Agreement
Termination of Development Agreement
302 Certification
302 Certification
1350 Certification
1350 Certification

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Information.

GRANITE FALLS ENERGY, LLC AND SUBSIDIARY

Condensed Consolidated Balance Sheet

	April 30,
	2006
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	3,887,400
Restricted cash		228,436
Accounts receivable — trade		4,826,118
Accounts receivable — government programs		349,281
Inventory		2,639,463
Derivative instruments		1,838,997
Prepaid expenses and other current assets		802,471
Total Current Assets		14,572,165
Property and Equipment
Land and improvements		2,231,838
Railroad improvements		1,595,500
Process equipment and tanks		52,194,237
Administration building		225,205
Office equipment		132,530
Rolling stock		495,999
		56,875,308
Less accumulated depreciation		2,616,097
Net Property and Equipment		54,259,211
Other Assets
Deferred financing costs, net		507,773
Total Other Assets		507,773
Total Assets	$	69,339,149
LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Current portion of Long-Term Debt	$	2,680,219
Accounts payable		1,267,461
Corn payable to FCE		579,279
Payable to construction contractors		87,485
Accrued liabilities		484,708
Total Current Liabilities		5,099,152
Long-Term Debt, less current portion		27,019,781
Commitments and Contingencies
Members’ Equity
Member contributions, net of costs related to capital contributions, 31,156 units outstanding		30,250,778
Retained earnings		6,969,438
Total Members’ Equity		37,220,216
Total Liabilities and Members’ Equity	$	69,339,149

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

3

GRANITE FALLS ENERGY, LLC AND SUBSIDIARY

Condensed Consolidated Statement of Operations

	Six Months			Six Months
	Ended			Ended
	April 30,			June 30,
	2006			2005
	(Unaudited)			(Unaudited)
Revenues	$	35,698,835		$	—
Cost of Goods Sold		24,430,095			—
Gross Profit		11,268,740			—
Operating Expenses		1,172,015			260,249
Operating Income (Loss)		10,096,725			(260,249	)
Other Income (Expense):
Interest income		11,826			116,096
Interest expense		(1,226,459	)		(2,183	)
Change in value of hedging instruments					29,815
Government Programs and other income		477,854			—
Total Other Income (Expense), net		(736,779	)		143,728
Net Income (Loss)	$	9,359,946		$	(116,521	)
Weighted Average Units Outstanding		31,156			31,134
Net Income (Loss) Per Unit	$	300.42		$	(3.74	)

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

4

GRANITE FALLS ENERGY, LLC AND SUBSIDIARY

Condensed Consolidated Statement of Operations

	Three Months			Three Months
	Ended			Ended
	April 30,			June 30,
	2006			2005
	(Unaudited)			(Unaudited)
Revenues	$	21,728,672		$	—
Cost of Goods Sold		12,699,756			—
Gross Profit		9,028,916			—
Operating Expenses		731,520			117,076
Operating Income (Loss)		8,297,396			(117,076	)
Other Income (Expense):
Interest income		9,399			34,922
Interest expense		(631,159	)		(1,101	)
Change in value of hedging instruments					29,815
Government Programs and other income		253,376			—
Total Other Income (Expense), net		(368,384	)		63,636
Net Income (Loss)	$	7,929,012		$	(53,440	)
Weighted Average Units Outstanding		31,156			31,151
Net Income (Loss) Per Unit	$	254.49		$	(1.72	)

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

5

GRANITE FALLS ENERGY, LLC AND SUBSIDIARY

Condensed Consolidated Statement of Cash Flows

	Six Months			Six Months
	Ended			Ended
	April 30,			June 30,
	2006			2005
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities:
Net income (loss)	$	9,359,946		$	(116,521	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization		2,608,915			4,230
Change in value of hedging instruments		(79,008	)		(29,815	)
Changes in assets and liabilities:
Derivative instruments		(860,632	)		(100,000	)
Receivables		(5,175,399	)		—
Inventory		(2,622,857	)		—
Prepaid expenses		(697,415	)		24,809
Interest receivable		—			7,090
Accounts payable		977,141			(28,779	)
Accrued liabilities		314,891			13,945
Net Cash Provided by (Used in) Operating Activities		3,825,582			(225,041	)
Cash Flows from Investing Activities:
Capital expenditures		(440,519	)		(86,066	)
Land		—			(285	)
Construction payable		(5,194,103	)		—
Construction in process		(3,631,644	)		(23,650,954	)
Net Cash Used in Investing Activities		(9,266,266	)		(23,737,305	)
Cash Flows from Financing Activities:
Net proceeds on short-term notes payable		14,749,378			3,313,216
Proceeds from long-term debt		700,000			—
Payments on long-term revolver		(5,000,000	)		—
Payments on revolving line of credit		(1,090,000	)		—
Payments for deferred financing costs		(35,824	)		(311,968	)
Net Cash Provided by Financing Activities		9,323,554			3,001,248
Net Increase (Decrease) in Cash and Cash Equivalents		3,882,870			(20,961,098	)
Cash and Cash Equivalents – Beginning of Period		4,530			21,157,557
Cash and Cash Equivalents – End of Period	$	3,887,400		$	196,459

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

6

GRANITE FALLS ENERGY, LLC AND SUBSIDIARY

Condensed Consolidated Statement of Cash Flows (continued)

	Six Months		Six Months
	Ended		Ended
	April 30,		June 30,
	2006		2005
	(Unaudited)		(Unaudited)
Supplemental Cash Flow Information
Cash paid during the period for:
Interest expense	$	927,312	$	—
Capitalized interest	$	54,141	$	—
Supplemental Disclosure of Noncash Investing, Operating and Financing Activities
Construction costs in construction payable	$	87,485	$	7,565,814
Deferred financing costs in accounts payable	$	—	$	4,700
Member units exchanged for land costs	$	—	$	39,000
Forgiveness of long-term debt	$	47,800	$	—

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

7

GRANITE FALLS ENERGY, LLC AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
April 30, 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Granite Falls Energy, LLC and Subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As used in this report in Form 10-QSB, the “Company” represents Granite Falls Energy, LLC (GFE) and its wholly-owned subsidiary Gopher State Ethanol, LLC (GSE).

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been consolidated or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended October 31, 2005, contained in the Company’s annual report on Form 10-KSB for 2005.

In the opinion of management, the interim consolidated financial statements reflect all adjustments considered necessary for fair presentation. The adjustments made to these statements consist only of normal recurring adjustments. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

Nature of Business

Granite Falls Energy, LLC (the “Company”) was originally organized to fund and construct a 40 million gallon per year ethanol plant on its location near Granite Falls, Minnesota with distribution to upper Midwest states. The Board of Governors of the Company has approved a proposal to increase the plant size to be capable of producing up to 50 million gallons of ethanol per year. The Company’s operations permit presently allows for the production of up to 47.25 million gallons of ethanol per year and will have to be amended in the event the Company desires to produce up to its capacity. The Company is currently in the process of amending this permit to produce up to the plant’s capacity. In addition, the Company produces and sells distiller’s dried grains as a co-product of fuel ethanol production. Construction began in the third quarter of 2004. During the remainder of 2004 and through mid-November 2005, the Company was in the development stage with its efforts being principally devoted to organizational and construction activities. The Company began its operations of the plant on November 13, 2005.

Principles of Consolidation

The consolidated financial statements include the accounts of Granite Falls Energy, LLC and its wholly-owned subsidiary, Gopher State Ethanol, LLC, collectively, the “Company.” All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Periods

The Company originally adopted a fiscal year ending December 31 for reporting financial operations. On April 28, 2005, members holding a majority of the Company’s outstanding limited liability company membership units voted to approve a change in the Company’s fiscal year from January 1 through December 31 to November 1 through October 31, effective as of April 28, 2005. In July 2005, the Company received approval from the Internal Revenue Service to change the fiscal year for Federal income tax purposes. Thus, the fiscal year ended on October 31, 2005.

During the fiscal year that will end on October 31, 2006, we will present information from the previous fiscal year for the fiscal quarters that closest match our current fiscal quarters. For the three months ended April 30, 2006 (second quarter of FY 2006), the comparable information presented will be for the three months ended June 30, 2005 (second quarter of FY 2005).

8

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. 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. Actual results could differ from those estimates.

Revenue Recognition

Revenue from the sale of ethanol and distiller’s grains is recorded when title transfers to the customer, which occurs when the product is loaded into the railcar or truck. Interest income is recognized as earned. Amounts received under incentive programs from the United States Department of Agriculture and the state of Minnesota are recognized as revenue based on the terms of the agreements (based on production of ethanol).

Cash and Cash Equivalents

The Company maintains some of its accounts at a financial institution which is a member of the Company. At times throughout the year, the Company’s cash balances at these financial institutions may exceed amounts insured by the Federal Deposit Insurance Corporation. All of the cash and cash equivalents were short-term investments (with maturities of three months or less) such as rated commercial paper and money market accounts. The Company has restricted cash related to a construction escrow account used for retainage payments.

Accounts Receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.

Accounts receivable are recorded at their estimated net realizable value. The Company follows a policy of providing an allowance for doubtful accounts; however, based on historical experience, and its evaluation of the current status of receivables, the Company is of the belief that such accounts will be collectible in all material respects and thus an allowance is not necessary. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Accounts considered uncollectible are written off.

Inventory

Inventory consists of raw materials, work in process, and finished goods. Corn is the primary raw material and, along with raw materials, is stated at the lower of average cost or market. Finished goods consist of ethanol and distiller’s dried grains produced, and are stated at the lower of first-in, first-out, (FIFO method) cost or market.

Deferred Financing Costs

Costs related to the Company’s debt financing have been capitalized as incurred. The Company amortizes these costs over the term of the loan using the effective interest rate method.

Property and Equipment

Property and equipment are stated at the lower of cost or estimated fair value. Depreciation is computed over estimated useful lives by use of the straight-line method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Interest was capitalized during the construction period.

Fair Value of Financial Instruments

The fair value of the Company’s cash and equivalents and hedge instruments approximates their carrying value. It is not currently practicable to estimate the fair value of our long-term debt since these agreements contain unique

9

terms, conditions, and restrictions (as discussed in Notes 4 and 5), which were negotiated at arm’s length. As such, there are no readily determinable similar instruments on which to base an estimate of fair value of each item.

Derivative Instruments

As of April 30, 2006, the Company has entered into derivative instruments to hedge (a) 7,750,000 bushels of its future corn purchases through June 2007, (b) 756,000 gallons of its future fuel ethanol sales through December 2006 and (c) 1,180,000 mmBTU of its future natural gas purchases through March 2007 to the extent considered necessary for minimizing risk from future market price fluctuations. The Company has used various option contracts as vehicles for these hedges.

At April 30, 2006, the Company had recorded an asset for these derivative instruments discussed above of $1,838,997. None of the positions open at April 30, 2006, were designated as fair value or cash flow hedges. Although the derivative instruments may not be designated as, and accounted for, as a fair value or cash flow hedge, management believes they are effective hedges of specified risks. The Company has recorded a reduction of revenue of $126,687 and $416,777 related to its ethanol related derivative instruments for the three months and six months ended April 30, 2006, respectively. The Company has recorded an increase in cost of goods sold of $617,135 and $1,718,583 related to its corn and natural gas related derivative instruments for the three months and six months ended April 30, 2006, respectively.

The hedge accounts are reported at fair value as designated by the broker. The Company has categorized the cash flows related to the hedging activities in the same category as the item being hedged. The Company expects substantially all of its hedge positions outstanding as of April 30, 2006, to be realized and recognized by June 30, 2007.

Income Taxes

The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements.

2. INVENTORY

Inventories consist of the following at April 30, 2006:

Raw materials	$	813,025
Work in process		302,236
Finished goods		1,524,202
Totals	$	2,639,463

3. NOTES PAYABLE TO CITY OF GRANITE FALLS

The Company had $47,800 of notes payable with the City of Granite Falls, Minnesota. In February 2006, the City of Granite Falls notified the Company that they had satisfied all of the terms and conditions of the Development Agreement and the note was formally forgiven. For financial purposes, the Company recorded the forgiveness of this note as an addition to members’ equity.

4. REVOLVING LINE OF CREDIT

The Company entered into a Loan Agreement with First National Bank of Omaha (the “Bank”) for the purpose of funding a portion of the cost of the fuel ethanol plant. Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $3,500,000 available and is secured by substantially all of the Company’s assets. Interest is charged at one-month London Inter-Bank Offering Rate (“LIBOR”) plus 3.50% or 8.34875% at April 30, 2006. There was no balance outstanding on this revolving line of credit at April 30, 2006. Effective with the initial advance in July 2005, the Company pays an unused commitment fee of 0.375% per annum on the unused portion of

10

the revolving line of credit. The revolving line of credit expires on March 30, 2007. The amount available under the revolving line of credit is determined by a borrowing base calculation based on qualifying receivables and inventory.

5. LONG-TERM DEBT

Long-term debt consists of the following at April 30, 2006:

Notes payable to Bank:
Swap Note	$	17,000,000
Variable Note		12,000,000
Total		29,000,000
Economic Development Agency (“EDA”) Loans:
City of Granite Falls / MIF		500,000
Western Minnesota RLF		100,000
Chippewa County		100,000
Total		700,000
		29,700,000
Less: Current Maturities		(2,680,219	)
Total Long-Term Debt	$	27,019,781

Note Payable to Bank:

Under the Loan Agreement, the Bank provided a construction loan for approximately $34,000,000 that was converted to term loans subsequent to completion of construction, a revolving line of credit of $3,5000,000, and standby letters of credit in an amount up to $1,000,000.

Under the construction loan, the Company was to make quarterly interest payments at a variable interest rate equal to one-month LIBOR plus 3.50% until March 10, 2006. The amounts borrowed under the construction loan matured and converted into three term loans aggregating up to $34,000,000 on March 10, 2006.

The maturity date of each term loan will be March 10, 2011 and interest accrues on each term loan at a variable rate at April 30, 2006, as follows:

Swap Note	Three-month LIBOR plus 3.00% or 7.88000%
Long-Term Revolver	One-month LIBOR plus 3.50% or 8.34875%
Variable Note	Three-month LIBOR plus 3.50% or 8.38000%

In addition to regular principal and interest payments on the term loans that start on June 10, 2006, the Company is required to make an additional principal payment to the Bank of 15% of its “excess cash flow”, as defined, on an annual basis.

Substantially all assets and contract rights of the Company are pledged as security under the Loan Agreement. The Loan Agreement and the related mortgage documents contain reporting requirements and restrictive loan covenants, which require the maintenance of various financial ratios, minimum working capital and allow distributions to unitholders of up to 65% of annual net income without Bank approval.

The Loan Agreement includes due diligence, negotiation, and commitment fees of $305,000 (paid at the closing of the Loan Agreement) and an annual servicing fee of $30,000 (first charged when the construction loan was converted to the term loans, which occurred on March 10, 2006). Additionally, the Company will pay the Bank, quarterly, an unused commitment fee equal to 0.375% per annum on the unused portion of the $5,000,000 long-term revolving note beginning on March 10, 2006.

11

Under the Long-Term Revolver, the Company has the ability to re-borrow any amounts paid on the $5,000,000 facility during the term of the loan.

On January 6, 2005, the Company entered into an interest rate swap agreement with the Bank (as required under the Loan Agreement) in order to change the interest on some of the anticipated borrowings from a variable rate to a fixed rate. Under the interest rate swap, the Company will pay the Bank the quarterly difference between interest charged at a fixed rate of 7.69% and the variable rate of three-month LIBOR plus 3.00% on the “notional” amount of $17,000,000, which was 7.8800% at April 30, 2006. The “notional” balance under the interest rate swap will match the principal balance of the Swap Note mentioned above. The interest rate swap became effective on September 10, 2005, and will terminate on March 10, 2011.

Under the Loan Agreement, the interest rate on the revolving line of credit, the Long-Term Revolver and the Variable Note can be reduced based on achieving certain defined debt-to-equity ratio levels on or after September 10, 2006. Once the required ratios are met, the change in the interest rate occurs at the start of the next “interest” period for the applicable note.

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 agencies. The amounts are as follows:

City of Granite Falls / Minnesota Investment Fund (“MIF”):
	Amount:	$500,000
	Interest Rate:	1.00%
	Principal and Interest Payments:	Semi-Annual
	Maturity Date:	June 15, 2014
Western Minnesota Revolving Loan Fund (“RLF”):
	Amount:	$100,000
	Interest Rate:	5.00%
	Principal and Interest Payments:	Semi-Annual
	Maturity Date:	June 15, 2016
Chippewa County:
	Amount:	$100,000
	Interest Rate:	3.00%
	Principal and Interest Payments:	Semi-Annual
	Maturity Date:	June 15, 2021

Amounts borrowed under the EDA Loan Agreements are secured by a second mortgage and a subordinated position on all of the assets of the Company.

6. COMMITMENTS AND CONTINGENCIES

Construction Contract for Plant

As of April 30, 2006, $87,485 is included in payable to construction contracts and will be paid upon final determination of amounts due to a warranty claim.

Construction Management and Operations Management Agreement

The Company entered into a Consulting Agreement and an Operating and Management Agreement with GLE, who is also a member. Under the Consulting Agreement, GLE provided assistance in planning, directing and monitoring the construction of the Company’s fuel ethanol plant. The Company paid GLE $10,000 plus pre-approved expenses per month. The Consulting Agreement terminated upon the effective date of the Operating and Management

12

Agreement under which GLE will operate and manage the Company’s plant, which was mutually determined to be August 8, 2005. The Company will pay GLE $35,000 per month plus 3% of the plant’s operating profits (payable annually) under the Operating and Management Agreement. The initial term of the Operating and Management Agreement is for five years and will automatically renew for successive one-year terms unless terminated 180 days prior to the start of a renewal term.

For the three months and six months ended April 30, 2006, the Company incurred $314,900 and $462,500, respectively, of costs under the Operating and Management Agreement (of which $305,000 is in accounts payable at April 30, 2006).

Corn Storage and Grain Handling Agreement

The Company entered into a corn storage and grain handling agreement with a Farmers Cooperative Elevator (FCE), a member. Under this agreement, the Company agreed to purchase all of the corn needed for the operation of the plant from the member. The price of the corn purchased will be the bid price the member establishes for the plant plus a fee of $0.05 per bushel. For the three months and six months ended April 30, 2006, the Company had purchased $6,996,846 and $12,534,985, respectively, of corn from the member (of which $579,279 is in accounts payable at April 30, 2006).

7. GOVERNMENT INCENTIVE PROGRAMS

The Company has enrolled in the Bioenergy Program, operated by the Commodity Credit Corporation (“CCC”), a division of the United States Department of Agriculture. In accordance with the terms of this agreement, the Company receives payments based on quarterly increases in production of undenatured ethanol compared to the same period of the prior year. The maximum amount that can be received in this program year is 5% of the annual funding and payments are subject to pro rata reduction if the aggregate payments to eligible producers in a program year exceed the maximum annual funding of the Bioenergy Program. The program year for the Bioenergy Program is from October 1 to September 30 and the Bioenergy Program is scheduled to expire on June 30, 2006.

For the three months and six months ended April 30, 2006, the Company recognized $253,240 and $477,274, respectively, of income from the program (of which $349,281 is in accounts receivable at April 30, 2006).

8. AGREEMENT WITH GOPHER STATE ETHANOL, LLC

On May 3, 2005, the Company entered into an agreement with Gopher State Ethanol, LLC (“Gopher State”) for the purpose of participating in the Minnesota ethanol producer incentive payments that Gopher State is entitled to receive. Under the agreement, Gopher State operates the Company’s fuel ethanol plant as a wholly-owned subsidiary. The agreement was conditional upon the Bankruptcy Court’s approval of a plan of reorganization for Gopher State that includes the agreement between Gopher State and the Company. The plan or reorganization was approved by the Bankruptcy Court in December 2005. On April 13, 2006, pursuant to our agreement regarding the plan of reorganization with Gopher State, we executed a lease agreement with our wholly-owned subsidiary, GS Acquisitions, Inc., under which we leased all of our operating assets to GS Acquisition. We then executed articles of merger, a plan of merger and a certificate of merger with Gopher State. Under the merger agreement, GS Acquisition was merged with and into Gopher State, at which time, the separate corporate existence of GS Acquisitions ceased. All outstanding equity interest in Gopher State was cancelled. One hundred percent (100%) of the outstanding equity interest in GS Acquisition was converted into one hundred percent (100%) of the outstanding equity interest in Gopher State. As such, Gopher State has survived as our wholly-owned subsidiary and is leasing all of our operating assets. The lease has a 10 year term with monthly payments of $800,000. However, the lease becomes effective as of the date the permits and licenses required to operate the plant and equipment are issued to the lessor and lessee in the name of both parties. As of April 30, 2006, the required permits and licenses have not been received and, accordingly, no monthly payments have been made.

Even with an approved plan of reorganization, there is no assurance and the Company has no guarantee that the state of Minnesota will agree to pay the ethanol producer incentive payments to Gopher State based upon its operation and production of ethanol at the Company’s facility. Communications with the Minnesota Department of Agriculture indicate that is does not consider the Company’s arrangement with Gopher State to be within the intent of the Minnesota legislature. Additionally, on June 30, 2005, the Minnesota legislature passed a law prohibiting an ethanol producer from transferring its eligibility for payments to a plant at a different location. Accordingly, it is likely that the Company and Gopher State will be required to commence legal proceedings against the State of

13

Minnesota and obtain a favorable court order before Gopher State will receive any ethanol producer incentive payments.

The Company may choose not to commence legal proceedings or the legal proceedings may not be successful in obtaining a portion or the full amount of ethanol producer incentive payments to Gopher State. The Company expects to incur legal costs and other expenses in connection with any legal proceedings to enforce Gopher State’s rights to the ethanol incentive payments. If the legal proceedings are ultimately successful, the Company may not be able to offset these legal costs and other expenses against any ethanol producer incentive payments.

Item 2. Management’s Discussion and Analysis or Plan of Operation.

Cautionary Statements Regarding Forward Looking Statements

     This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “will,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the following factors:

• Projected growth, overcapacity or contraction in the ethanol market in which we operate;

• Fluctuations in the price and market for ethanol and distiller’s grains;

• Changes in plant production capacity, variations in actual ethanol and distiller’s grains production from expectations or technical difficulties in operating the plant;

• Availability and costs of products and raw materials, particularly corn and natural gas;

• Changes in our business strategy, capital improvements or development plans for expanding, maintaining or contracting our presence in the ethanol market in which we operate;

• Our ability to market and our reliance on third parties to market our products;

• Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as:

- national, state or local energy policy;

- federal ethanol tax incentives;

- legislation mandating the use of ethanol or other oxygenate additives;

- state and federal regulation restricting or banning the use of methyl tertiary butyl ether (“MTBE”); or

- environmental laws and regulations that apply to our plant operations and their enforcement;

• Increased competition in the ethanol and oil industries;

• Fluctuations in U.S. oil consumption and petroleum prices;

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

• Anticipated trends in our financial condition and results of operations;

• Changes and advances in ethanol production technology; and

• Competition from alternative fuels and alternative fuel additives.

     Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in this report. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, 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 statements by these cautionary statements.

14

Overview

     Granite Falls Energy, LLC is a Minnesota limited liability company formed on December 29, 2000, for the purpose of constructing and operating an ethanol manufacturing facility on our 56-acre site located near Granite Falls, Minnesota. On November 13, 2005, we began plant operations and are currently producing fuel-grade ethanol and distiller’s grains for sale. Our plant has a production capacity of 50 million gallons per year, although our current environmental permits only allow us to produce up to 47.25 million gallons per year. We expect to fund our operations during the next 12 months using cash flow from continuing operations and our credit facilities.

     Our operating results are largely driven by the prices at which we sell ethanol and distiller’s grain and the costs related to their production. Historically, the price of ethanol has fluctuated with the price of petroleum-based products such as unleaded gasoline, heating oil and crude oil. The price of distiller’s grains is primarily influenced the price of corn as a substitute livestock feed. We expect these price relationships to continue for the foreseeable future. Our largest costs of production are corn, natural gas and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors. Natural gas, manufacturing chemicals and denaturant pricing levels are tied directly to the overall energy sector, crude oil and unleaded gasoline.

     Since we only recently became operational, we do not yet have comparable income, production and sales data for the three months and six months ended April 30, 2006 from our previous fiscal year. Accordingly, we do not provide a comparison of our financial results between reporting periods in this report. If you undertake your own comparison of our second fiscal quarter of 2005 and our second fiscal quarter of 2006, it is important that you keep this in mind.

Results of Operations — Three Months Ended April 30, 2006

     During our first fiscal quarter ended January 31, 2006, we transitioned from a development stage company to an operational company. The following table shows the results of our operations for our second fiscal quarter ended April 30, 2006, and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations:

	Quarter Ended
	April 30, 2006
	(Unaudited)
Income Statement Data	Amount			Percent
Revenues	$	21,728,672			100.0	%
Cost of Sales	$	12,699,756			58.4	%
Gross Profit	$	9,028,416			41.6	%
Operating Expenses	$	731,520			3.4	%
Operating Income	$	8,297,396			38.2	%
Interest Expense	$	(631,159	)		(2.9	)%
Government Programs and Other Income	$	253,376			1.2	%
Interest Income	$	9,399			.04	%
Net Income	$	7,929,012			36.5	%

15

Revenues

     Our revenues from operations come from two primary sources: ethanol sales and sales of distiller’s grains. For the three months ended April 30, 2006, our total revenues were $21,728,672. The following table shows the sources of our revenue:

			% of
Revenue Sources	Amount		Total Revenue
Ethanol Sales	$	19,717,542		90.7	%
Distiller’s Grain Sales	$	2,011,130		9.3	%
Total Revenues	$	21,728,672		100.0	%

     We expect the sale price of fuel ethanol to increase from current levels based on information from our marketer. See “Plan of Operations for the Next 12 Months—Trends and Uncertainties Impacting the Ethanol and Distiller’s Grains Industries and Our Revenues.” As a result, we expect the percentage of revenues from the sale of fuel ethanol to increase. We expect the percentage of revenue from the sale of distiller’s grains to decrease during the remainder of the fiscal year due to the increase in the price of fuel ethanol. We expect the sale price of distiller’s grain to be consistent during the remainder of the fiscal year.

Cost of Sales

     Cost of sales for our products for the three months ended April 30, 2006, was $12,699,756 or 58.4% of our revenue. We expect this percentage to change with the expected increase in fuel ethanol prices.

     We expect that cost of sales on a per gallon sold basis will be consistent during the remainder of the fiscal year. Our two largest costs of production are corn (54.2% of cost of sales for our quarter ended April 30, 2006) and natural gas (26.2% of cost of sales for our quarter ended April 30, 2006). Both of these costs are affected by factors largely out of our control. Corn costs significantly impact our cost of goods sold. The 2005 national corn crop was the second largest on record with approximately 11.1 billion bushels produced nationally. Higher production amounts allowed ethanol plants to purchase inexpensive corn throughout 2005, which widened profit margins for many ethanol plants in the current year. We expect corn prices to remain relatively low through our third fiscal quarter; however, variables such as rainfall, planting dates, and temperatures will likely cause market uncertainty and create corn price volatility as the growing season begins. Domestic and export demand for U.S. corn is at an all time high. Although carryout supplies for the 2006 marketing year appear adequate, any production shortfall during the 2006 growing season will create volatility and may increase our cost of corn. In addition, newly constructed ethanol plants and expansion of existing plants in our geographic area may lead to increased demand for corn, higher prices and possibly an inadequate supply of corn from local producers.

     Natural gas has recently been available only at prices exceeding historical averages. We expect continued volatility in the natural gas market. Global demand for natural gas is expected to continue to increase, which may further drive up prices. Any ongoing increases in the price of natural gas will increase our cost of production and may negatively impact our profit margins.

Operating Expense

     Our general and administrative operating expenses for the three months ended April 30, 2006, were equal to 3.4% of our revenue and totaled $731,520. We expect that general and administrative expenses will remain relatively constant for the rest of the fiscal year.

Government Programs

     Revenue from government programs for the three months ended April 30, 2006, equaled 1.2% of our revenue and totaled $253,240. The amounts recognized under the USDA Commodity Credit Corporation Bioenergy Program are based on our production of un-denatured ethanol and the amounts available under the program. The program is set to expire in September 2006, however, a notice has been issued that the program will terminate by

16

June 30, 2006, because funds are expected to be exhausted. As a result, we expect payments under the program to end at that time.

Interest Expense and Interest Income

     Interest expense for the three months ended April 30, 2006, was equal to 2.9% of our revenue and totaled $631,159. We expect this percentage to be consistent during the remainder of the fiscal year as the decreases in outstanding balances will be offset by increases in interest rates on variable rate debt.

Results of Operations — Six Months Ended April 30, 2006

     The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the six months ended April 30, 2006:

	Six Months Ended
	April 30, 2006
	(Unaudited)
Income Statement Data	Amount			Percent
Revenues	$	35,698,835			100.0	%
Cost of Sales	$	24,430,095			68.4	%
Gross Profit	$	11,268,740			31.6	%
Operating Expenses	$	1,172,015			3.3	%
Operating Income	$	10,096,725			28.3	%
Interest Expense	$	(1,226,459	)		(3.4	)%
Government Programs and Other Income	$	477,854			1.3	%
Interest Income	$	11,826			.03	%
Net Income	$	9,359,946			26.2	%

Revenues

     For the six months ended April 30, 2006, we received approximately 90.4% of our revenue from the sale of fuel ethanol and approximately 9.6% of our revenue from the sale of distiller’s grains. We expect the sale price of fuel ethanol to increase from current levels based on information from our marketer. See “Plan of Operations for the Next 12 Months—Trends and Uncertainties Impacting the Ethanol and Distiller’s Grains Industries and Our Revenues.” As a result, we expect the percentage of revenues from the sale of fuel ethanol to increase. We expect the percentage of revenue from the sale of distiller’s grains to decrease during the remainder of the fiscal year due to the increase in the price of fuel ethanol. We expect the sale price of distiller’s grain to be consistent during the remainder of the fiscal year.

Cost of Sales

     Our cost of sales as a percentage of revenues was 68.4% for the six months ended April 30, 2006. We expect this percentage to change with the expected increase in fuel ethanol prices. We expect that cost of sales on a per gallon sold basis will be consistent during the remainder of the fiscal year. Our two largest costs of production are corn (55.3% of cost of sales for the six months ended April 30, 2006) and natural gas (27.3% of cost of sales for the six months ended April 30, 2006). Both of these costs are affected by factors largely out of our control. Corncosts significantly impact our cost of goods sold. The 2005 national corn crop was the second largest on record with

17

approximately 11.1 billion bushels produced nationally. Higher production amounts allowed ethanol plants to purchase inexpensive corn throughout 2005, which widened profit margins for many ethanol plants in the current year. We expect corn prices to remain relatively low through our third fiscal quarter; however, variables such as rainfall, planting dates, and temperatures will likely cause market uncertainty and create corn price volatility as the growing season begins. Domestic and export demand for US corn is at an all time high. Although carryout supplies for 2006 marketing year appear adequate, any production shortfall during the 2006 growing season will create volatility and may increase our cost of corn. In addition, newly constructed ethanol plants and expansions of existing plants in our geographic area may lead to increased demand for corn, higher prices and possibly an inadequate supply of corn from local producers.

     Natural gas has recently been available only at prices exceeding historical averages. We expect continued volatility in the natural gas market. Global demand for natural gas is expected to continue to increase, which may further drive up prices. Any ongoing increases in the price of natural gas will increase our cost of production and may negatively impact our profit margins.

Operating Expense

     Our general and administrative operating expenses for six months ended April 30, 2006, were equal to 3.3% of our revenue and totaled $1,172,015. We expect that general and administrative expenses will remain relatively constant for the rest of the fiscal year.

Government Programs

     Revenue from government programs for the six months ended April 30, 2006, equaled 1.3% of our revenue and totaled $477,274. The amounts recognized under the USDA Commodity Credit Corporation Bioenergy Program are based on our production of un-denatured ethanol and the amounts available under the program. The program is set to expire in September 2006, however, a notice has been issued that the program will terminate by June 30, 2006, because funds are expected to be exhausted. As a result, we expect payments under the program to end at that time.

Interest Expense and Interest Income

     Interest expense for the six months ended April 30, 2006, was equal to 3.4% of our revenue and totaled $1,226,459. We expect this percentage to be consistent during the remainder of the fiscal year as the decreases in outstanding balances will be offset by increases in interest rates on variable rate debt.

Plan of Operations for the Next 12 Months

     We expect to spend the next 12 months engaging in the production of ethanol and distiller’s grains at our plant. We will continue to focus our attention on two main areas: (i) ensuring the plant is operating as efficiently as possible; and (ii) cost-effective purchasing of important manufacturing inputs such as corn and natural gas. In addition, we expect to receive amended environmental permits that will allow us to operate at our full production capacity.

Plant Construction Activity

     Construction of our plant was completed in early November 2005 and operations began on November 13, 2005. Our final contract price with applicable change orders with Fagen, Inc. totaled $49,170,575 to build our plant. As of April 30, 2006, we have incurred all of the construction costs related to this contract of which $87,485 is included in payables to construction contractors. This amount will be paid to Fagen upon determination of final costs incurred by the Company related to a warranty issue.

Permitting

     We have obtained the required air, water, construction and other permits necessary to construct and operate the plant. Our permits allow us to operate up to 47.25 million gallons per year, which is less than our production capacity of 50 million gallons per year. In addition, some of our permits require additional action in order for us to

18

increase our production efficiency or maintain compliance with applicable environmental laws and regulations. During the next twelve months, we expect to work on the following permitting activities:

     SPCC and RMP. We have prepared a Spill Prevention Control and Countermeasures (“SPCC”) plan and a Process Hazard Analysis. We must also prepare a Risk Management Plan (“RMP”). We will complete the Risk Management Plan with assistance from Glacial Lakes personnel by November 2006 (twelve months after the start-up of the plant). These items are required by the Environmental Protection Agency and enforced by the MPCA.

     Air Permits. Our current Air Emissions Permit and National Pollution Discharge Elimination System (“NPDES”) Permit allows the Company to operate at a rate of 45 million gallons per year of undenatured ethanol (“200 proof”) or 47.25 million gallons per year of fuel ethanol. In June 2005, we applied for amendments to both permits to allow us to operate at a rate of 60 million gallons of undenatured ethanol or 63 million gallons per year of fuel ethanol. These applications are currently under review by the MPCA and the Attorney General for the State of Minnesota. During the period the amendments were open for public comment, an environmental group submitted a letter challenging several aspects of our NPDES permit. MPCA is reviewing the claims made in the letter and is preparing a response to the environmental group. We expect to receive the Air Emissions Permit amendment by the end of June 2006 and the NPDES Permit amendment by the end of August 2006; however, there is no guarantee that we will receive the amendments or that the amendments will be received by the expected dates. Under both the current Air Emissions Permit and the anticipated amended Air Emissions Permit, we were required to conduct emissions testing within 180 days of plant start-up. We performed the compliance testing in mid-April and we were in full compliance with the rate of the amended Air Emissions Permit level.

     Water Permits. We obtained a three-year conditional, 240 million gallon per year water appropriation permit from the Minnesota Department of Natural Resources, which will remain in effect through December 31, 2008. We will obtain the water to operate our plant from wells located approximately one and one-half miles from our plant. As part of the application process, we conducted drawdown tests for the wells which indicated that the wells contain a sufficient supply of water for our purposes. As a condition of the water appropriations permit, we are required to frequently monitor the static water level in our wells and the wells of adjacent property owners. While we are in compliance with the terms of our conditional water appropriation permit, our recent monitoring activities indicate that the water level of our wells has decreased more than expected since plant operations commenced in November of 2005. If the wells continue to be adversely impacted by our operations, we will need to locate additional water supply sources.

     Based on the current levels in the wells and to provide a redundant source of water, we have started the engineering and permitting process to obtain water from the Minnesota River. We have applied to the Army Corps of Engineers for a permit to draw water from the river and exepct to receive the permit by the end of June 2006. Based on preliminary engineering work, we have determined that it will cost approximately $1,900,000 to build an intake structure in the river and build the water pipeline to the plant. We have easements with two landowners that would allow us to bring the water pipeline across their property to the plant. In order to use river water in our production process, we will have to add additional water treatment equipment which is estimated to cost between $3,500,000 and $4,000,000. The current plan is to have the new water pipeline and water treatment equipment operational by December 2006 and to fund these expenditures from cash flow from current operations. We are also investigating ways to receive water from the City of Granite Falls.

     Our current and expected amended NPDES permit will be in effect through December 2008. We have requested and expect to receive a variance from MPCA by the end of August 2006 for certain minerals that are in the water that we discharge into a local creek. We have been informed by MPCA that we will not receive the same variance when our NPDES permit comes up for renewal in 2008 unless we make significant changes to our process and be subject to much higher standards for water discharge. This will require us to find new ways to treat all of the water that comes from our plant to be discharged or find a process that does not require water to be discharged. This could be done with new water treatment equipment as described above, which would allow us to treat and re-use water. There is also a possibly that we could contract with the City of Granite Falls for the treatment of some or all of our discharge water.

19

Contracting Activity

     Management, Supply and Marketing Agreements. We have secured all of the material contracts necessary to operate our ethanol plant. Glacial Lakes managed plant construction and is currently managing plant operations. Under our Operating and Management Agreement with Glacial Lakes, we pay Glacial Lakes $35,000 per month plus an annual payment equal to 3% of the plant’s net income from operations.

     Farmers Cooperative Elevator Company supplies our corn. Aventine Renewable Energy markets our ethanol and Commodity Specialists Company markets our distiller’s grains by rail and truck. Our contracts with these related parties are critical to our success, and we are very dependent on each of these companies. We are independently marketing a portion of our distiller’s grains to local markets; however, if local markets do not supply competitive prices, we may choose to market all of our distiller’s grains through Commodity Specialists Company.

     Natural Gas. We are using various natural gas vendors to supply the natural gas necessary to operate the plant. U.S. Energy assists us with sourcing natural gas through various vendors. We determined that sourcing our natural gas from a variety of vendors may prove more cost-efficient than using an exclusive supplier.

     Rail Service. Our ethanol and distiller’s grains marketing firms continue to discuss rail service and freight rates on our behalf with both the TC&W Railroad and the Burlington Northern Santa Fe Railroad.

     Railcar Lease. On October 3, 2005, we entered into a lease agreement with Trinity Industries Leasing Company (“Trinity”) for 75 hopper cars to transport distiller’s grains by rail. The lease is for a 5-year period which commenced with delivery and inspection of the cars from October 2005 to December 2005. Granite Falls will pay Trinity $673.00 per month, plus $0.03 for each mile traveled in excess of 36,000 miles per year. As a condition of the lease, Granite Falls provided a standby letter of credit to Trinity for $281,250, which is approximately six months of lease payments. This amount will be outstanding until Granite Falls has met Trinity’s credit standards, which is expected to occur after Granite Falls has made a full year of payments on a timely basis.

Agreement with Gopher State Ethanol, LLC

     Gopher State is a debtor in possession under Chapter 11 of the U.S. Bankruptcy Code. Before its bankruptcy, it was an ethanol plant located in St. Paul, Minnesota and was entitled to ethanol producer incentive payments pursuant to Section 41A.09 of the Minnesota Statutes. Because it no longer produces ethanol, Gopher State is not entitled to incentive payments at this time. Our intent is to qualify Gopher State to receive ethanol producer payments, however we cannot be certain that the agreement will achieve the desired result.

     On May 3, 2005, we entered into an agreement with Gopher State for the purpose of participating in the Minnesota ethanol producer incentive payments that Gopher State is entitled to receive. All of our obligations under this agreement are subject to certain conditions that must be fulfilled prior to our obligation to perform. The agreement provides that if we are successful in receiving ethanol producer incentive payments, we will pay to Gopher State’s unsecured creditors 50% of any payments we receive resulting from Gopher State’s future ethanol production at our facility. In exchange, Gopher State’s unsecured creditors will agree to release and discharge any and all claims against Gopher State.

     On April 13, 2006, pursuant to our agreement regarding plan of reorganization with Gopher State, we executed a lease agreement with our wholly-owned subsidiary, GS Acquisition, Inc., under which we leased all of our operating assets to GS Acquisition. We then executed articles of merger, a plan of merger and a certificate of merger with Gopher State. Under the merger agreement, GS Acquisition was merged with and into Gopher State, at which time, the separate corporate existence of GS Acquisition ceased. All outstanding equity interest in Gopher State was cancelled. One hundred percent (100%) of the outstanding equity interest in GS Acquisition was converted into one hundred percent (100%) of the outstanding equity interest in Gopher State. As such, Gopher State has survived as our wholly-owned subsidiary and is leasing all of our operating assets. The lease has a 10 year term with monthly payments of $800,000. However, the lease becomes effective as of the date the permits and licenses required to operate the plant and equipment are issued to the lessor and lessee in the name of both parties. As of April 30, 2006, the required permits and licenses have not been received and, accordingly, no monthly payments have been made.

     There is no assurance, and we cannot guarantee that, even though the plan of reorganization has been approved by the Bankruptcy Court, the State of Minnesota will agree to pay the Minnesota ethanol producer incentive payments to Gopher State based upon its operation and production of ethanol at our facility.

20

Communications from the Minnesota Department of Agriculture indicate that it does not consider the Company’s arrangement with Gopher State to be within the intent of the Minnesota legislature. Further, on June 30, 2005, a new law became effective that specifically prohibits an ethanol producer from transferring its eligibility for payments to a plant at a different location. Accordingly, it is likely that the Minnesota Department of Agriculture will reject any future application for producer payments, and it may be necessary to institute legal proceedings against the State of Minnesota and obtain a court order in our favor before receiving any ethanol producer incentive payments. It is also possible that a court would construe the statute against us and use it as a basis for denying the ethanol producer incentive payments.

     We may choose not to commence legal proceedings, or the legal proceedings may not be successful in obtaining a portion or the full amount of ethanol producer incentive payments to which Gopher State could receive. In addition, we expect to incur legal costs and expenses in connection with any legal proceedings to enforce Gopher State’s rights to the ethanol producer incentive payments. If the legal proceedings are ultimately unsuccessful, we may not be able to offset these legal costs and expenses against any ethanol producer incentive payments.

Operating Budget and Financing of Plant Operations

     We expect to have sufficient cash from cash flow generated by plant operations, current cash reserves, our senior credit facility and other sources of debt financing to cover our operating costs over the next 12 months, including the cost of corn and natural gas supplies, other production costs, staffing, office, audit, legal, compliance and working capital costs. We estimate that our total operating costs and expenditures for the next 12 months will be $66,580,000. This estimate is based on our limited operational experience and that of our general contractor with other ethanol plants similar to ours. This is only an estimate and our actual expenses and costs could be much higher due to a variety of factors outside our control, such as:

• Changes in the availability and price of corn;

• Changes in federal ethanol tax incentives;

• Changes in the environmental regulations that apply to our plant operations;

• Increased competition in the ethanol industry;

• Changes in interest rates or the availability of credit;

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

• 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;

• Changes in the availability and price of natural gas;

• Increases or decreases in the supply and demand for distiller’s grains; and

• Changes and advances in ethanol production technology

Employees

     As of the date of this report, we have filled all of the positions necessary to operate our plant and perform administrative functions by hiring 32 employees. Four of these employees are involved primarily in management and administration. The remaining 28 employees are primarily involved in plant operations. Our employees underwent training at Glacial Lakes Energy.

     In addition to our 32 employees, Glacial Lakes provide 6 management positions to our plant pursuant to our operating and management agreement with Glacial Lakes. Glacial Lakes provides its own personnel to act as part-time contract officers and managers of our plant for the positions of Chief Executive Officer or General Manager; Chief Financial Officer; Commodities Manager; Environmental, Health and Safety Manager and Director of Operations. All of these positions are compensated by Glacial Lakes.

Trends and Uncertainties Impacting the Ethanol and Distiller’s Grains Industries and Our Revenues

     Now that our plant is operational, our revenues primarily consist of sales of the ethanol and distiller’s grains we produce. Ethanol sales constitute the majority of our revenues. Beginning in September 2005, the

21

demand for ethanol increased relative to supply causing upward pressure on ethanol market prices. During April 2006, prices for ethanol increased dramatically due to the start of a new marketing period as fixed price contracts at lower prices ended in March 2006. Increased demand, firm crude oil and gas markets, increased public acceptance of ethanol, and positive political signals have all contributed to a strengthening of ethanol prices. In order to sustain these higher price levels however, management believes the industry will need to continue to grow demand to offset the increased supply brought to the market place by additional production.

     We also expect that use of ethanol as a fuel oxygenate may increase due to decreased use of MTBE, the primary competitor of ethanol as a fuel oxygenate. Although the Energy Policy Act of 2005 did not impose a national ban of MTBE, the Act’s failure to include liability protection for manufacturers of MTBE could result in refiners and blenders using ethanol as an oxygenate rather than MTBE to satisfy the Clean Air Act’s reformulated gasoline oxygenate requirement. While this may create some additional demand, the Act repealed the Clean Air Act’s 2% oxygenate requirement, as effective nationwide May 5, 2006. However, the Clean Air Act also contains an oxygenated fuel requirement for areas classified as carbon monoxide non-attainment areas. These areas are required to establish an oxygenated fuels program for a period of no less than three months each winter. The minimum oxygen requirement for gasoline sold in these areas is 2.7% by weight. This is the equivalent of 7.7% ethanol by volume in a gasoline blend. This requirement was unaffected by the Act and a number of states, including California, participate in this program. As a result, demand for ethanol in these areas during the winter months may increase and positively effect ethanol prices.

     In addition, we expect ethanol prices will be positively impacted by blenders and refineries increasing their use of ethanol in response to environmental liability concerns about MTBE and increased consumer acceptance and exposure of ethanol. For instance, if gasoline prices continue to trend higher, consumers will look for lower priced alternative fuels. The Consumer Federation of America recently published a report that states that consumers could save up to $0.08 per gallon at the pump if ethanol were blended at a rate of 10%. Since ethanol blended fuel is a cheaper alternative for consumers, the demand for such ethanol blended fuel could increase, thus increasing the overall demand for ethanol. This could positively affect our earnings. However, the recent voluntary shift away from MTBE to ethanol has put increased focus on America’s ethanol and gasoline supplies. Although the Energy Policy Act of 2005 effectively eliminated reformulated gas (“RFG”) requirements with the enactment of the national renewable fuel standard, federal air quality laws in some areas of the country still require the use of RFG. On April 25, 2006, President Bush announced that he has asked Stephen Johnson, the EPA Administrator, to grant temporary RFG waivers to areas that need them to relieve critical fuel supply shortages. Such waivers may decrease the demand for ethanol, thus driving down the price of ethanol. In addition, a greater supply of ethanol on the market from additional plants and plant expansions could reduce the price we are able to charge for our ethanol, especially if supply outpaces demand.

     Legislation was recently introduced in the Senate and House that would strike the $0.54 secondary tariff on imported ethanol due to concerns that the recent spikes in retail gasoline prices are a result of ethanol supplies. The proposed legislation seems misguided in light of recent reports by the Energy Information Administration (“EIA”). The EIA estimates that 130,000 barrels per day of ethanol will be needed to replace the volume of MTBE refiners have chosen to remove from the gasoline pool. The most recent EIA report shows that U.S. ethanol production has soared to 302,000 barrels per day in February, which is enough ethanol to meet the new MTBE replacement demand while continuing to supply existing markets. Further, ethanol production capacity continues to increase as new plants come on-line. Nevertheless, if the legislation is passed, the price of ethanol may decrease, negatively affecting our earnings.

     The Act also expands standards determining who qualifies as a small ethanol producer for purposes of the small ethanol producer tax credit. Historically, small ethanol producers were allowed a 10-cent per gallon production income tax credit on up to 15 million gallons of production annually. The size of the plant eligible for the tax credit was limited to 30 million gallons. Under the Act, the size limitation on the production capacity for small ethanol producers increases from 30 million gallons per year to 60 million gallons per year. The credit can be taken on the first 15 million gallons of production. The tax credit is capped at $1.5 million per year per producer. The credit is effective for taxable years ending after the date of enactment through 2008. Since we expect to now qualify as a small ethanol producer under the Act, we expect to be eligible for this tax credit this taxable year and to pass this credit onto our members.

22

     Demand for ethanol may also increase as a result of increased consumption of E85 fuel. E85 fuel is a blend of 70% to 85% ethanol and gasoline. According to the Energy Information Administration, E85 consumption is projected to increase from a national total of 11 million gallons in 2003 to 47 million gallons in 2025. E85 is also used as an aviation fuel and as a hydrogen source for fuel cells. In the U.S., there are currently about 5 million flexible fuel vehicles capable of operating on E85 and 650 retail stations supplying it. Automakers have indicated plans to produce an estimated 2 million more flexible fuel vehicles per year.

     Ethanol production continues to grow as additional plants become operational. According to the Renewable Fuels Association (as of June 1, 2006), there are currently 101 ethanol plants in operation nationwide that have the capacity to annually produce approximately 4.80 billion gallons. In addition, there are 32 new ethanol plants and 6 expansions of existing ethanol plants under construction, constituting another 1.97 billion gallons of annual capacity. In addition, ADM has recently announced its plan to add 550 million gallons of ethanol production and Aventine has recently announced its plan to add 220 million gallons of ethanol production, clearly indicating its desire to maintain a significant share of the ethanol market. Since our current national ethanol production capacity exceeds the 2006 RFS requirement, it is management’s belief that other market factors are primarily responsible for current ethanol prices. Accordingly, it is possible that the RFS requirements may not significantly impact ethanol prices in the short-term. However, the RFS requirement of 7.5 billion gallons by 2012 is expected to support ethanol prices in the long-term. A greater supply of ethanol on the market from these additional plants and plant expansions could reduce the price we are able to charge for our ethanol. This may have a negative impact on our revenues.

     Demand for ethanol has been supported by higher oil prices and by clean air standards mandated by federal agencies that have required highly populated areas to blend ethanol into their gasoline supplies as an oxygenate. The intent of the air standards is to reduce harmful emissions into the atmosphere. These mandates have been challenged in several metropolitan areas, and are currently being reviewed by the courts. In the future, the combination of additional supply, successful challenges to the clean air standards and stagnant or reduced demand may damage our ability to generate revenues and maintain positive cash flows.

     Consumer resistance to the use of ethanol may affect the demand for ethanol which could affect our ability to market our product and reduce the value of your investment. Certain individuals believe that use of ethanol will have a negative impact on prices at the pump. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy in the ethanol produced. These consumer beliefs could potentially be wide-spread. If consumers choose not to buy ethanol, it would affect the demand for the ethanol we produce which could negatively affect our ability sell our product and negatively affect our profitability.

     We also sell dried distiller’s grains. Prices for distiller’s grains were lower in early 2006 than in early 2005, due in part to lower prices for competing feeds, such as corn. Increased ethanol production has led to increased availability of the co-product. Continued increased supply of dried distiller’s grains on the market from other ethanol plants could reduce the price we will be able to charge for our dried distiller’s grains. This could have a negative impact on our revenues. During the first six months of our fiscal year, prices for distiller’s grains in our local market have remained constant or have increased as more users of animal feed (for cattle, poultry and swine) are familiar with distiller’s grains and incorporate the co-product in their rations instead of using corn.

Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Cost of Goods Sold

     The cost of our goods consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distiller’s grains for sale. We grind approximately 1,500,000 bushels of corn each month. Corn yields nationwide have been better than expected, which may lead to an excess supply of corn and low corn prices as a result. However, increasing demand for corn from increased ethanol production or other changes in demand could keep corn prices higher than currently anticipated. Increases in corn prices may negatively impact our profitability by increasing our cost of goods and reducing our net operating income. We attempt to use hedging strategies to minimize our exposure to corn price movements; however, there is no guarantee or assurance that our hedging strategies will be effective.

     Natural gas is also an important input commodity to our manufacturing process. Our natural gas usage is approximately 125,000 million British thermal units (mmBTU) per month. We use natural gas to (a) operate a

23

boiler that provides steam used in the production process, (b) operate the thermal oxidizer that helps us comply with emissions requirements, and (c) dry our distiller’s grain products to moisture contents at which they can be stored for long periods of time, and can be transported greater distances. Recently, the price of natural gas has followed other energy commodities to historically high levels. Current natural gas prices are considerably higher than the 10-year average. Global demand for natural gas is expected to continue to increase, further driving up prices. As a result, we expect natural gas prices to remain higher than average in the short to mid term. Increases in the price of natural gas increases our cost of production and negatively impacts our profit margins. We have secured a marketing firm and an energy consultant for our natural gas procurement, and will work with them on an ongoing basis to mitigate our exposure to volatile gas prices.

Commodity Price Risk Protection

     We seek to minimize the risks from fluctuations in the prices of corn, ethanol and natural gas through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, we do not use hedge accounting which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means that as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. As of April 30, 2006, the fair values of our derivative instruments are reflected as an asset in the amount of $1,838,997. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn, ethanol or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. As we move forward, additional protection may be necessary. As the prices of these hedged commodities move in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for the Company.

     As of April 30, 2006, the Company has entered into derivative instruments to hedge (a) 7,750,000 bushels of its future corn purchases through June 2007, (b) 756,000 gallons of its future fuel ethanol sales through December 2006 and (c) 1,180,000 mmBTU of its future natural gas purchases through March 2007. The Company has used various option contracts as vehicles for these hedges.

     The hedge accounts are reported at fair value as designated by the broker. The Company has categorized the cash flows related to the hedging activities in the same category as the item being hedged. As of April 30, 2006, no derivative contracts were designated as hedges and all changes in market value have been recognized in the statement of operations. For the three months ended April 30, 2006, the following amounts were recognized:

Increase (decrease) in revenues from ethanol sales	$	(126,687	)
(Increase) decrease in cost of corn ground		107,718
(Increase) decrease in cost of natural gas used		(724,853	)

Critical Accounting Estimates

     Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These 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 fair value of our cash and equivalents and derivative instruments approximates their carrying value. It is not currently practicable to estimate the fair value of our long-term debt since these agreements contain unique terms, conditions, and restrictions, which were negotiated at arm’s length, there is no readily determinable similar instrument on which to base an estimate of fair value.

24

Liquidity and Capital Resources

Short-Term Debt Sources

     The Company entered into a Loan Agreement with First National Bank of Omaha (the “Bank”) for the purpose of funding a portion of the cost of the fuel ethanol plant. Under the Loan Agreement, the Company has a revolving line of credit with a maximum of $3,500,000 available and is secured by substantially all of the Company’s assets. Interest is charged at one-month London Inter-Bank Offering Rate (“LIBOR”) plus 3.50% or 8.34875% at April 30, 2006. There was no balance outstanding on this revolving line of credit at April 30, 2006. Effective with the initial advance in July 2005, the Company pays an unused commitment fee of 0.375% per annum on the unused portion of the revolving line of credit. The revolving line of credit expires on March 30, 2007.

     The amount available under the revolving line of credit is determined by a borrowing base calculation based on qualifying receivables and inventory.

     Under the Loan Agreement, we have a facility for the issuance of up to $1,000,000 in stand-by letters of credit.

Long-Term Debt Sources

     Note Payable to Bank. Under the Loan Agreement, the Bank provided a construction loan for approximately $34,000,000 that was converted to term loans on March 10, 2006.

     Substantially all assets and contract rights of the Company are pledged as security under the Loan Agreement. The Loan Agreement and the related mortgage documents contain reporting requirements and restrictive loan covenants, which require the maintenance of various financial ratios, minimum working capital and allow distributions to unitholders of up to 65% of annual net income without Bank approval.

     The Loan Agreement included due diligence, negotiation, and commitment fees of $305,000 (paid at the closing of the Loan Agreement) and an annual servicing fee of $30,000 (first charged when the construction loan was converted to the term loans, which occurred on March 10, 2006). Additionally, the Company will pay the Bank, quarterly, an unused commitment fee equal to 0.375% per annum on the unused portion of the $5,000,000 long-term revolving note beginning on March 10, 2006.

     Under the construction loan, the Company was to make quarterly interest payments at a variable interest rate equal to one-month LIBOR plus 3.50% until March 10, 2006. The amounts borrowed under the construction loan matured and converted into three term loans aggregating up to $34,000,000 on March 10, 2006.

     The maturity date of each term loan will be March 10, 2011, and interest accrues on each term loan at a variable rate at April 30, 2006, as follows:

Swap Note	Three-month LIBOR plus 3.00% or 7.88000%
Long-Term Revolver	One-month LIBOR plus 3.50% or 8.34875%
Variable Note	Three-month LIBOR plus 3.50% or 8.38000%

     In addition to regular principal and interest payments on the term loans that start on June 10, 2006, the Company is required to make an additional principal payment to the Bank of 15% of its “excess cash flow” on an annual basis.

     Under the Long-Term Revolver, the Company has the ability to re-borrow any amounts paid on the $5,000,000 facility during the term of the loan.

     On January 6, 2005, the Company entered into an interest rate swap agreement with the Bank (as required under the Loan Agreement) in order to change the interest rate on some of the anticipated borrowings from a variable rate to a fixed rate. Under the interest rate swap, the Company will pay the Bank the quarterly difference between interest charged at a fixed rate of 7.69% and the variable rate of three-month LIBOR plus 3.00% on the

25

“notional” amount of $17,000,000, which was 7.8800% at April 30, 2006. The “notional” balance under the interest rate swap will match the principal balance of one of the Swap Note mentioned above. The interest rate swap became effective on September 10, 2005, and will terminate on March 10, 2011.

     Under the Loan Agreement, the interest rate on the revolving line of credit, the Long-Term Revolver and the Variable Note can be reduced based on achieving certain defined debt-to-equity ratio levels on or after September 10, 2006. Once the required ratios are met, the change in the interest rate occurs at the start of the next “interest” period for the applicable note.

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

City of Granite Falls / Minnesota Investment Fund (“MIF”):
	Amount:	$500,000
	Interest Rate:	1.00%
	Principal and Interest Payments:	Semi-Annual
	Maturity Date:	June 15, 2014
Western Minnesota Revolving Loan Fund (“RLF”):
	Amount:	$100,000
	Interest Rate:	5.00%
	Principal and Interest Payments:	Semi-Annual
	Maturity Date:	June 15, 2016
Chippewa County:
	Amount:	$100,000
	Interest Rate:	3.00%
	Principal and Interest Payments:	Semi-Annual
	Maturity Date:	June 15, 2021

     Amounts borrowed under the EDA Loan Agreements are secured by a second mortgage on all of the assets of the Company.

Grants and Government Programs

For the three months and six months ended April 30, 2006, the Company recognized $253,240 and $477,274, respectively, of income from the USDA Commodity Credit Corporation Bioenergy Program. The amounts recognized under the program are based on our production of un-denatured ethanol and the amounts available under the program. The program is set to expire in September 2006, however, a notice has been issued that the program will terminate by June 30, 2006, because funds are expected to be exhausted. As a result, we expect payments under the program to end at that time.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements.

Item 3. Controls and Procedures.

     Our management, including our Chief Executive Officer and General Manager (the principal executive officer), Thomas Branhan, along with our Chief Financial Officer (the principal financial officer), Michael Nealon, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2006. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the

26

reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

     Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred as of April 30, 2006, and there has been no change that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     None.

Item 3. Defaults Upon Senior Securities.

     None.

Item 4. Submission of Matters to a Vote of Security Holders.

     None.

Item 5. Other Information.

     None.

Item 6. Exhibits. The following exhibits are included herein:

Exhibit No.	Exhibit
2.1	Plan of merger between GS Acquisition, Inc. and Gopher State Ethanol, LLC dated April 13, 2006.
10.1	Lease agreement between Granite Falls Energy, LLC and GS Acquisition, Inc. dated April 13, 2006.
10.2	Loan agreement between the City of Granite Falls, MN and Granite Falls Energy, LLC dated February 1, 2006.
10.3	Promissory note to the City of Granite Falls, MN dated February 1, 2006.
10.4	Statutory mortgage in favor of the City of Granite Falls, MN dated February 1, 2006.
10.5	Joint powers and participation agreement dated February 1, 2006
10.6	Termination of development agreement dated February 1, 2006.
31.1	Certificate Pursuant to 17 CFR 240.13a-14(a).

27

Exhibit No.	Exhibit
31.2	Certificate Pursuant to 17 CFR 240.13a-14(a).
32.1	Certificate Pursuant to 18 U.S.C. § 1350.
32.2	Certificate Pursuant to 18 U.S.C. § 1350.

SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GRANITE FALLS ENERGY, LLC
	/s/ Thomas Branhan
June 12, 2006	Thomas Branhan
	General Manager/CEO

	/s/ Michael Nealon
June 12, 2006	Michael Nealon
	Chief Financial Officer

28

EX-2.1

EXHIBIT 2.1

PLAN OF MERGER

     THIS PLAN OF MERGER (the “Plan of Merger”) is dated as of April 12, 2006, and is made and entered into by and between GS ACQUISITION INC. (“Acquisition Subsidiary”) and GOPHER STATE ETHANOL, LLC (“Gopher State”), each a “Constituent Company” and together “Constituent Companies.”

     WHEREAS, Acquisition Subsidiary is a corporation organized under the Minnesota Business Corporation Act (as amended, the “MBCA”) and Gopher State is a limited liability company organized and existing under the Delaware limited liability company act (as amended, the “DLLCA”); and

     WHEREAS, Gopher State is a debtor in possession under Chapter 11 of the Bankruptcy Code (28 U.S.C. § 1101-1174); and

     WHEREAS, the respective shareholders and members and boards of directors and managers each has and have approved and adopted this Plan of Merger in the manner required by and in accordance with the Act and their respective articles of organization and operating agreements; and

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements of the parties contained herein, the parties hereto agree as follows:

     Section 1. Constituent Companies and Surviving Company. The name of each Constituent Company is: GS Acquisition Inc. and Gopher State Ethanol, LLC. The name of the surviving company is Gopher State Ethanol, LLC.

     Section 2. The Merger. On the Effective Time (as defined in Section 3 hereof), Acquisition Subsidiary shall merge with and into Gopher State (the “Merger”) in accordance with the applicable provisions of the MBCA and the DLLCA, and Gopher State shall be the surviving company and shall continue to exist as a limited liability company organized under the laws of the State of Delaware and the separate corporate existence of Acquisition Subsidiary shall cease.

     Section 3. Articles of Merger and Certificate of Merger. On or before the Effective Time, following the execution and delivery of this Plan of Merger by each of Acquisition Subsidiary and Gopher State, Acquisition Subsidiary and Gopher State each shall execute articles of merger (“Articles of Merger”) setting forth the information required by and otherwise in compliance with the applicable provisions of the MBCA and the laws of the state of Minnesota. The Articles of Merger shall be filed in the manner required by, and otherwise in accordance with, the MBCA and the laws of the State of Minnesota as soon as practicable following the execution thereof. In addition to the Articles of Merger, on or before the Effective Time, following the execution and delivery of this Plan of Merger by each of Acquisition Subsidiary and Gopher State, Gopher State shall execute a certificate of merger (“Certificate of Merger”) setting forth the information required by and otherwise

1

in compliance with the applicable provisions of DLLCA and the laws of the state of Delaware. The Merger shall be effective at the time of filing of the Articles of Merger and Certificate of Merger in the manner required by the MBCA and the DLLCA (the “Effective Time”). The Certificate of Merger shall be filed in the manner required by, and otherwise in accordance with, the DLLCA and the laws of the state of Delaware.

     Section 4. Effect of Merger. Upon the terms and subject to the conditions hereof, at the Effective Time, and in accordance with the provision of the DLLCA and the MBCA, Acquisition Subsidiary shall be merged with and into Gopher State whereupon the separate corporate existence of Acquisition Subsidiary shall cease, and Gopher State shall continue as the surviving company. From and after the Effective Time, without any further action by Acquisition Subsidiary and Gopher State or any of their respective shareholders or members, Gopher State, as the surviving company in the merger, shall possess all the rights, privileges, immunities, powers and franchises by public as well as of private nature, of Gopher State and the Acquisition Subsidiary, and all property, real, personal, intangible and mixed and all right and action of any kind and any other interests of or due to each constituent company, shall be deemed to be and is hereby vested in Gopher State without further act or deed and the title to any property or any interest therein, vested in either constituent company shall not revert or be in any way impaired by reason of the merger. Gopher State shall be subject to all the liabilities, obligations and duties of Gopher State and Acquisition Subsidiary all as more fully described in the MBCA , the DLLCA and the Plan of Reorganization (as defined below) and the organizational documents in effect prior to the Effective Time.

     Section 5. Articles of Organization; Amended and Restated Operating Agreement. From and after the Effective Time, pursuant to the Certificate of Merger and Articles of Merger and without any further action by the Constituent Companies or their respective shareholders and members, (a) the name of Gopher State as the surviving company in the Merger shall remain “Gopher State Ethanol, LLC” and the certificate of formation of Gopher State shall be the certificate of formation of the surviving company; and (b) no changes are to be made to the Articles of Organization of Gopher State as the surviving company in the Merger. From and after the Effective Time, without any further action by the Constituent Companies or their respective shareholders and members, the Operating Agreement of Gopher State, as the surviving company in the Merger, shall be the operating agreement of the surviving company.

     Section 6. Managers. From and after the Effective Time, without any further action by the Constituent Companies or their respective shareholders and members: (i) the managers of Gopher State shall immediately resign; and (ii) the directors of the Acquisition Subsidiary immediately prior to the Effective Time shall become, from and after the Effective Time, the managers of Gopher State, until their respective successors are duly elected or appointed or their earlier resignation or removal. For purposes of the DLLCA, the directors shall be deemed to be the “Managers” (as such term is defined and used in the DLLCA) of Gopher State.

     Section 7. Cancellation and Conversion of Membership Interests and Class A Shares. At and as of the Effective Time, by virtue of the Merger and confirmation of the Agreement Regarding Plan of Reorganization dated May 3, 2005 by and between Gopher State, Granite Falls

2

Energy, LLC, a Minnesota limited liability company, and Acquisition Subsidiary (“Plan of Reorganization”), and without any action on the part of the holder thereof:

     (a) Equity Interests of the Gopher State. By virtue of the Plan of Reorganization all outstanding Membership Interests in Gopher State (as defined by Gopher State’s Amended and Restated Operating Agreement dated July 20, 1999) immediately prior to the Effective Time, shall be canceled and shall cease to exist and the owners and/or holders of any Membership Interest shall have no further rights or interest in Gopher State other then as set forth in the Plan of Reorganization; and

     (b) Conversion of Acquisition Subsidiary Common Stock. The 100 shares of common stock of Acquisition Subsidiary held by Granite Falls Energy, LLC, representing 100% of the outstanding shares of common stock of Acquisition Subsidiary, shall be converted into a 100% Membership Interest of Gopher State, such that Granite Falls Energy, LLC shall become and be the holder of 100% of the Membership Interest of Gopher State and Gopher State will become a wholly-owned subsidiary of Granite Falls Energy, LLC.

     (c) Voting Rights. The voting rights of each and any member of Gopher State in Gopher State shall terminate, and Granite Falls Energy, LLC shall become and be the sole member of Gopher State and shall be entitled to all of the rights, benefits, and duties of and as the sole member as provided in the Gopher State Certificate of Formation dated February 25, 1999 and the Gopher State Amended and Restated Operating Agreement dated July 20, 1999.

     Section 8. Further Assurances. At and after the Effective Time, the managers and officers of the surviving company will be authorized to execute and deliver, in the name and on behalf of Gopher State or Acquisition Subsidiary, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of Gopher State or Acquisition Subsidiary, any other actions and things to vest in, perfect or confirm of record or otherwise in the surviving company any or all rights, title and interest in and to and under any of the rights, properties or assets acquired or to be acquired by the surviving company as a result of, or in connection with, the merger of Gopher State and Acquisition Subsidiary.

     Section 9. Preservation of Interest in Producer Payments. Gopher State shall solely retain all legal, equitable, contractual and other rights with respect to any and all cash payments authorized to be paid from the Commissioner of Agriculture of the State of Minnesota to certain producers of ethanol pursuant to Section 41A.09 of the Minnesota Statutes, as amended, (hereinafter referred to as “Producer Payments”), and may, but is not required to, enforce all such rights. Notwithstanding the foregoing, any Producer Payments earned by the Gopher State as a result of ethanol production occurring prior to the date of filing of the Gopher State’s Chapter 11 voluntary petition in the United States Bankruptcy Court (the “Earned Producer Payments”) shall remain an asset of Gopher State includible in the bankruptcy estate and subject to the prior perfected security interest of Bruce Hendry and GDN Holdings, LLC.

3

     Section 10. Governing Law; Counterparts. This Plan of Merger shall be governed by and construed in accordance with the laws of the State of Minnesota. This Plan of Merger may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same.

     Section 11. Service of Process upon Gopher State. Gopher State agrees that it may be served with process in the State of Minnesota in any proceeding for enforcement of any obligation of a Constituent Company, as well as for enforcement of the right of a dissenting shareholder of a Constituent Company against Gopher State. Gopher State hereby irrevocably appoints the Secretary of State of Minnesota as its agent to accept service of process in any such suit or proceeding. The address to which a copy of such process shall be mailed by the Secretary of State of Minnesota is:

Gopher State Ethanol, LLC
15045 Highway 23 S.E.
P.O. Box 216
Granite Falls, MN 55241-0216

Gopher State agrees that it will promptly pay to the dissenting shareholders of Acquisition Subsidiary, the Minnesota domiciled Constituent Company, the amount, if any, to which they are entitled under Section 302A.473 of the Minnesota Business Corporation Act.

     IN WITNESS WHEREOF, the parties hereto have agreed to and executed this Plan of Merger by their duly authorized representatives, as of the date first set forth above.

GOPHER STATE ETHANOL LLC		GS ACQUISTION INC.
By:	/s/ David Kreitzer	By:	/s/ Thomas E. Branhan
Its:	President & COO	Its:	CEO & GM

4

EX-10.1

EXHIBIT 10.1

LEASE AGREEMENT

     THIS LEASE AGREEMENT (the “Lease”) is made and entered into by and between Granite Falls Energy, LLC (“Lessor”) and GS Acquisition Inc. (“Lessee”), effective as of the date permits and licenses, sufficient to legally operate the Equipment (as defined below) are issued or granted to the Lessor and Lessee in the name of both the Lessor and Lessee (the “Effective Date”).

W I T N E S S E T H:

     WHEREAS, Lessor is the owner of (i) real property on which a certain ethanol production facility is located, particularly described in Exhibit A and (ii) any and all structures located on the real property particularly described in Exhibit A; ((i) and (ii) herewithin described as the “Property “); and

     WHEREAS, Lessor is the owner of all equipment used at the Property for the production of ethanol as more particularly described in Exhibit B (the “Equipment”); and

     WHEREAS, Lessee desires to lease the Property and the Equipment from Lessor and Lessor desires to lease the Property and the Equipment to Lessee on the terms and conditions set forth herein.

     NOW, THEREFORE, Lessor and Lessee, in consideration of the mutual covenants and promises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, do hereby agree as follows:

     1. Lease. Lessor hereby leases the Property and the Equipment to Lessee, and Lessee hereby leases the Property and the Equipment from Lessor. Lessor leases the Property to Lessee subject and subordinate to all liens, encumbrances, easements, restrictions, convenants, underlying leases, zoning ordinances and any and all other governmental and quasi-governmental laws, rules, regulations and ordinances now or hereafter affecting or governing the Property. [Lessor will provide Lessee with non-exclusive right to use the railway or spur track (the “Rail Access”) located on the Property; provided that if Lessee uses such Rail Access it shall pay its pro rata share of the maintenance costs and expenses associated with Rail Access.] Lessor will work with Lessee to obtain all necessary licenses and permits to the extent necessary to operate the Equipment. Lessor and Lessee agree to cooperate and execute any and all other instruments and documents, and shall take other such actions, as the other party may reasonably request for the purpose of and carrying or evidencing the Lease.

     2. Term. The term (the “Term”) of this Lease shall commence on April 12, 2006 and shall terminate on April 11, 2016, unless sooner terminated pursuant to this Lease.

     3. Rent. The monthly rental rate (“Rent”) for the Term shall be $800,000.

     4. Location of the Equipment. Lessee shall not remove or relocate the Equipment from the Property.

     5. Lessor’s Right of Inspection. Lessor shall at any and all times during business hours have the right to enter into and upon the Property for the purpose of inspecting both the Property and the Equipment or observing its use. Lessee shall give Lessor immediate notice of any attachment or other judicial process affecting the Equipment.

     6. Supplies; Repairs and Maintenance; Alterations. Lessee shall, at its sole cost and expense, be responsible for all supplies necessary for the operation of the Equipment. Lessee shall, at its sole cost and expense, maintain the Equipment in good operating condition and

repair, and shall protect the Equipment from deterioration, normal wear and tear excepted. Lessee shall not make modifications, alterations or additions to the Equipment (other than ordinary use and maintenance) without the prior written consent of Lessor, which shall not be unreasonably withheld. All modifications, repairs, alterations, additions, replacements and substitutions shall accrue to the Equipment and shall become the property of Lessor. Lessor shall not be responsible for any loss or damage caused by error in the operation or programming of the Equipment, nor shall Lessor be responsible for latent defects, wear and tear, gradual deterioration or loss of use of the Equipment. Lessor shall not be liable to Lessee or any other party for any liability, claim, loss, damage or expense caused directly or indirectly or arising from, the inadequacy of the Equipment, the interruption of use or loss of service of the Equipment, or any loss of business or other consequence or damage, whether or not resulting from any of the foregoing.

     7. Utilities. Lessee shall pay for all water, gas, heat, light, power, sewer charges, telephone service and all other services and utilities which may from time to time be supplied to the Property, together with any taxes thereon.

     8. Taxes. Lessor shall list the Property for taxes and shall pay ad valorem and all other tax assessments of whatever kind or nature assessed against the Property. Lessee shall list and pay, before delinquency, ad valorem and all other tax assessments of whatever kind or nature assessed against or on Lessee’s furnishings, fixtures, inventory, equipment, leasehold improvements and other property situated or placed upon, in or about the Property. In the event any or all of Lessee’s leasehold improvements, equipment, furniture, fixtures and other personal property shall be assessed and taxed with the real property, Lessee shall pay to Lessor its share of such taxes within ten (10) days after delivery to Lessee by Lessor of a statement in writing setting forth the amount of such taxes applicable to Lessee’s property.

     9. Use. Lessee shall use the Equipment in the regular course of the operation of an ethanol production facility only, within its normal capacity and in the manner contemplated by the manufacturer. The Equipment shall be used only on the Property. Lessee may use the Equipment at its full capacity. Lessee shall not lease the Equipment to a third party for a fee or contract to use the Equipment to produce ethanol for a third party for a fee.

     10. Compliance with Law. Lessee shall not use the Property or the Equipment, or permit anything to be done in or about the Property, or with respect to Lessee’s signs or signage and any pylon or pole signs used by Lessee, which will in any way conflict with or violate any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Lessee shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereinafter be in force, including without limitation those pertaining to accessibility and use by individuals with disabilities and those pertaining to environmental conditions, and with the requirements of any board of fire underwriters or other similar bodies now or hereafter constituted, in each case relating to or affecting the condition, use or occupancy of the Property, excluding structural changes not related to or affected by Lessee’s improvements or acts or use of the Property. The judgment of any court of competent jurisdiction or the admission of Lessee in any action against Lessee, whether Lessor be a party thereto or not, that Lessee has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Lessor and Lessee.

     11. Alterations and Additions.

          A. Lessee’s Alterations, and Additions. Subject to obtaining Lessor approval, Lessee may make alterations, additions and improvements upon the Property as desired, with the right to remove the same upon termination of this Lease, or any renewal or extension thereof; provided, however, that the Property are left in as good a state as when received, reasonable wear and tear and damage by fire or other casualty excepted. Failure to remove such

improvements, additions and alterations shall not be deemed a holding over under the terms of this Lease, but upon the request of Lessor, Lessee shall remove any such improvements, additions and alterations and repair any damage to the Property caused by such removal. Any installation of special equipment requiring exceptional electric service or exceeding the live load rating shall be subject to Lessor’s approval.

          B. Lessor’s Alterations and Additions. Notwithstanding anything else contained herein, Lessor may, from time to time, change the improvements on the Property by the construction, removal, relocation or alteration of any such improvements.

     12. Warranties. LESSOR MAKES NO WARRANTIES, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE CONDITION OR QUALITY OF THE EQUIPMENT, ITS SUITABILITY, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. LESSEE IS LEASING THE EQUIPMENT IN ITS AS-IS-WHERE-IS CONDITION.

     13. Indemnity. Lessee shall indemnify and hold Lessor harmless from and against any and all claims, actions, suits, proceedings, costs, expenses, damages and liabilities, including reasonable attorneys’ fees and court costs, arising out of, connected with, or resulting from (i) the use of the Property, (ii) the use of the Equipment, (iii) any breach or default in the performance of any obliagtion of the Lessee, or (iv) any act, omission or negligence of Lessee, its respective agents, employees and contractors. Each party agrees that it will give the other prompt notice of the assertion of any such claim or the institution of any such action, suit or proceeding.

     14. Damage by Fire or Other Casualty. If (a) the Property and/or the Equipment are totally destroyed by fire or other casualty, or (b) the Property and/or the Equipment are destroyed or damaged by fire or other casualty to such an extent that such damage cannot be repaired within 30 days following such destruction or damage (“Major Damage”), then Lessor may by written notice given as provided below, terminate this Lease, in which event rent paid for the period beyond the date of destruction shall be refunded to Lessee. If the Property and/or the Equipment are destroyed or damaged by fire or other casualty but only to an extent that such destruction or damage can be restored or repaired within 30 days following such damage (“Minor Damage”), then Lessor shall not have an option to terminate because of such damage or destruction and this Lease shall continue in full force and effect. If, notwithstanding total destruction or Major Damage, Lessor elects not to terminate or if only Minor Damage occurs, then the Lessor shall promptly restore the Property and/or the Equipment to substantially the same conditions as they were in immediately prior to the destruction. In the case of total destruction or Major Damage, Lessor shall exercise its option to terminate, if at all, by notifying Lessee of its election to terminate this Lease within seven (7) days of Lessor’s receiving notice that 30 days (or longer) will be required for restoration or repair. If during the period of repair or restoration Lessee reasonably is required to close its operations during repairs, rent shall abate while so closed.

     15. Risk of Loss. Lessee hereby assumes and shall bear the entire risk of loss and damage to the Property and the Equipment from whatever cause. No loss or damage to the Property and the Equipment shall impair any obligation of Lessee under this Lease which shall continue in full force and effect.

     In the event of loss or damage of any kind whatsoever to the Property and/or the Equipment, Lessee shall, at Lessor’s sole option:

     (a) replace the Property and/or the Equipment with like property and/or equipment acceptable to Lessor, which replacement property and/or equipment shall be in good condition and of equivalent value, and shall immediately become the property of Lessor;

     (b) repair the Property and/or Equipment, returning it to its previous condition and working order; or

     (c) if, in the reasonable judgment of Lessor such Property and/or Equipment is determined to be lost, stolen, destroyed or damaged beyond repair, pay Lessor therefor in cash the full replacement cost of the Property and/or Equipment. Upon such payment this Lease shall terminate with respect to such Property and/or Equipment, and such Equipment shall thereupon immediately become the property of Lessee, in its AS-IS-WHERE-IS condition, without warranty, express or implied.

     16. Insurance. Lessee shall insure its property and for all occurences on the Property, maintain, at its expense, comprehensive general liability insurance for the Property. Such coverage shall (i) have a single limit of not less than $1,000,000 (ii) cover Lessor’s contractual liabuiility hereunder, (iii) cover any third parites performing work on the Property, and (iv) name Lessor and Lessee as insureds, to the extent of their interests. Lessee shall also keep in force fire and extended coverage insurance for the full replacement value of Lessee’s improvements and full worker’s compensation insurance.

     Lessee shall keep the Equipment insured against special cause of loss, as commonly displayed in a commercial property policy, for not less than the full replacement cost of the Equipment; and Lessee shall carry public liability and property damage insurance covering the Equipment in amounts of not less than $50,000,000 combined single limit. All such insurance shall insure both Lessor and Lessee. Lessee may effect such coverages under its blanket policies. All such policies shall be written by companies reasonably satisfactory to Lessor. Certificates evidencing such coverages shall be furnished to Lessor upon request, showing Lessor as additional insured and showing Lessor and Lessor’s creditor(s) as loss payees. Each insurer shall agree, by endorsement upon the certificate(s) issued by it, or by independent instrument furnished by Lessor, that it will give Lessor thirty (30) days written notice before the policy in question will be altered or canceled and that any proceeds shall be paid jointly to Lessor and Lessee as their interests may appear. The proceeds of such insurance, at the option of Lessor, shall be applied: (i) toward the replacement, restoration or repair of the Equipment; or (ii) toward payment of Lessee’s obligations hereunder.

     17. Default and Remedies. In the event Lessee fails to comply with any of the terms of this Lease and Lessee fails to remedy, cure or remove such failure within ten (10) days after receipt of written notice from Lessor, Lessor shall have the right to exercise any one or more of the following remedies:

     (a) To sue for and recover any and all payments, then accrued or thereafter accruing for the remainder of the Term;

     (b) To take possession of the Property and the Equipment without demand or notice to Lessee, without court order or other process of law. Lessee hereby waives any and all damages occasioned by such repossession unless caused by Lessor’s gross negligence or willful misconduct. Any said repossession shall not constitute a termination of this Lease unless Lessor expressly so notifies Lessee in writing;

     (c) To terminate this Lease; and/or

     (d) To pursue any other remedy available at law or in equity.

     Notwithstanding any said repossession, or other action which Lessor may take, Lessee shall be and remain liable for the full performance of all of its obligations hereunder

     18. Termination by Lessor. This Lease may be terminated by either the Lessor or the Lessee upon mutual consent. This Lease may also be terminated in the event of a breach by the non-breaching party.

     19. Bankruptcy or Insolvency of Lessee. Neither this Lease nor any interest hereunder is assignable or transferable by operation of law. If any proceeding under the Bankruptcy Act, as amended, is commenced by Lessee, or such action is commenced against Lessee and is not dismissed within sixty (60) days after the commencement thereof; or if a writ of attachment or execution is levied on the Property and/or the Equipment and is not released or satisfied within ten (10) days thereafter; or if a receiver is appointed in any proceeding or action to which Lessee is a party, with authority to take possession or control of the Equipment, Lessor may exercise any of the remedies set forth in Section 17 hereof; and this Lease shall, at the option of Lessor, immediately terminate.

     20. Net Lease. The Rent due under this Lease shall be net to Lessor. Lessee shall comply promptly with all present and future laws, ordinances rules and regulations of federal, state, county and local governments, agencies and authorities in connection with the Property and Equipment. Lessee shall be solely responsible for the payment of taxes and insurance relating to the possession or use of the Property and the Equipment during the Term. Lessee shall pay to Lessor all costs and expenses, including reasonable attorneys’ fees and court costs, incurred by Lessor in exercising any of its rights or remedies hereunder or enforcing any term, condition or provision hereof.

     21. Assignment and Subletting. Lessee shall not: (a) assign, transfer, pledge or hypothecate this Lease or the Property and/or the Equipment or any interest herein or therein; or (b) sublet or lend the Property and/or Equipment or any part thereof, or permit the Equipment or any part thereof to be used by anyone other than Lessee or Lessee’s employees.

     22. Ownership of Equipment: Equipment as Personal Property. Lessee acknowledges and agrees that the Equipment is and shall remain the sole property of Lessor. Lessee shall have no right, title or interest in the Equipment, except as Lessee hereunder. Lessee further acknowledges that the Equipment is, and shall remain, personal property notwithstanding that the Equipment may become affixed or attached to real property or buildings or may be attached to a permanent fixture. If at any time during the Term Lessor supplies Lessee with labels, plates or other markings identifying Lessor as the owner of the Equipment, Lessee shall promptly and prominently affix such items to the Equipment. Lessee agrees to execute and pay the filing charges for any UCC financing statement or other document which Lessor deems necessary or advisable to protect Lessor’s ownership of the Equipment, including, without limitation, those attached hereto.

     23. Payment by Lessor: Default Interest Rate. In the event Lessee fails to procure insurance or to pay all fees, assessments, charges and taxes required hereunder, Lessor shall have the right, but not the obligation, to obtain such insurance, or pay such fees, assessments, charges and taxes. In that event, the cost thereof shall be reimbursed to Lessor immediately, together with interest thereon at Eighteen Percent (18%) per annum (the “Default Rate”), from the date on which Lessor incurs such expense. Any amount due from Lessee to Lessor under this Lease which is not paid within ten (10) days after the due date, shall bear interest from the expiration of such ten (10) day period until paid, at the Default Rate.

     24. Environmental Representations and Warranties.

          A. Lessee agrees to comply with any and all Federal, State or local environmental laws regulating Lessee’s use and occupancy of the Property, including, without limitation, any such law regulating Hazardous Materials. As used herein, “Hazardous Materials” means asbestos, PCBs, petroleum or any other hazardous or toxic substance, material, waste or other environmentally regulated substance that is subject to any Hazardous Materials Law (as

defined below). Lessee shall be responsible for obtaining and maintaining any environmental permits, including but not limited to waste water discharge permits, NPDES permits, water use or withdrawal permits, air permits, AST or UST permits necessary for its business.

          B. Lessee acknowledges that it has received all of the information available to Lessor regarding the environmental condition of the Property. Lessor and Lessee both represents and warrants that to the best of their knowledge, except as otherwise disclosed in Paragraph 25.C., no Hazardous Materials are located on, in or about the Property, the building or the real estate on which the building is located, or used in connection therewith. Both Lessor and Lessee agree to disclose to the other in writing the existence, extent and nature of any Hazardous Material ascertained on, in or about the Property, building or real estate, or used in connection therewith, upon their knowledge of the same. Lessor agrees to comply with any known or ascertained violation of a Hazardous Materials Law arising from existing contamination in or affecting the Property arising during the term of this Lease. “Hazardous Materials Law” shall mean the Federal Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; and all other Federal, State and local laws, rules, regulations, or ordinances relating to Hazardous Materials, whether existing or enacted in the future.

     25. Concurrent Remedies. No right or remedy herein conferred upon or reserved to Lessor is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy provided under this Lease or now or hereafter existing at law or in equity.

     26. Offset. Lessee hereby waives any and all existing and future claims and offsets against any Rent or other payment due hereunder and agrees to pay Rent and other amounts due hereunder without demand.

     27. Amendments. This Lease sets forth the entire understanding of the parties and supersedes any prior agreements, oral or written, as to the subject matter hereof. This Lease may be amended or modified only by a written instrument executed by the parties hereto.

     28. Binding Effect. This Lease shall inure to the benefit of and be binding upon the parties hereto, their respective successors, permitted assigns and personal representatives.

     29. Severability. Any term or provision of this Lease which is invalid or unenforceable, in whole or in part, shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Lease, which shall be enforced to the fullest extent permitted by law.

     30. Waiver. Lessor’s failure to insist, in any one or more instances, upon strict compliance with any term, covenant or condition of this Lease shall not be deemed a waiver of future failures to comply with such term, covenant or condition. Moreover, no waiver or relinquishment of any right or power under this Lease shall be deemed a waiver of such right or power at any other time. The consent or approval of Lessor to or of any act by Lessee requiring Lessor’s consent or approval shall not be deemed to render unnecessary Lessor’s consent to or approval of any subsequent similar act by Lessee. No breach of a covenant or condition of this Lease shall be deemed to have been waived by Lessor unless such waiver is in writing and signed by Lessor.

     31. Notices. Any and all notices or other communications provided for herein shall be given in writing by registered or certified mail, postage prepaid, to the last known address of the party to whom such notice is directed.

     32. Consents. Any consent required of either party hereto shall be ineffective unless in writing and signed and certified by a duly authorized representative of the consenting party.

     33. Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of Minnesota. The parties, by their execution of this Lease, submit to the jurisdiction of the courts of the State of Minnesota.

     34. Time of Essence. Time is of the essence as to each and every provision of this Lease.

     35. Headings: Gender: Number. Headings in this Lease are for convenience only and shall not be used to interpret or construe its provisions. Whenever the context of this Lease requires, the masculine gender includes the feminine or neuter, and the singular number includes the plural.

     36. Counterparts. This Lease may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

     37. Due Authorization. Lessee warrants and represents that it has good right, title and authority to enter into and perform the obligations assumed by Lessee hereunder, and, upon execution by the individuals set forth below, this Lease shall become a valid and binding obligation of Lessee, enforceable in accordance with its terms.

     IN WITNESS WHEREOF, the parties hereof have duly executed this LEASE AGREEMENT as of the day and year first above written.

LESSOR:
By:	/s/ Thomas Branhan
	Thomas Branhan
	President
LESSEE:
By:	/s/ Thomas Branhan
	Thomas Branhan
	President

EXHIBIT A

DESCRIPTION OF PROPERTY

LAND DESCRPTION – 46.70 ACRE PARCEL

That part of the East Half of the Northeast Quarter of Section 1, Township 115 North, Range 39 West of the Fifth Principal Meridian, Granite Falls Township, Chippewa County, Minnesota, described as follows:

Commencing at the northwest corner of Parcel 3, as shown on the record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, on file in the office of the Chippewa County Recorder; thence on an assumed bearing of South 1 degree 56 minutes 15 seconds West, along the west line of Parcel 3, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT No. 12-1, a distance of 182.53 feet to southerly right of way boundary line of the railroad, which is also the southwest corner of said Parcel 3 and the point of beginning of the land to be described; thence on a bearing of South 87 degrees 01 minutes 14 seconds West, along the southerly right of way line of the railroad, a distance of 911.97 feet to the west line of the East Half of the Northeast Quarter of said Section 1; thence on a bearing of South 0 degrees 44 minutes 38 seconds West, along the west line of the East Half of the Northeast Quarter of said Section 1, a distance of 2290.26 feet to the northwest corner of Parcel 213, as shown on the record plat entitled MINNESOTA DEPARTMENT OF TRANSPORATION RIGHT OF WAY PLAT NO. 12-24, on file in the office of the Chippewa County Recorder; thence on a bearing of South 88 degrees 21 minutes 26 seconds East, along the north boundary line of said Parcel 213, a distance of 729.81 feet; thence on a bearing of North 47 degrees 28 minutes 37 seconds East, along the boundary line of said Parcel 213, a distance of 143.46 feet to the west line of Parcel 1, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1; thence on a bearing of North 3 degrees 18 minutes 35 seconds East, along the west line of said Parcel 1, a distance of 1123.61 feet to the northwest corner of said Parcel 1; thence continuing on a bearing of North 3 degrees 18 minutes 35 seconds East, along the west line of Parcel 2, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, a distance of 75.63 feet; thence on a bearing of North 1 degree 56 minutes 15 seconds East, along the west line of Parcel 2, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, a distance of 1064.80 feet to the point of beginning.

EXHIBIT B

IDENTIFICATION OF OPERATING ASSETS

1.	Grain Receiving Elevator
2.	Grain Storage Silos
3.	Railroad and Car Mover, Ethanol Loadout
4.	Rolling Stock (Tele-Handler, Skid-Steer, Pay Loader, Fork Lift, Used Trailer, Used Pick-Up).
5.	Administrative Building, DDD Storage Building
6.	Dryer System
7.	Thermal Oxidizer
8.	Mixers, Pumps, Heat Exchangers
9.	Sieves, Sieve Bottles and Beads
10.	Chiller
11.	Centrifuges
12.	Air Compressors
13.	Methanator and Methanator Feed Tank; Liquefaction Tanks
14.	Whole and Thin Stillage Tanks
15.	Syrup Tank
16.	190 Proof and 200 Proof Day Tanks
17.	Denaturant Tank
18.	Cool Water Tank, Field Erected Tanks, Other Process Tanks and Vessels
19.	Fire Water Tank, Denatured Ethanol Tanks
20.	Cooling Tower
21.	Vapor Flare System
22.	Truck Scales and Probe
23.	Process Piping and Valves
24.	Electrical, Plumbing and HVAC
25.	Beer Column / Beerwell
26.	Computers, Phones, Radio System, Copier, Office Equipment and Office Furniture
27.	Shop Supplies and Equipment
28.	Safety Equipment
29.	Any and All Spare Parts
30.	Fire Loop and Water Storage Tank
31.	Water Wells
32.	Security Fence
33.	Geo Piers (Processing and Receiving)
34.	Main Electrical Switch
35.	Sanitary Sewer System
36.	Potable and Process Water Supply and Distribution System

To the extent, items on this list are duplicative or inapplicable or no longer used in operations of the plant, these items shall be stricken from the exhibit. Any items which are missing that are necessary to operate the plant, shall be added hereto.

EX-10.2

EXHIBIT 10.2

LOAN AGREEMENT

BY AND BETWEEN

CITY OF GRANITE FALLS, MINNESOTA

AND

GRANITE FALLS ENERGY, LLC

This document drafted by:	BRIGGS AND MORGAN
	Professional Association
	2200 First National Bank Building
	St. Paul, Minnesota 55101

LOAN AGREEMENT

	Page
ARTICLE I   DEFINITIONS		2
Section 1.1     Definitions		2
ARTICLE II   REPRESENTATIONS OF THE City		5
Section 2.1     Representations and Warranties of the City		5
ARTICLE III   THE LOAN		6
Section 3.1     City Loan		6
Section 3.2     Terms of the Loan		6
Section 3.3     Conditions to Making the Loan		7
Section 3.4     Disbursement		7
Section 3.5     Prepayment		9
Section 3.6     Business Subsidies Act		9
Section 3.7     Employment Documentation		10
Section 3.8     Low and Moderate Income Requirement and Documentation		11
Section 3.9     Labor Standards		11
Section 3.10   Non-Minnesota Construction Contracts		11
Section 3.11   Lobbying		11
Section 3.12   Annual Financial Statements		11
Section 3.13   Workers Compensation Insurance		12
Section 3.14   Business with the State of Minnesota/State Tax Laws		12
Section 3.15   Conflict of Interests; Representatives Not Individually Liable		12
Section 3.16   Default Reporting		12
ARTICLE IV   REPRESENTATIONS AND COVENANTS oF DEVELOPER		13
Section 4.1     Representations and Warranties of the Developer		13
Section 4.2     Release and Indemnification Covenants		14
ARTICLE V   EVENTS OF DEFAULT		16
Section 5.1     Events of Default Defined		16
Section 5.2     Remedies on Default		16
Section 5.3     No Remedy Exclusive		17
Section 5.4     No Implied Waiver		17
Section 5.5     Agreement to Pay Attorneys’ Fees and Expenses		17
ARTICLE VI   ADDITIONAL PROVISIONS		18
Section 6.1     Titles of Articles and Sections		18
Section 6.2     Notices and Demands		18
Section 6.3     Counterparts		18
Section 6.4     Modification		18
Section 6.5     Law Governing		18
Section 6.6     City Approvals		19
Section 6.7     Termination		19
EXHIBIT A Legal Description of Development Property		A-1

i

		Page
EXHIBIT B	Form of Legal Opinion of Developer’s Counsel		B-1
EXHIBIT C	County Loan Amortization Schedule		C-1
EXHIBIT D	MIF Loan Amortization Schedule		D-1
EXHIBIT E	Western Minnesota RLF Loan Amortization Schedule		E-1
EXHIBIT F	Equipment		F-1
EXHIBIT G	Default Report		G-1

ii

LOAN AGREEMENT

     THIS AGREEMENT, made as of the 1st day of February, 2006, by and between City of Granite Falls, Minnesota (the “City”), a municipal corporation and political subdivision of the State of Minnesota, and Granite Falls Energy, LLC, a Minnesota limited liability company (the “Developer”):

     WITNESSETH:

     WHEREAS, the City believes that the development of a certain Project as more fully set forth in, and pursuant to the terms of, this Agreement, and fulfillment of this Agreement, are vital and are in the best interests of the City, will result in preservation and enhancement of the tax base, provide employment opportunities and are in accordance with the public purpose and provisions of the applicable state and local laws and requirements under which the Project has been undertaken and is being assisted;

     WHEREAS, the City is authorized pursuant to Minnesota Statutes, Section 469.192 and Sections 469.001 through 469.047 to make a loan to the Developer for the purpose of undertaking the Project;

     WHEREAS, the requirements of the Business Subsidy Law, Minnesota Statutes, Section 116J.993 through 116J.995, apply to this Agreement;

     WHEREAS, the City has adopted criteria for awarding business subsidies that comply with the Business Subsidy Law, after a public hearing for which notice was published; and

     WHEREAS, the City Council has approved this Agreement as a subsidy agreement under the Business Subsidy Law.

     NOW, THEREFORE, in consideration of the premises and the mutual obligations of the parties hereto, each of them does hereby covenant and agree with the other as follows:

1

ARTICLE I

DEFINITIONS

     Section 1.1 Definitions. All capitalized terms used and not otherwise defined herein shall have the following meanings unless a different meaning clearly appears from the context:

     Agreement means this Agreement, as the same may be from time to time modified, amended or supplemented;

     Bank means First National Bank of Omaha, a national banking association established in Omaha, Nebraska;

     Benefit Date means the date that the Developer puts the Equipment into service;

     City means Granite Falls, Minnesota, or any successor to its functions;

     Construction Plans means the plans, specifications, drawings and related documents of the construction work to be performed by the Developer on the Project and the Development Property in such form as required to obtain a building permit for the Project from the City according to the stated procedures of the City;

     County Loan means a loan from the County in the amount of $100,000 pursuant to the Redevelopment Plan, the Joint Powers Agreement and Minnesota Statutes, Section 469.041;

     County means Chippewa County, Minnesota;

     DEED means the Minnesota Department of Employment and Economic Development;

     Developer means Granite Falls Energy, LLC, a Minnesota limited liability company, its successors and assigns;

     Development Property means the real property (including any improvements thereon) legally described in Exhibit A of this Agreement;

     EDA means Granite Falls Economic Development Authority;

     Equipment means the equipment listed in Exhibit F and acquired by the Developer in connection with the Project;

     Event of Default means any of the events described in Section 5.1 of this Agreement;

     Grant Agreement means the Grant Agreement # CDAP-04-0041-H-FY05 between the City and the State of Minnesota acting through DEED, dated as of December 29, 2004.

     Interest Payment Date means, with respect to the MIF Loan, the 15^th day of each March, June, September and December, beginning June 15, 2006, and with respect to the County Loan

2

and Western Minnesota RLF Loan, the 15^th day of each June and December, beginning June 15, 2006;

     JOBZ Agreement means the Job Opportunity Building Zone Business Subsidy Agreement, between the City and the Developer, dated as of October 19, 2004 as the same may be from time to time modified, amended or supplemented;

     Joint Powers Agreement means the Joint Powers and Participation Agreement pursuant to which the County has contributed the proceeds of the County Loan, the Western MN RLF has contributed the proceeds of the Western Minnesota RLF Loan to the Project and the City has contributed the proceeds of the MIF Loan to the Project;

     Loan Repayments means the payments made or to be made by the Developer pursuant to Section 3.2(c) of this Loan Agreement;

     MIF Loan means a loan from the City in the amount of $500,000 pursuant to the Redevelopment Plan, the Joint Powers Agreement and a loan received from the Minnesota Department of Employment and Economic Development through the Minnesota Investment Fund program;

     Mortgage means the Statutory Mortgage executed by the Developer in favor of the City and recorded against the Development Property;

     Note means the Promissory Note dated as of February 1, 2006 executed by the Developer evidencing the Loan;

     Project means the acquisition, construction and equipping of an approximately 40,000,000 gallon per year dry mill ethanol production plant by the Developer on the Development Property;

     Redevelopment Plan means the Redevelopment Plan, dated October 4, 2004, adopted by the EDA in connection with the Project;

     Senior Loan Agreement means the Senior Loan Agreement by and between the Developer and the Bank;

     State means the State of Minnesota;

     Subordination Agreement means the Subordination Agreement among the Developer, the City and the Bank;

     Western Minnesota RLF Loan means a loan from the Western MN RLF through its Revolving Loan Fund program in the amount of $100,000 pursuant to the Joint Powers Agreement; and

3

     Western MN RLF means The Western Minnesota Revolving Loan Fund, a Minnesota nonprofit corporation.

4

ARTICLE II

REPRESENTATIONS OF THE CITY

     Section 2.1 Representations and Warranties of the City. The City makes the following representations and warranties:

     (1) The City is a municipal corporation and a political subdivision of the State and has the power to enter into this Agreement and carry out its obligations hereunder.

     (2) The City has provided a copy of its policies and procedures related to the MIF Loan and its Community Fair Housing/Equal Opportunity Profile to DEED as required by the Grant Agreement; and the City is not otherwise in default under the Grant Agreement.

     (3) The Redevelopment Plan was adopted and approved in accordance with the terms of Minnesota Statutes, Sections 469.090 through 469.1082.

     (4) To finance a portion of the costs of the Equipment for the Project to be undertaken by the Developer, the City proposes, subject to the further provisions of this Agreement, to loan the proceeds of the MIF Loan, the County Loan and the Western Minnesota RLF Loan to the Developer as further provided in this Agreement.

5

ARTICLE III

THE LOAN

     Section 3.1 City Loan.

     (1) Subject to satisfaction of the conditions set forth in this Article III, the City agrees to loan the Developer the proceeds of the MIF Loan, the County Loan and the Western Minnesota RLF Loan in an amount not to exceed $700,000 to be used to pay a portion of the costs of the Equipment (the “Loan”).

     (2) The Loan shall occur upon the receipt by the City of the MIF Loan, the County Loan and the Western Minnesota RLF Loan and satisfaction of the conditions set forth in Section 3.3.

     Section 3.2 Terms of the Loan.

     (1) The Developer acknowledges that the City is loaning $700,000 to the Developer (the “Loan”).

     (2) The advanced and unpaid principal amount of the County Loan shall bear interest from the date of this Agreement at the rate of three percent (3.00%) per annum. Interest shall be computed on the basis of a 360 day year consisting of twelve (12) 30-day months.

     (3) The advanced and unpaid principal amount of the MIF Loan shall bear interest from the date of this Agreement at the rate of one percent (1.00%) per annum. Interest shall be computed on the basis of a 360 day year consisting of twelve (12) 30-day months.

     (4) The advanced and unpaid principal amount of the Western Minnesota RLF Loan shall bear interest from the date of this Agreement at the rate of five percent (5.00%) per annum. Interest shall be computed on the basis of a 360 day year consisting of twelve (12) 30-day months.

     (5) The Developer covenants and agrees to repay the Loan, together with interest and premium, if any, in Loan Repayments to the City in immediately available funds, as follows:

         (a) on or before each Interest Payment Date, commencing June 15, 2006, through and including June 15, 2021, principal of and accrued interest on the County Loan, in 31 equal semi-annual installments as set forth in the attached Exhibit C; provided such Exhibit C may be adjusted after the date hereof to reflect the Developer’s actual draw schedule; plus

6

        (b) on or before each Interest Payment Date, commencing June 15, 2006, through and including June 15, 2014, principal of and accrued interest on the MIF Loan, in 33 equal quarterly installments as set forth in the attached Exhibit D; provided such Exhibit D may be adjusted after the date hereof to reflect the Developer’s actual draw schedule; plus

         (c) on or before each Interest Payment Date, commencing June 15, 2006, through and including June 15, 2016, principal of and accrued interest on the Western Minnesota RLF Loan, in 21 equal semi-annual installments as set forth in the attached Exhibit E; provided such Exhibit E may be adjusted after the date hereof to reflect the Developer’s actual draw schedule.

     Section 3.3 Conditions to Making the Loan. As conditions precedent to the making of the Loan by the City:

     (1) The Developer shall provide the City an executed Mortgage that when filed will be a second mortgage lien on the Development Property;

     (2) The Developer shall provide the City the executed Note;

     (3) The Developer shall provide the City an executed opinion of counsel to the Developer in the form attached hereto as Exhibit B;

     (4) The Developer shall be in material compliance with all the terms and provisions of this Agreement;

     (5) The Developer shall have submitted to the City Construction Plans for the Project and such Construction Plans shall have been approved by the City;

     (6) The Developer shall have obtained a building permit for the Project; and

     (7) The Developer shall furnish the City evidence that the Developer has obtained construction financing for the Project in an amount sufficient, together with equity commitments, to complete the Project in conformance with the Construction Plans.

     Section 3.4 Disbursement.

     (1) County Loan. Upon receipt of the County Loan proceeds, the City shall retain $65,000 to pay $30,000 of administrative costs and $35,000 of engineering costs in connection with the Project. In addition, the City shall disburse the remaining County Loan proceeds directly to the Developer for the acquisition of Equipment eligible to be financed by the County Loan as indicated on Exhibit F hereto. Upon the acquisition of such Equipment the Developer shall submit to the City (1) a brief description of the Equipment purchased with such funds, (2) bills, receipts, invoices, or other documents reasonably acceptable to the City evidencing the acquisition of such Equipment in an

7

amount equal to $35,000, and (3) a certificate of the Developer to the effect that the Equipment purchased with the proceeds of the County Loan were not the subject of any other request for disbursement pursuant to this Agreement. The Developer agrees to submit to the City the above mentioned attachments in form and substance reasonably satisfactory to the City and such other documents and certificates as the City may reasonably request to evidence the proper expenditure of the County Loan proceeds for the purposes of payment of the costs of the Equipment. The City has no duty to ascertain the correctness of any documents submitted in connection with any direction to disburse funds.

     (2) Western Minnesota RLF Loan. Upon receipt of a written request from the Developer, approved by the City, setting forth the following: (1) the amount to be disbursed, (2) the address to which such funds are to be forwarded, (3) a brief description of the Equipment purchased with such funds, (4) bills, receipts, invoices, or other documents reasonably acceptable to the City evidencing that the Developer has acquired Equipment eligible to be financed by the Western Minnesota RLF Loan as indicated on Exhibit F hereto in an amount equal to $100,000, and (5) a certificate of the Developer to the effect that the amounts requested to be disbursed were properly incurred in connection with the Project and were not the subject of any previous request for disbursement, the City shall forward such request and documentation to the Western MN RLF. Upon receipt of the proceeds of the Western Minnesota RLF Loan, the City shall disburse such funds to the Developer in reimbursement for the costs of such eligible Equipment; provided that such documentation must be submitted no later than February 15, 2006 and no disbursement of Western Minnesota RLF Loan proceeds shall be made after February 28, 2006. Equipment other than the rail car mover listed in Exhibit F may be substituted if the rail car mover will not be acquired by the Developer prior to February 28, 2006. The City has no duty to ascertain the correctness of any documents submitted in connection with any direction to disburse funds.

     (3) MIF Loan. Upon receipt of (i) a written request from the Developer, approved by the City, setting forth the following: (1) the amount to be disbursed, (2) the address to which such funds are to be forwarded, (3) a brief description of the Equipment purchased with such funds, (4) bills, receipts, invoices, or other documents reasonably acceptable to the City evidencing that the Developer has acquired new Equipment eligible to be financed by the MIF Loan as indicated on Exhibit F hereto in an amount equal to $500,000, and (5) a certificate of the Developer to the effect that the amounts requested to be disbursed were properly incurred in connection with the Project and were not the subject of any previous request for disbursement, together with (ii) evidence of substantial completion of the Project, (iii) evidence that, except for a reasonable retainage, substantially all of the proceeds of the construction financing under the Senior Loan Agreement and the approximately $24,000,000 equity contribution have been disbursed so that the proceeds of the MIF Loan represent not more than 1% of the funds disbursed for the cost of the Project as of the date requested, and (iv) a certificate of the Developer to the effect that there has been no adverse change in the Developer’s financial condition, organization, operations, or ability to repay the MIF Loan, City shall forward

8

such request and documentation to DEED. Upon receipt of the proceeds of the MIF Loan, the City shall disburse such funds to the Developer in reimbursement for the costs of such eligible Equipment.

     Section 3.5 Prepayment.

     (1) Prepayment at Option of Developer. Subject to the terms of the Subordination Agreement so long as any portion of the loan under the Senior Loan Agreement is outstanding, the Developer may at its option and is encouraged to prepay the Loan, in whole or in part, on any date by paying the principal, interest and premium, if any, then due. Any partial prepayment shall be applied first against the accrued interest and then against the principal amounts due on a pro rata basis according to the outstanding principal balance of each of the County Loan, the MIF Loan and the Western Minnesota RLF Loan.

     (2) Mandatory Prepayment. Subject to the terms of the Subordination Agreement so long as any portion of the loan under the Senior Loan Agreement is outstanding, the Developer shall prepay the Loan, in whole, upon any sale, transfer, assignment or lease of the Project or if the Developer dissolves or otherwise disposes of all or substantially all of its assets, or consolidates with or merges into another corporation or other business entity or permits any other corporation or other business entity to consolidate with or merge into it unless the City consents, in writing, to the assignment and assumption of this Agreement by any successor entity.

     Section 3.6 Business Subsidies Act.

     (1) In order to satisfy the provisions of Minnesota Statutes, Sections 116J.993 to 116J.995 (the “Business Subsidies Act”), the Developer acknowledges and agrees that the amount of the “Business Subsidy” granted to the Developer under this Agreement is the amount of the Loan, and that the Business Subsidy is needed because the Project is not sufficiently feasible for the Developer to undertake without the Business Subsidy. The public purpose of the Business Subsidy is to develop new jobs within the City and the County and to develop an ethanol production facility in the City. The Developer agrees that it will meet the following goals (the “Goals”): It will create at least 10 new full-time equivalent positions at the Project at a wage of at least $12.00 per hour within fourteen months of the Benefit Date and at least 20 additional new full-time equivalent positions at the Project at an average wage of at least $12.00 per hour within two years of the Benefit Date for a total of 30 full-time equivalent jobs within two years of the Benefit Date. The City agrees that jobs created on or after May 1, 2005 may be included in the total number of jobs required to be created pursuant to this Section 3.6(1). The Developer certifies that as of the date hereof the Developer has created 30 full-time equivalent jobs at an average wage of at least $12.00 per hour in satisfaction of this Section 3.6(1).

     (2) If the Goals are not met, the Developer agrees to repay all or a part of the Business Subsidy to the City, plus interest (“Interest”) set at the implicit price deflator

9

defined in Minnesota Statutes, Section 275.70, Subdivision 2, accruing from and after the Benefit Date, compounded semiannually. If the Goals are met in part, the Developer will repay a portion of the Business Subsidy (plus Interest) determined by multiplying the Business Subsidy by a fraction, the numerator of which is the number of jobs in the Goals which were not created at the wage level set forth above and the denominator of which is 30 (i.e. number of jobs set forth in the Goals in (1) above).

     (3) The Developer agrees to (i) report its progress on achieving the Goals to the City until the later of the date the Goals are met or two years from the Benefit Date, or, if the Goals are not met, until the date the Business Subsidy is repaid, (ii) include in the report the information required in Minnesota Statutes, Section 116J.994, Subdivision 7 on forms developed by DEED, and (iii) send completed reports to the City. The Developer agrees to file these reports no later than March 1 of each year commencing March 1, 2006, and within 30 days after the deadline for meeting the Goals. The City agrees that if it does not receive the reports, it will mail the Developer a warning within one week of the required filing date. If within 14 days of the post marked date of the warning the reports are not made, the Developer agrees to pay to the City a penalty of $100 for each subsequent day until the report is filed up to a maximum of $1,000.

     (4) The Developer agrees to continue operations of the Project for at least five (5) years after the Benefit Date.

     (5) The Developer will receive financial assistance for the Project from the City pursuant to this Agreement and certain tax exemptions and job credits pursuant to the Job Opportunity Building Zone Law (Minnesota Statutes, Sections 469.310 through 469.320) pursuant to the JOBZ Agreement.

     (6) There is no parent corporation of the Developer.

     Section 3.7 Employment Documentation. In addition to the reporting required pursuant to Section 3.5, the Developer shall annually complete and provide to the City notification of employment of hiring each new permanent employee for inclusion in the City’s annual Progress Report to DEED. This notification requirement must be provided to the City no later than October 15 of each year and will not be necessary after October 15, 2008, provided the employment objectives set forth in Section 3.5(1) have been met. This information must include:

     (1) Permanent jobs created.

     (2) Job title per job.

     (3) Date employee(s) hired.

     (4) Hourly wage.

     (5) Hourly value of benefits paid.

10

     (6) Benefits.

     Section 3.8 Low and Moderate Income Requirement and Documentation. The Developer agrees to provide evidence that at a minimum, 51% of the permanent jobs created are made available to (i.e. require not more than a high school diploma or one year’s experience) or filled by low and moderate income persons per Section 8 income guidelines. To meet this requirement, the Developer agrees that it will have each new employee complete a Job Information Form (prepared by DEED and available from the City) to self-certify to the family income. Twenty percent of the new employees incomes’ must be verified. If 51% of the jobs are not filled by low and moderate income persons, the Developer will be required to repay to the City the remaining amount of the MIF Loan balance on an accelerated schedule. The Developer certifies that as of the date hereof the Developer has made 23 of the 30 full-time equivalent jobs required to be created pursuant to Section 3.6(1) available to low and moderate income persons and 11 of the 30 required jobs have been filled by low and moderate income persons in satisfaction of this Section 3.8.

     Section 3.9 Labor Standards. No MIF Loan proceeds shall be used for construction or rehabilitation of the Project, or more than an incidental amount of installation ($2,000 or more) of the Equipment items financed in whole or in part with MIF Loan proceeds because the Developer has not complied with the following statutory provisions in connection with the construction of the Project: Davis-Bacon Act, Contract Work Hours and Safety Standards Acts, Copeland Act (anti-kickback), and Fair Labor Standards Act.

     Section 3.10 Non-Minnesota Construction Contracts. The Developer must comply with Minnesota Statutes, Section 290.9705, by either:

     (1) depositing with the State, eight percent of every payment made to non-Minnesota construction contractors where the contract exceeds $100,000; or

     (2) receiving an exemption from this requirement from the Minnesota Department of Revenue.

     Section 3.11 Lobbying. The Developer must not use MIF Loan proceeds to pay any person for influencing or attempting to influence an officer or employee of a federal agency, a member of Congress, an officer or employee of Congress, or any employee of a member of Congress in connection with the awarding of any federal contract, the making of a Federal grant, the entering into of any cooperative agreement, and the extension, continuation, renewal, amendment, or modification of any federal contract, grant, loan, or cooperative agreement. If the Developer uses non-federal funds to conduct any of the aforementioned activities, the Developer must complete and submit Standard Form LLL, A Disclosure Form to Report Lobbying (available from DEED).

     Section 3.12 Annual Financial Statements. For the term of the MIF Loan, the Developer must submit the most recent annual financial statement prepared in accordance with generally accepted accounting principals. The annual financial statements shall include a profit and loss statement, balance sheet, statement of cash flow, notes and an opinion from the

11

accountants of such statements acceptable to the City. This information must be submitted within 120 days after the end of the Developer’s fiscal year.

     Section 3.13 Workers Compensation Insurance. The Developer has obtained workers’ compensation insurance as required by Minnesota Statutes, Section 176.181, subd. 2. The Developer’s workers compensation insurance information is as follows:

(1	)	Company Name:	Transcontinental Insurance Company
(2	)	Policy Number:	C2077854546
(3	)	Local Agent:	Ellen Gloud, IMA of Kansas, Inc.

     Section 3.14 Business with the State of Minnesota/State Tax Laws. The Developer is required by Minnesota Law to provide its Minnesota tax identification number if it does business with the State of Minnesota. This information may be used in the enforcement of Federal and State tax laws. Supplying these numbers could result in an action to require the Developer to file State tax returns and pay delinquent State tax liabilities. This Agreement will not be approved unless these numbers are provided. These numbers will be available to Federal and State tax authorities and State personnel involved in the payment of State obligations.

(1	)	Minnesota Tax ID:	6303468
(2	)	Federal Employer ID:	41-1997390

     Section 3.15 Conflict of Interests; Representatives Not Individually Liable. No officer or employee of the City may acquire any financial interest, direct or indirect, in this Agreement, the Equipment or in any contract related to the Equipment. No officer, agent, or employee of the City shall be personally liable to the Developer or any successor in interest in the event of any default or breach by the City or for any amount that may become due to the Developer or on any obligation or term of this Agreement.

     Section 3.16 Default Reporting. On or before the 15th day of each March, June, September and December, beginning June 15, 2006, so long as the Senior Loan Agreement is in effect, the Developer shall submit to the City a statement, substantially in the form attached as Exhibit G and confirmed by the Bank, that no event of default or event that would constitute an event of default by the Developer under the Senior Loan Agreement or which, with the giving or notice or lapse of time or both, would become such an event of default, has occurred and is continuing under the Senior Loan Agreement or any document executed in connection therewith. The Developer shall immediately notify the City if any such event shall occur and shall provide the City a copy of any notice from the Bank of any event of default under the Senior Loan Agreement or any document executed in connection therewith.

12

ARTICLE IV

REPRESENTATIONS AND COVENANTS OF DEVELOPER

     Section 4.1 Representations and Warranties of the Developer. The Developer makes the following representations and warranties:

     (1) The Developer has the power to enter into this Agreement and to perform its obligations hereunder and is not in violation of its articles, operating agreement, member control agreement or any local, state or federal laws.

     (2) The Developer is a limited liability company validly existing under the laws of this State and has full power and to enter into this Agreement and carry out the covenants contained herein.

     (3) The Developer will cause the Project to be constructed in accordance with the terms of this Agreement and all local, state and federal laws and regulations (including, but not limited to, environmental, zoning, energy conservation, building code and public health laws and regulations).

     (4) The Developer will obtain or cause to be obtained, in a timely manner, all required permits, licenses and approvals, and will meet, in a timely manner, all requirements of all applicable local, state, and federal laws and regulations which must be obtained or met before the Project may be lawfully constructed

     (5) The construction of the Project would not be undertaken by the Developer, and in the opinion of the Developer would not be economically feasible within the reasonably foreseeable future, without the assistance and benefit to the Developer provided for in this Agreement.

     (6) Neither the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement is prevented, limited by or conflicts with or results in a breach of, the terms, conditions or provision of any contractual restriction, evidence of indebtedness, agreement or instrument of whatever nature to which the Developer is now a party or by which it is bound, or constitutes a default under any of the foregoing.

     (7) The Developer will cooperate fully with the reasonable requests of the City with respect to any litigation commenced with respect to the Project to the extent that the City and the Developer are not adverse parties to the litigation.

     (8) The Developer will cooperate fully with the City in resolution of any traffic, parking, trash removal or public safety problems which may arise in connection with the construction and operation of the Project.

13

     (9) To the best of the Developer’s knowledge, no member, officer, of employee of the City, or its officers, employees, designees, or agents, no consultant, member of the governing body of the City, and no other public official of the City, who exercises or has exercised any functions or responsibilities with respect to the Project during his or her tenure shall have any interest, direct or indirect, in any contract or subcontract, or the proceeds thereof, for work to be performed in connection with the Project or in any activity, or benefit there from, which is part of the Project.

     (10) The Developer warrants that it shall keep and maintain books, records, and other documents relating directly to the MIF Loan, and that any duly authorized representative of DEED shall, at all reasonable times, have access to and the right to inspect, copy, audit, and examine all such books, records, and other documents of the Developer until such time that the City and DEED have both determined that all issues, requirements, and close-out procedures relating to or arising out of the MIF Loan have been settled and completed.

     Section 4.2 Release and Indemnification Covenants.

        (a) The Developer releases the City, the State, DEED, the County, the Western MN RLF and their governing body members, officers, agents, servants and employees thereof (hereinafter, for purposes of this Section 4.2, the “Indemnified Parties”) from, covenants and agrees that the Indemnified Parties shall not be liable for, and agrees to indemnify, defend and hold harmless the Indemnified Parties against, any loss or damage to property or any injury to or death of any person occurring at or about or resulting from any defect in the Project or resulting from or occurring on the Development Property.

         (b) Except for any willful misrepresentation or any willful or wanton misconduct or any unlawful act of the Indemnified Parties, the Developer agrees to protect and defend the Indemnified Parties, now or forever, and further agrees to hold the Indemnified Parties harmless, from any claim, demand, suit, action or other proceeding whatsoever by any person or entity whatsoever arising or purportedly arising (i) from any violation of any agreement or condition of this Agreement or the Mortgage (except with respect to any suit, action, demand or other proceeding brought by the Developer against the City to enforce its rights under this Agreement) or (ii) the acquisition, construction, installation, ownership, and operation of the Project or (iii) any pollutant, contaminant or hazardous substance located in or on the Development Property.

        (c) The Indemnified Parties shall not be liable for any damage or injury to the persons or property of the Developer or its officers, agents, servants or employees or any other person who may be about the Project due to any act of negligence of any person, other than any act of negligence on the part of any such Indemnified Party or its officers, agents, servants or employees.

         (d) All covenants, stipulations, promises, agreements and obligations of the City contained herein shall be deemed to be the covenants, stipulations, promises,

14

agreements and obligations of the City, respectively, and not of any governing body member, officer, agent, servant or employee of the City in the individual capacity thereof.

         (e) The provisions of this Section 4.2 shall survive the termination of this Agreement.

15

ARTICLE V

EVENTS OF DEFAULT

     Section 5.1 Events of Default Defined. The following shall be “Events of Default” under this Agreement and the term “Event of Default” shall mean, whenever it is used in this Agreement, any one or more of the following events:

     (1) If (a) the Developer shall fail to make any payments required under Section 3.2 of this Agreement on the date due, or (b) any other payment due under this Agreement on or before the date that the payment is due and such default continues for ten (10) days after written notice given to the Developer by the City.

     (2) Failure by the Developer to substantially observe or perform any other covenant, condition, obligation or agreement on its part to be observed or performed under this Agreement for a period of thirty (30) days after written notice, specifying such default and requesting that it be remedied, given to the Developer by the City.

     (3) The Developer shall:

          (a) file any petition in bankruptcy or for any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the United States Bankruptcy Act of 1978, as amended, or under any similar federal or state law; or

          (b) make an assignment for the benefit of its creditors; or

          (c) admit in writing its inability to pay its debts generally as they become due; or

          (d) be adjudicated a bankrupt or insolvent; or if a petition or answer proposing the adjudication of the Developer as a bankrupt or its reorganization under any present or future federal bankruptcy act or any similar federal or state law shall be filed in any court and such petition or answer shall not be discharged or denied within ninety (90) days after the filing thereof; or a receiver, trustee or liquidator of the Developer or of the Project, or part thereof, shall be appointed in any proceeding brought against the Developer, and shall not be discharged within ninety (90) days after such appointment, or if the Developer shall consent to or acquiesce in such appointment.

     (4) If any event of default as that term is defined in the Senior Loan Agreement shall occur and be continuing.

     Section 5.2 Remedies on Default. Whenever any Event of Default referred to in Section 5.1 of this Agreement occurs and is continuing, the City, as specified below, may take any one or more of the following actions:

16

          (a) The City may declare immediately due and payable the unpaid principal of the Loan.

          (b) The City may suspend its performance under this Agreement until it receives assurances from the Developer, deemed adequate by the City, that the Developer will cure its default and continue its performance under this Agreement.

          (c) The City may cancel and rescind this Agreement.

          (d) The City may enforce its rights under the Mortgage.

          (e) The City may take any action, including legal or administrative action, which may appear necessary or desirable to collect any payments due under this Agreement, or to enforce performance and observance of any obligation, agreement, or covenant of the Developer under this Agreement.

     Section 5.3 No Remedy Exclusive. No remedy herein conferred upon or reserved to the City is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient.

     Section 5.4 No Implied Waiver. In the event any agreement contained in this Agreement should be breached by any party and thereafter waived by any other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other concurrent, previous or subsequent breach hereunder.

     Section 5.5 Agreement to Pay Attorneys’ Fees and Expenses. Whenever any Event of Default occurs and the City shall employ attorneys or incur other expenses for the collection of payments due or to become due or for the enforcement or performance or observance of any obligation or agreement on the part of the Developer herein contained, the Developer agrees that it shall, on demand therefor, pay to the City the reasonable fees of such attorneys and such other expenses so incurred by the City.

17

ARTICLE VI

ADDITIONAL PROVISIONS

     Section 6.1 Titles of Articles and Sections. Any titles of the several parts, articles and sections of this Agreement are inserted for convenience of reference only and shall be disregarded in construing or interpreting any of its provisions.

     Section 6.2 Notices and Demands. Except as otherwise expressly provided in this Agreement, a notice, demand or other communication under this Agreement by any party to any other shall be sufficiently given or delivered if it is dispatched by registered or certified mail, postage prepaid, return receipt requested, or delivered personally, and

          (a) in the case of the Developer, is addressed to or delivered personally to the Developer at:

Granite Falls Energy, LLC
15045 Highway 23 S.E.
P.O. Box 216
Granite Falls, MN 56241
Attn: General Manager

          (b) in the case of the City, is addressed or delivered personally to the City at:

City of Granite Falls, Minnesota
885 Prentice Street
Granite Falls, MN 56241-1520
Attn: City Coordinator

or at such other address with respect to any such party as that party may, from time to time, designate in writing and forward to the other, as provided in this Section.

     Section 6.3 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute one and the same instrument.

     Section 6.4 Modification. If the Developer is requested by the holder of a mortgage or by a prospective holder of a prospective mortgage to amend or supplement this Agreement in any manner whatsoever, the City will, in good faith, consider the request with a view to granting the same unless the City, in its reasonable judgment, concludes that such modification is not in the public interest, or will significantly and undesirably weaken the financial security provided to the interests of the City by the terms and provisions of this Agreement.

     Section 6.5 Law Governing. This Agreement will be governed and construed in accordance with the laws of the State.

18

     Section 6.6 City Approvals. Any approval, execution of documents, or other action to be taken by the City pursuant to this Agreement, for the purpose of carrying out the terms of this Agreement or for the purpose of determining sufficient performance by the Developer under this Agreement, may be made, executed or taken by the City without further approval by the City Council.

     Section 6.7 Termination. This Agreement shall automatically terminate without any notice to Developer: (1) if no MIF Loan proceeds have been disbursed to the Developer prior to March 31, 2006; or (2) if: (a) the Developer has not received any disbursement of MIF Loan proceeds from the City; and (b) the Developer fails to pay its debts as they become due, files a petition under any chapter of the Federal Bankruptcy Code or any similar law, state or federal, now or hereafter existing, becomes “insolvent” as that term is generally defined under the Federal Bankruptcy Code, files an answer admitting insolvency or inability to pay its debts as they become due in any involuntary bankruptcy case commenced against it, or fails to obtain a dismissal of such case within sixty (60) days after its commencement or convert the case from one chapter of the Federal Bankruptcy Code to another chapter, or is the subject of an order for relief in such bankruptcy case, or is adjudged a bankrupt or insolvent, or has a custodian, trustee, or receiver appointed for it, or has any court take jurisdiction of its property, or any part thereof, in any proceeding for the purpose of reorganization, arrangement, dissolution, or liquidation, and such custodian, trustee, or receiver is not discharged, or such jurisdiction is not relinquished, vacated, or stayed within sixty (60) days of the appointment; or (3) the City terminates this Agreement pursuant to Section 5.2(c). Otherwise, this Agreement shall terminate on June 15, 2021 or the date the Loan is repaid in full.

19

     IN WITNESS WHEREOF, the City has caused this Agreement to be duly executed in its name and the Developer has caused this Agreement to be duly executed in its name and on its behalf, on or as of the date first above written.

CITY OF GRANITE FALLS, MINNESOTA
By	/s/ Dave Smiglewski
Its Mayor
By	/s/ William Lavin
Its Manager

This is a signature page to the Loan Agreement by and between City of Granite Falls, Minnesota and Granite Falls Energy, LLC

S-1

GRANITE FALLS ENERGY, LLC
By	/s/ Julie Oftedahl-Volstad
Its Secretary/Treasurer

This is a signature page to the Loan Agreement by and between City of Granite Falls, Minnesota and Granite Falls Energy, LLC

S-2

EXHIBIT A

Legal Description of Development Property

Land Description — 46.70 Acre Parcel

That part of the East Half of the Northeast Quarter of Section 1, Township 115 North, Range 39 West of the Fifth Principal Meridian, Granite Falls Township, Chippewa County, Minnesota, described as follows:

Commencing at the northwest corner of Parcel 3, as shown on the record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, on file in the office of the Chippewa County Recorder; thence on an assumed bearing of South 1 degree 56 minutes 15 seconds West, along the west line of Parcel 3, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT No. 12-1, a distance of 182.53 feet to southerly right of way boundary line of the railroad, which is also the southwest corner of said Parcel 3 and the point of beginning of the land to be described; thence on a bearing of South 87 degrees 01 minutes 14 seconds West, along the southerly right of way line of the railroad, a distance of 911.97 feet to the west line of the East Half of the Northeast Quarter of said Section 1; thence on a bearing of South 0 degrees 44 minutes 38 seconds West, along the west line of the East Half of the Northeast Quarter of said Section 1, a distance of 2290.26 feet to the northwest corner of Parcel 213, as shown on the record plat entitled MINNESOTA DEPARTMENT OF TRANSPORTATION RIGHT OF WAY PLAT NO. 12-24, on file in the office of the Chippewa County Recorder; thence on a bearing of South 88 degrees 21 minutes 26 seconds East, along the north boundary line of said Parcel 213, a distance of 729.81 feet; thence on a bearing of North 47 degrees 28 minutes 37 seconds East, along the boundary line of said Parcel 213, a distance of 143.46 feet to the west line of Parcel 1, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1; thence on a bearing of North 3 degrees 18 minutes 35 seconds East, along the west line of said Parcel 1, a distance of 1123.61 feet to the northwest corner of said Parcel 1; thence continuing on a bearing of North 3 degrees 18 minutes 35 seconds East, along the west line of Parcel 2, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, a distance of 75.63 feet; thence on a bearing of North 1 degree 56 minutes 15 seconds East, along the west line of Parcel 2, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, a distance of 1064.80 feet to the point of beginning.

A-1

EXHIBIT B

Form of Legal Opinion of Developer’s Counsel

City of Granite Falls, Minnesota
885 Prentice Street
Granite Falls, MN 56241-1520

Re: Loan Agreement by and between City of Granite Falls, Minnesota and Granite Falls Energy, LLC

Ladies and Gentlemen:

     As counsel for Granite Falls Community Ethanol Plant, LLC, a Minnesota limited liability company (the “Developer”), and in connection with the execution and delivery of a certain Loan Agreement (the “Loan Agreement”) between the Developer and the City of Granite Falls, Minnesota (the “City”); the Promissory Note (the “Note”) executed by the Developer evidencing the Loan (as defined in the Loan Agreement); and a certain Statutory Mortgage executed by the Developer in favor of the City (the “Mortgage”), each dated as of February 1, 2006, we hereby render the following opinion:

     We have examined the original certified copy, or copies otherwise identified to our satisfaction as being true copies, of the following:

               (a) The articles of organization, the operating agreement and the member control agreement of the Developer;

               (b) The Loan Agreement; and

               (c) The Note; and

               (d) The Mortgage;

and such other documents and records as we have deemed relevant and necessary as a basis for the opinion set forth herein.

     Based on the pertinent law, the foregoing examination and such other inquiries as we have deemed appropriate, we are of the opinion that:

     1. The Developer has been duly organized and is validly existing as a limited liability company under the laws of the State of Minnesota and is qualified to do business in the State of Minnesota. The Developer has full power and authority to execute, deliver and perform in full the Loan Agreement, the Note and the Mortgage; and the Loan Agreement, the Note and the Mortgage have been duly and validly authorized, executed and delivered by the Developer and, assuming due authorization, execution and delivery by the other parties thereto, are in full force and effect and are valid and legally binding instruments of the Developer enforceable in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors’ rights generally.

B-1

     2. The consummation of the transactions contemplated by the Loan Agreement, the Note and the Mortgage and the carrying out of the terms thereof, will not result in violation of any provision of, or in default under, the articles of organization, member control agreement and operating agreement of the Developer or any indenture, mortgage, deed of trust, indebtedness, agreement, judgment, decree, order, statute, rule, regulation or restriction to which the Developer is a party or by which it or its property is bound or subject.

Very truly yours,

B-2

EXHIBIT C

County Loan Amortization Schedule

Amount:	$100,000.00
Interest Rate:	3.00%
Date of Note:	3/9/2006
Date of Maturity:	6/15/2021

	Total		Accrued		Principal		Principal
	Payment		Interest		Payment		Balance
3/9/2006							$	100,000.00
6/15/2006	$	4,029.78	$	808.33	$	3,221.45	$	96,778.55
12/15/2006	$	4,029.78	$	1451.68	$	2,578.10	$	94,200.45
6/15/2007	$	4,029.78	$	1413.01	$	2,616.77	$	91,583.68
12/15/2007	$	4,029.78	$	1373.76	$	2,656.02	$	88,927.66
6/15/2008	$	4,029.78	$	1333.91	$	2,695.87	$	86,231.79
12/15/2008	$	4,029.78	$	1293.48	$	2,736.30	$	83,495.49
6/15/2009	$	4,029.78	$	1252.43	$	2,777.35	$	80,718.14
12/15/2009	$	4,029.78	$	1210.77	$	2,819.01	$	77,899.13
6/15/2010	$	4,029.78	$	1168.49	$	2,861.29	$	75,037.84
12/15/2010	$	4,029.78	$	1125.57	$	2,904.21	$	72,133.63
6/15/2011	$	4,029.78	$	1082.00	$	2,947.78	$	69,185.85
12/15/2011	$	4,029.78	$	1037.79	$	2,991.99	$	66,193.86
6/15/2012	$	4,029.78	$	992.91	$	3,036.87	$	63,156.99
12/15/2012	$	4,029.78	$	947.35	$	3,082.43	$	60,074.56
6/15/2013	$	4,029.78	$	901.12	$	3,128.66	$	56,945.90
12/15/2013	$	4,029.78	$	854.19	$	3,175.59	$	53,770.31
6/15/2014	$	4,029.78	$	806.55	$	3,223.23	$	50,547.08
12/15/2014	$	4,029.78	$	758.21	$	3,271.57	$	47,275.51
6/15/2015	$	4,029.78	$	709.13	$	3,320.65	$	43,954.86
12/15/2015	$	4,029.78	$	659.32	$	3,370.46	$	40,584.40
6/15/2016	$	4,029.78	$	608.77	$	3,421.01	$	37,163.39
12/15/2016	$	4,029.78	$	557.45	$	3,472.33	$	33,691.06
6/15/2017	$	4,029.78	$	505.37	$	3,524.41	$	30,166.65
12/15/2017	$	4,029.78	$	452.50	$	3,577.28	$	26,589.37
6/15/2018	$	4,029.78	$	398.84	$	3,630.94	$	22,958.43
12/15/2018	$	4,029.78	$	344.38	$	3,685.40	$	19,273.03
6/15/2019	$	4,029.78	$	289.10	$	3,740.68	$	15,532.35
12/15/2019	$	4,029.78	$	232.99	$	3,796.79	$	11,735.56
6/15/2020	$	4,029.78	$	176.03	$	3,853.75	$	7,881.81
12/15/2020	$	4,029.78	$	118.23	$	3,911.55	$	3,970.26
6/15/2021	$	4,029.81	$	59.55	$	3,970.26	$	(0.00	)

C-1

EXHIBIT D

MIF Loan Amortization Schedule

Amount:	$	500,000.00
Interest Rate:		1.00	%
Date of Note:		3/9/2006
Date of Maturity:		6/15/2014

	Total		Accrued		Principal		Principal
	Payment		Interest		Payment		Balance
3/9/2006							$	500,000.00
6/15/2006	$	15,807.10	$	1,347.22	$	14,459.88	$	485,540.12
9/15/2006	$	15,807.10	$	1,213.85	$	14,593.25	$	470,946.87
12/15/2006	$	15,807.10	$	1,177.37	$	14,629.73	$	456,317.14
3/15/2007	$	15,807.10	$	1,140.79	$	14,666.31	$	441,650.83
6/15/2007	$	15,807.10	$	1,104.13	$	14,702.97	$	426,947.86
9/15/2007	$	15,807.10	$	1,067.37	$	14,739.73	$	412,208.13
12/15/2007	$	15,807.10	$	1,030.52	$	14,776.58	$	397,431.55
3/15/2008	$	15,807.10	$	993.58	$	14,813.52	$	382,618.03
6/15/2008	$	15,807.10	$	956.55	$	14,850.55	$	367,767.48
9/15/2008	$	15,807.10	$	919.42	$	14,887.68	$	352,879.80
12/15/2008	$	15,807.10	$	882.20	$	14,924.90	$	337,954.90
3/15/2009	$	15,807.10	$	844.89	$	14,962.21	$	322,992.69
6/15/2009	$	15,807.10	$	807.48	$	14,999.62	$	307,993.07
9/15/2009	$	15,807.10	$	769.98	$	15,037.12	$	292,955.95
12/15/2009	$	15,807.10	$	732.39	$	15,074.71	$	277,881.24
3/15/2010	$	15,807.10	$	694.70	$	15,112.40	$	262,768.84
6/15/2010	$	15,807.10	$	656.92	$	15,150.18	$	247,618.66
9/15/2010	$	15,807.10	$	619.05	$	15,188.05	$	232,430.61
12/15/2010	$	15,807.10	$	581.08	$	15,226.02	$	217,204.59
3/15/2011	$	15,807.10	$	543.01	$	15,264.09	$	201,940.50
6/15/2011	$	15,807.10	$	504.85	$	15,302.25	$	186,638.25
9/15/2011	$	15,807.10	$	466.60	$	15,340.50	$	171,297.75
12/15/2011	$	15,807.10	$	428.24	$	15,378.86	$	155,918.89
3/15/2012	$	15,807.10	$	389.80	$	15,417.30	$	140,501.59
6/15/2012	$	15,807.10	$	351.25	$	15,455.85	$	125,045.74
9/15/2012	$	15,807.10	$	312.61	$	15,494.49	$	109,551.25
12/15/2012	$	15,807.10	$	273.88	$	15,533.22	$	94,018.03
3/15/2013	$	15,807.10	$	235.05	$	15,572.05	$	78,445.98
6/15/2013	$	15,807.10	$	196.11	$	15,610.99	$	62,834.99
9/15/2013	$	15,807.10	$	157.09	$	15,650.01	$	47,184.98
12/15/2013	$	15,807.10	$	117.96	$	15,689.14	$	31,495.84
3/15/2014	$	15,807.10	$	78.74	$	15,728.36	$	15,767.48
6/15/2014	$	15,806.90	$	39.42	$	15,767.48	$	(0.00	)

D-1

EXHIBIT E

Western Minnesota RLF Loan Amortization Schedule

Amount:	$	100,000.00
Interest Rate:		5.00	%
Date of Note:		3/9/2006
Date of Maturity:		6/15/2016

	Total		Accrued		Principal		Principal
	Payment		Interest		Payment		Balance
3/9/2006							$	100,000.00
6/15/2006	$	6,109.24	$	1,347.22	$	4,762.02	$	95,237.98
12/15/2006	$	6,109.24	$	2,380.95	$	3,728.29	$	91,509.69
6/15/2007	$	6,109.24	$	2,287.74	$	3,821.50	$	87,688.19
12/15/2007	$	6,109.24	$	2,192.20	$	3,917.04	$	83,771.15
6/15/2008	$	6,109.24	$	2,094.28	$	4,014.96	$	79,756.19
12/15/2008	$	6,109.24	$	1,993.90	$	4,115.34	$	75,640.85
6/15/2009	$	6,109.24	$	1,891.02	$	4,218.22	$	71,422.63
12/15/2009	$	6,109.24	$	1,785.57	$	4,323.67	$	67,098.96
6/15/2010	$	6,109.24	$	1,677.47	$	4,431.77	$	62,667.19
12/15/2010	$	6,109.24	$	1,566.68	$	4,542.56	$	58,124.63
6/15/2011	$	6,109.24	$	1,453.12	$	4,656.12	$	53,468.51
12/15/2011	$	6,109.24	$	1,336.71	$	4,772.53	$	48,695.98
6/15/2012	$	6,109.24	$	1,217.40	$	4,891.84	$	43,804.14
12/15/2012	$	6,109.24	$	1,095.10	$	5,014.14	$	38,790.00
6/15/2013	$	6,109.24	$	969.75	$	5,139.49	$	33,650.51
12/15/2013	$	6,109.24	$	841.26	$	5,267.98	$	28,382.53
6/15/2014	$	6,109.24	$	709.56	$	5,399.68	$	22,982.85
12/15/2014	$	6,109.24	$	574.57	$	5,534.67	$	17,448.18
6/15/2015	$	6,109.24	$	436.20	$	5,673.04	$	11,775.14
12/15/2015	$	6,109.24	$	294.38	$	5,814.86	$	5,960.28
6/15/2016	$	6,109.29	$	149.01	$	5,960.28	$	0.00

E-1

EXHIBIT F

Equipment

							Chippewa		Region 6W
					MIF		County		RLF
Equipment	Model	Vendor	Cost		Eligible		Eligible		Eligible		Total
Rolling Stock:
Tele-Handler	Manitou MLT 741	Lift Pro Equipment	$	74,964.00	$	74,964.00					$	74,964.00
Front-End Loader	John Deere 544J H/L	RDO Equipment	$	133,500.00	$	133,500.00					$	133,500.00
Railcar Mover	Trackmobile 4350TM	Hercu-Lift	$	182,500.00	$	82,500.00	$	—	$	100,000.00	$	182,500.00
Fork Lift	Kalmar A/C P60BX	Hercu-Lift	$	23,700.00	$	23,700.00					$	23,700.00
Aerial Work Platform	JLG 450AJ	Ziegler	$	54,500.00	$	19,500.00	$	35,000.00			$	54,500.00
Pick-Up	Chevrolet K1500	Kollen Motors	$	24,367.00	$	24,367.00					$	24,367.00
Rolling Stock — Subtotal					$	358,531.00	$	35,000.00	$	100,000.00	$	493,531.00
Spare Parts and Shop Tools:
See Tab “ShopTools and SpareParts”					$	123,966.66					$	123,966.66
Preventative Maintenance Program - Datastream					$	7,233.00					$	7,233.00
Lab Equipment:
Other Lab Equipment	Hach Co, Fischer Scientific, Midland Scientific										$	4,551.04

F-1

							Chippewa		Region 6W
					MIF		County		RLF
Equipment	Model	Vendor	Cost		Eligible		Eligible		Eligible		Total
Computer Equipment:
Server & PC’s	Dell	IBS	$	37,074.30	$	37,074.30					$	37,074.30
Phone System	NEC	UTI	$	6,897.70	$	6,897.70
Admistration and Engineering:
	estimate	GF EDA	$	30,000.00			$	30,000.00			$	30,000.00
	estimate	GF EDA	$	35,000.00			$	35,000.00			$	35,000.00
					$	533,702.66	$	100,000.00	$	100,000.00	$	731,356.00

F-2

EXHIBIT G

DEFAULT REPORT

TO: City of Granite Falls, Minnesota
885 Prentice Street
Granite Falls, MN 56241-1520
Attn: City Coordinator

         The undersigned authorized representative of Granite Falls Energy, LLC (the “Developer”), hereby certifies that [check all that apply]:

o No event of default or event that would constitute an event of default by the Developer under the Senior Loan Agreement, dated December 16, 2004, between the Developer and First National Bank of Omaha (the “Senior Loan Agreement”) or which, with the giving or notice or lapse of time or both, would become such an event of default, has occurred and is continuing under the Senior Loan Agreement or any document executed in connection therewith.

o On                     , 20___, the undersigned spoke to                      of First National Bank of Omaha (402-633-___) who is familiar with the Senior Loan Agreement and who confirmed that to his/her actual knowledge without investigation, there is no event of default or event that would constitute an event of default by the Developer under the Senior Loan Agreement, or which, with the giving or notice or lapse of time or both, would become such an event of default, has occurred and is continuing under the Senior Loan Agreement or any document executed in connection therewith.

o An event of default has occurred under the Senior Loan Agreement. Attached is the notice of default from First National Bank of Omaha.

o An event of default or event that would constitute an event of default by the Developer under the Senior Loan Agreement or which, with the giving or notice or lapse of time or both, would become such an event of default, has occurred and is continuing under the Senior Loan Agreement or a document executed in connection therewith. The Developer expects to cure such default no later than                     , 20___.

Dated:
	.
		GRANITE FALLS ENERGY, LLC
		By
		Its

G-1

EX-10.3

EXHIBIT 10.3

PROMISSORY NOTE

$700,000 February 1, 2006

     Granite Falls Energy, LLC, a Minnesota limited liability company (the “Developer”), for value received, hereby promises to pay to the City of Granite Falls, Minnesota (the “City”) or its assigns (the City and any assigns are hereinafter referred to as the “Holder”), at its designated principal office or such other place as the Holder may designate in writing, the principal sum of Seven Hundred Thousand and No/100 Dollars ($700,000) or so much thereof as may be advanced under this Note, with interest as hereinafter provided, in any coin or currency which at the time or times of payment is legal tender for the payment of private debts in the United States of America. The principal of this Note is payable in installments due as follows:

     1. The Loan shall bear interest at the rates set forth in Section 3.2 of the Loan Agreement, dated as of the date hereof, between the Developer and City (the “Loan Agreement”) and interest shall commence to accrue on the amounts and as of the dates advanced in accordance with Section 3.4 of the Loan Agreement (each a “Disbursement Date”).

     2. Payments of principal and interest shall commence on June 15, 2006 shall and continue, with respect to the MIF Loan, the 15th day of each March, June, September and December thereafter and, with respect to the County Loan and Western Minnesota RLF Loan, the 15th day of each June and December thereafter in accordance with Section 3.2(5) of the Loan Agreement.

     3. Subject to the terms of the Subordination Agreement (as defined in the Loan Agreement) so long as any portion of the loan under the Senior Loan Agreement (as defined in the Loan Agreement) is outstanding, the Developer shall have the right to prepay the principal of this Note, in whole or in part, without prepayment penalty and the Developer shall prepay the outstanding principal of and accrued interest on this Note upon any sale, transfer, assignment or lease of the Project or if the Developer dissolves or otherwise disposes of all or substantially all of its assets, or consolidates with or merges into another corporation or other business entity or permits any other corporation or other business entity to consolidate with or merge into it unless the City consents, in writing, to the assignment and assumption of the Loan Agreement by any successor entity.

     4. This Note is given pursuant to the Loan Agreement and is secured by a certain Statutory Mortgage executed by the Developer in favor of the City (the “Mortgage”) covering certain real property located in Chippewa County, Minnesota. In the event the Mortgage is found to be invalid for whatever reason, such invalidity shall constitute an event of default hereunder.

     5. All of the agreements, conditions, covenants, provisions, and stipulations contained in the Loan Agreement, or any instrument securing this Note are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. It is agreed that time is of the essence of this Note. If a default

occurs under the Loan Agreement, or any instrument securing this Note, then the Holder of this Note may at its right and option, without notice, declare immediately due and payable the principal balance of this Note, together with any costs of collection including attorney fees incurred by the Holder of this Note in collecting or enforcing payment hereof, whether suit be brought or not, and all other sums due hereunder, or under any instrument securing this Note. The Developer agrees that the Holder of this Note may, without notice to the Developer of this Note and without affecting the liability of the Developer of this Note, accept additional or substitute security for this Note, or release any security or any party liable for this Note or extend or renew this Note.

     6. The remedies of the Holder of this Note as provided herein, and in the Loan Agreement, or any other instrument securing this Note, shall be cumulative and concurrent and may be pursued singly, successively, or together, and, at the sole discretion of the Holder of this Note, may be exercised as often as occasion therefore shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof.

     7. The Holder of this Note shall not be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by the Holder of this Note and then only to the extent specifically set forth in the writing. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. This Note may not be amended, modified, or changed except only by an instrument in writing signed by the party against whom enforcement of any such amendment, modifications, or change is sought.

     8. This Note shall be governed by and construed in accordance with the laws of the state of Minnesota without regard to its conflict of laws provisions. Any disputes, controversies, or claims arising out of this Note shall be heard in the state or federal courts of Minnesota, and all parties to this Note waive any objection to the jurisdiction of these courts, whether based on convenience or otherwise.

     9. The headings used in this Note are solely for convenience of reference, are not part of this Note, and are not to be considered in construing or interpreting this Note.

     10. This Note, with the Loan Agreement, Subordination Agreement and Mortgage, constitutes the entire agreement between the parties pertaining to its subject matter and it supercedes all prior contemporaneous Notes, representations, and understandings of the parties pertaining to the subject matter of this Note.

     11. Wherever possible, each provision of this Note and each related document shall be interpreted so that it is valid under applicable law. If any provision of this Note or any related document is to any extent found invalid by a court or other governmental entity of competent jurisdiction, that provision shall be ineffective only to the extent of such invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note or any other related document.

2

     IT IS HEREBY CERTIFIED AND RECITED that all conditions, acts, and things required to exist, happen, and be performed precedent to or in the issuance of this Note do exist, have happened, and have been performed in regular and due form as required by law.

     IN WITNESS WHEREOF, the Developer has caused this Note to be duly executed as of the 1^st day of February, 2006.

GRANITE FALLS ENERGY, LLC
By	/s/ Julie Oftedahl-Volstad
Its Secretary/Treasurer

3

EX-10.4

EXHIBIT 10.4

JOINT POWERS AND PARTICIPATION AGREEMENT
PROVIDING FOR A LOAN TO
GRANITE FALLS ENERGY, LLC

     THIS AGREEMENT is entered into as of the 1st day of February, 2006, by and among the Granite Falls Economic Development Authority (“EDA”), the City of Granite Falls, Minnesota (the “City”), The Western Minnesota Revolving Loan Fund, a Minnesota nonprofit corporation (the “Western MN RLF”) and Chippewa County, Minnesota (the “County”) (collectively, the “Parties”, or individually, a “Party”). Each of the foregoing entities, other than the Western MN RLF, is a political subdivision of, or instrumentality of a political subdivision of, the State of Minnesota and a governmental unit within the meaning of Minnesota Statutes, Section 471.59 (the “Joint Powers Act”).

     1. The Joint Powers Act provides that two or more governmental units, by agreement entered into through action of their governing bodies, may jointly or cooperatively exercise any power common to the contracting parties, and may provide for the exercise of such power by one of the participating governmental units.

     2. On October 4, 2004, the EDA adopted a Redevelopment Plan (the “Redevelopment Plan”) pursuant to Minnesota Statutes, Sections 469.001 through 469.047 (the “HRA Law”) in connection with the acquisition, construction and equipping of an approximately 40,000,000 gallon per year dry mill ethanol production plant in the City (the “Project”).

     3. Pursuant to Minnesota Statutes, Section 469.041, for the purpose of aiding and cooperating in the planning, undertaking, construction or operation of a redevelopment project, any state public body, including the City, the EDA and the County, may upon the terms, with or without consideration, as it may be determined: (1) do any and all things necessary or convenient to aid and cooperate in the planning, undertaking, construction or operation of a redevelopment project; (2) incur the entire expense of any public improvement made by it in exercising the powers granted in the HRA Law; (3) enter into agreements with an authority respecting action to be taken by the state public body pursuant to any of the powers granted by the HRA Law; and (4) furnish funds available to it from any source, including the proceeds of bonds, to an authority to pay all or part of the costs to the authority of the activities authorized by the HRA Law.

     4. The Western MN RLF has the power to enter into this Agreement, to make loans and to carry out its obligations hereunder.

     5. Granite Falls Energy, LLC, a Minnesota limited liability company, (the “Developer”) has proposed that the Parties enter into this Agreement pursuant to Minnesota Statutes, Section 469.041 to (1) provide for a loan to the Developer in the aggregate principal amount of $700,000 (the “Loan”) to finance the acquisition of certain equipment in connection with the Project (the “Equipment”) and pay certain engineering and administrative expenses, (2) to authorize the City to enter into a Loan Agreement with the Developer and (3) to provide for the allocation of security for the Loan and Loan Repayments from the Developer to the Parties.

     6. The County, the Western MN RLF and the EDA hereby request and authorize the City to enter into a Loan Agreement with the Developer on their behalf in connection with the Project and the Equipment. The County, the Western MN RLF and the EDA further request and authorize the City to secure the repayment of the Loan with a second lien mortgage in the real property on which the Developer is constructing the Project (the “Mortgaged Property”) pursuant to a Statutory Mortgage from the Developer to the City (the “Mortgage”) and to disburse and administer the Loan and enforce the terms of the Loan Agreement and the Mortgage in accordance with the terms thereof and take such further actions and assert such further rights under the Loan Agreement, the Mortgage or any document relative thereto as the City in its reasonable judgment deems appropriate.

     7. The County agrees to deposit the proceeds of a loan from the County in the amount of $100,000 pursuant to the Redevelopment Plan and Minnesota Statutes, Section 469.041 (the “County Loan”) with the City to be disbursed and administered pursuant to the Loan Agreement.

     8. The Western MN RLF agrees to deposit the proceeds of a loan from its Revolving Loan Fund program in the amount of $100,000 with the City to be disbursed and administered pursuant to the Loan Agreement (the “Western Minnesota RLF Loan”).

     9. The City agrees to disburse the proceeds of a loan received from the Minnesota Department of Employment and Economic Development through the Minnesota Investment Fund program in the amount of $500,000 pursuant to the Redevelopment Plan and pursuant to the Loan Agreement (the “MIF Loan”).

     10. Payments received by the City from the Developer pursuant to Section 3.2(5) of the Loan Agreement (the “Loan Repayments”) shall allocated to the County, the Western MN RLF and the City within 10 days of receipt in the amounts set forth therein for the repayment of the County Loan, the Western Minnesota RLF Loan and the MIF Loan.

     11. The County, the Western MN RLF and the EDA hereby request and authorize the City to enter into a Subordination Agreement with the Developer and First National Bank of Omaha and agree that its terms apply equally to the County Loan, the Western Minnesota RLF Loan and the MIF Loan.

     12. In the event Loan Repayments received by the City from the Developer pursuant to Section 3.2(5) of the Loan Agreement are insufficient to make payments with respect to the County Loan, the MIF Loan and the Western Minnesota RLF Loan in the amounts set forth in Section 3.2(5), the City shall apply such Loan Repayments pro rata in accordance with the outstanding principal balance of each of the County Loan, the MIF Loan and the Western Minnesota RLF Loan.

     13. In the event the City receives a partial prepayment from the Developer pursuant to Section 3.5 of the Loan Agreement, the City shall apply such prepayment pro rata in accordance with the outstanding principal balance of each of the County Loan, the MIF Loan and the Western Minnesota RLF Loan.

2

     14. In the event of a declaration of default under the Loan Agreement or the acceleration or demand for payment of the Loan, or of any foreclosure, sale, or other disposition or liquidation of the Mortgaged Property, all money collected or received by the City on account of the Loan or otherwise owed by the Developer shall be applied to the payment of all proper costs incurred in the collection thereof (including expenses and disbursements of the Parties and their counsel and including attorneys’ fees, including any extraordinary administrative fees of the Parties) pro rata in accordance with the amount of such costs, and the balance of such money shall be applied pro rata in accordance with the outstanding principal balance of each of the County Loan, the MIF Loan and the Western Minnesota RLF Loan.

     15. This Agreement shall terminate upon the payment in full of the County Loan, the MIF Loan and the Western Minnesota RLF Loan, and this Agreement may not be terminated in advance of such payment.

3

     IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed on its behalf by its duly authorized officers, all as of the day and year first above written.

GRANITE FALLS ECONOMIC DEVELOPMENT AUTHORITY
By	/s/ Mark Henderson
Mark Henderson, Chair
By	/s/ Dick Wambeke
Dick Wambeke, Secretary

SIGNATURE PAGE TO JOINT POWERS AGREEMENT

S-1

CITY OF GRANITE FALLS, MINNESOTA
By	/s/ Dave Smiglewski
Dave Smiglewski, Mayor
By	/s/ William Lavin
Bill Lavin, City Manager

SIGNATURE PAGE TO JOINT POWERS AGREEMENT

S-2

CHIPPEWA COUNTY, MINNESOTA
By	/s/ Kenneth Koenen
Kenneth Koenen, Chair
By	/s/ Jon Clauson
Jon Clauson, Auditor/Treasurer

SIGNATURE PAGE TO JOINT POWERS AGREEMENT

S-3

THE WESTERN MINNESOTA REVOLVING LOAN FUND
By	/s/ Richard Hanson
Richard Hanson, Chair
ATTEST:
By	/s/ Ryan Krosch
Ryan Krosch, Director

SIGNATURE PAGE TO JOINT POWERS AGREEMENT

S-4

EX-10.5

EXHIBIT 10.5

SPACE ABOVE THIS LINE FOR RECORDER’S USE

The Maximum Principal Indebtedness Secured by this Mortgage is $700,000

STATUTORY MORTGAGE

     THIS STATUTORY MORTGAGE (the “Mortgage”), made and given as of the 1st day of February, 2006, by GRANITE FALLS ENERGY, LLC, a Minnesota limited liability company (the “Mortgagor”) in favor of the CITY OF GRANITE FALLS, MINNESOTA, a municipal corporation and a political subdivision of the State of Minnesota (the “Mortgagee”).

W I T N E S S E T H :

     WHEREAS, the Mortgagee will make a loan in the amount of Seven Hundred Thousand Dollars ($700,000) (the “Loan”) to the Mortgagor pursuant to a Loan Agreement dated as of the date hereof, between the Mortgagee and the Mortgagor (the “Loan Agreement”) for the purpose of financing a portion of the costs of equipping an approximately 40,000,000 per year dry mill gallon ethanol production plant to be constructed, owned and operated by the Mortgagor and located on the land legally described on Exhibit A attached hereto (the “Project”); and

     WHEREAS, pursuant to the Loan Agreement, the Mortgagor has covenanted, among other things, to make loan repayments sufficient to pay amortized installments of principal and interest on the Loan when due; and

     WHEREAS, the Mortgagee has required, as a condition for the issuance of the Loan by the Mortgagee that the Mortgagor secure the payments due under the Loan Agreement by this Mortgage.

     1. Mortgage. The Mortgagor hereby mortgages to the Mortgagee the tracts of land lying in the County of Chippewa, State of Minnesota, legally described on Exhibit A attached hereto, together with all tenements, easements, hereditaments, privileges, leases, rents, minerals and mineral rights, water and water rights, buildings, fixtures, improvements now or hereafter erected or located on the above-described land (hereinafter referred to as the “Mortgaged Premises”).

     2. Statutory Covenants. The Mortgagor makes and includes in this Mortgage the Statutory Covenants and other provisions set forth in Minnesota Statutes, Section 507.15, or in any future Minnesota Statute providing for a statutory form of real estate mortgage, and the Mortgagor covenants with the Mortgagee the following Statutory Covenants:

          (a) to warrant title to the Mortgaged Premises, subject to the Permitted Encumbrances listed in Exhibit B attached hereto;

          (b) to pay the indebtedness as herein provided;

          (c) to pay all taxes on the Mortgaged Premises;

          (d) to keep any buildings insured against fire for an amount not less than the full replacement cost and against other hazards for the amounts specified by the Mortgagee for the protection of the Mortgagee, including, but not limited to, lightning, hazards under the usual extended coverage endorsement, and all other hazards and risks of direct physical loss occasioned by any cause whatsoever, subject only to the exceptions and exclusions, if any, agreed to by the Mortgagee. All such policies shall name the Mortgagee as loss payee under the so-called standard mortgage clause, contain no pro rata reduction provisions and provide for not less than thirty (30) days’ notice to the Mortgagee of cancellation of said policy; and

          (e) that the Mortgaged Premises shall be kept in repair and no waste shall be committed.

     3. Additional Covenants and Agreements of Mortgagor. The Mortgagor makes the following additional covenants and agreements with the Mortgagee:

          (a) Subject to the terms of the Subordination Agreement (as defined in the Loan Agreement) so long as any portion of the loan under the Senior Loan Agreement (as defined in the Loan Agreement) is outstanding, if any amount of the Loan is outstanding when all or any part of the Mortgaged Premises is taken by eminent domain, or destroyed or damaged, unless the Mortgagor exercises its right to prepay all or a portion of the Loan, the Mortgagor shall proceed promptly to replace, repair, rebuild and restore the Mortgaged Premises to substantially the same condition as existed before the taking or event causing the damage or destruction, with such changes, alterations and modifications (including substitution or addition of other property) as may be desired by the Mortgagor, and reasonably approved by the Mortgagee, and will be suitable for continued operation of the Mortgaged Premises for the business purposes of the Mortgagor. Subject to the provisions of any mortgage which is a Permitted Encumbrance listed in Exhibit B, all proceeds of any condemnation award or property insurance claim shall be paid directly to the Mortgagee. The Mortgagee shall apply the proceeds, less such sum, if any, required for payment of all expenses incurred in collecting the same (“Net Proceeds”), to payment of the costs of repair, replacement, rebuilding or restoration of the Mortgaged Premises upon compliance with such construction and disbursement terms as the Mortgagee may deem reasonably necessary, including deposit with the Mortgagee of such funds of the Mortgagor as may be required to insure payment of all costs of rebuilding and restoration. If such deposit is not made when requested by the Mortgagee, or if any other Event of Default should occur while the Mortgagee is retaining the Net Proceeds, the Mortgagee may

2

apply said Net Proceeds to the indebtedness of the Mortgagor under the Loan Agreement and the balance of Net Proceeds remaining after payment of all costs of any repair, rebuilding, replacement or restoration of the Mortgaged Property shall be applied against the unpaid principal balance of the Loan. The Mortgagor shall not, by reason of the payment of any costs of repair, rebuilding, replacement or restoration, be entitled to any reimbursement from the Mortgagee or any abatement or diminution of the amounts payable under Article III of the Loan Agreement.

          (b) Except for liens and encumbrances listed on Exhibit B hereto (the “Permitted Encumbrances”) or any other liens consented to in writing by the Mortgagee, the Mortgagor will keep the Mortgaged Premises free from all liens and encumbrances of every nature heretofore or hereafter arising which might or could be prior to or equal to the security interest of this Mortgage; and upon written demand of the Mortgagee, the Mortgagor will pay and procure the release of any such lien or encumbrance.

          (c) The Mortgagor will promptly pay when due all charges for utilities or other service to the Mortgaged Premises including, but not limited to, electricity, water, gas, telephone, sanitary sewer and trash and garbage removal, supplied and upon request of the Mortgagee, provide evidence of such payment.

          (d) The Mortgagor will hold the Mortgagee harmless from all costs and expenses in connection with establishing the priority of this Mortgage and if the Mortgagee becomes a party to any mechanics’ lien suit or other proceeding relating to the premises or to this Mortgage, the Mortgagor will reimburse the Mortgagee for the Mortgagee’s reasonable attorneys’ fees, costs and expenses in connection with said suit or proceeding.

          (e) At the request of the Mortgagee, the Mortgagor shall execute and deliver to the Mortgagee such financing statements and other documents and instruments as may be reasonably necessary or desirable to maintain, preserve and protect the validity and perfected status of this Mortgage and the security interests granted hereby.

          (f) The Mortgagor shall comply with all present and future laws, ordinances, regulations, covenants, conditions and restrictions affecting the Mortgaged Premises or the operation thereof, and shall pay all fees or charges of any kind in connection therewith.

          (g) The Mortgagor represents, warrants, and covenants that the Mortgaged Premises will not be used or involved in the release, handling, storage, or disposal of Hazardous Substances, AS THOSE TERMS ARE DEFINED IN THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT OF 1980, (CERCLA), as amended, 42 U.S.C. Section et seq., THE SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT (SARA), AND THE MINNESOTA ENVIRONMENTAL RESPONSE AND LIABILTIY ACT (MERLA), Minnesota Statutes Section 115B.01 et seq., as amended except in accordance with the requirements of such state and federal statutes; provided however, that the Mortgagor may engage in the manufacturing, processing, storage, transportation and production of ethanol, including all ingredients and byproducts associated therewith. With respect to the foregoing the Mortgagor represents, warrants, and covenants that it has (1) conducted all appropriate inquiry under CERCLA, (2) delivered a Phase I

3

Environmental Assessment, addressed to the Mortgagee, showing no recognized conditions, (3) obtained all necessary federal, state and local permits, licenses and approvals for the construction and operation of the Project in accordance with all air, water, soil and environmental standards, rules, regulations and laws and that it shall not maintain any storage tanks on the Mortgaged Premises except in accordance with such permits and licenses.

          (h) The Mortgagor will pay the principal and interest, when due, on prior mortgages and other similar encumbrances.

          (i) The Mortgagor shall, at its own expense, cause comprehensive liability insurance to be carried and maintained with respect to the activities to be undertaken by and on behalf of the Mortgagor in connection with the use of the Mortgaged Premises substantially the same as insurance carried by the Mortgagor with respect to other similar activities of the Mortgagor, such policies to name the Mortgagee as loss payee.

     4. Payment by Mortgagee. In case of failure by the Mortgagor to pay taxes and assessments, prior liens or encumbrances, expenses and attorneys’ fees as above specified, or to insure said buildings, improvements and fixtures and deliver the policies as aforesaid, the Mortgagee may pay such taxes, assessments, prior liens, expenses and attorneys’ fees and interest thereon, or obtain such insurance, and the sums so paid shall bear interest from the date of such payment at the same rate set forth in the Loan Agreement, and shall be impressed as an additional lien upon the Mortgaged Premises and be immediately due and payable from the Mortgagor to the Mortgagee and this Mortgage shall from the date thereof secure the repayment of such advances with interest.

     5. Events of Default/Acceleration of Maturity. The Mortgagor agrees that at the option of the Mortgagee and in addition to the Mortgagee’s right to accelerate the maturity of the indebtedness secured hereby as set forth above in the Statutory Covenants, the entire remaining principal amount plus accrued interest shall become due and payable in full upon the occurrence of any of the following (each of which is herein referred to as an “Event of Default”):

          (a) The Mortgagor shall fail to pay (i) when due the principal sum of the Loan or any interest thereon or any installment thereof, or (ii) shall fail to pay when due any other payment due under the Loan Agreement or this Mortgage and such failure continues after ten (10) days written notice thereof to the Mortgagor;

          (b) An Event of Default (as that term is defined therein) shall occur under the Loan Agreement;

          (c) Except as otherwise provided in this Mortgage, the Mortgagor, without the written consent of the Mortgagee, voluntarily or by operation of law, shall transfer, sell, convey or assign all or any part of the legal or equitable title or legal and equitable title to the Mortgaged Property, or any part of the Mortgaged Property, or any of the personalty located thereon or used or intended to be used in connection therewith;

          (d) The Mortgagor shall otherwise fail to perform or observe any of the covenants contained in this Mortgage and such default shall remain uncured for thirty (30) days after written notice thereof to the Mortgagor;

4

          (e) Any representation or warranty made by the Mortgagor in this Mortgage or in the Loan Agreement is untrue or misleading in any material respect, or any statement, certificate or report furnished hereunder or under the Loan Agreement by or on behalf of the Mortgagor is untrue or misleading in any material respect on the date as of which the facts set forth are stated or certified.

     6. Statutory Power of Sale, Waiver and Agreement. At maturity, whether at the stated time or prior thereto by the acceleration of maturity pursuant hereto, the Mortgagee (in addition to any other remedies provided for herein or which it may have at law or equity) shall have the statutory power of sale, and on foreclosure may retain statutory costs and attorneys’ fees.

THE MORTGAGOR HEREBY: EXPRESSLY CONSENTS TO THE FORECLOSURE AND SALE OF THE MORTGAGED PREMISES BY ACTION PURSUANT TO MINNESOTA STATUTES, CHAPTER 581 OR, AT THE OPTION OF THE MORTGAGEE, BY ADVERTISEMENT PURSUANT TO MINNESOTA STATUTES, CHAPTER 580, WHICH PROVIDES FOR SALE AFTER SERVICE OF NOTICE THEREOF UPON THE OCCUPANT OF THE MORTGAGED PREMISES AND PUBLICATION OF SAID NOTICE FOR EIGHT WEEKS IN THE COUNTY IN MINNESOTA WHERE THE MORTGAGED PREMISES ARE SITUATED; ACKNOWLEDGES THAT SERVICE NEED NOT BE MADE UPON THE MORTGAGOR PERSONALLY (UNLESS THE MORTGAGOR IS AN OCCUPANT) AND THAT NO HEARING OF ANY TYPE IS REQUIRED IN CONNECTION WITH THE SALE; AND EXCEPT AS MAY BE PROVIDED IN SAID STATUTES, EXPRESSLY WAIVES ANY AND ALL RIGHT TO PRIOR NOTICE OF SALE OF THE MORTGAGED PREMISES AND ANY AND ALL RIGHTS TO A PRIOR HEARING OF ANY TYPE IN CONNECTION WITH THE SALE OF THE MORTGAGED PREMISES.

     7. Miscellaneous. This Mortgage shall be governed by and construed in accordance with the laws of the State of Minnesota and shall inure to the benefit of the Mortgagee, its successors and assigns.

5

     IN WITNESS WHEREOF, the Mortgagor has executed this Mortgage as of the day and year first above written.

GRANITE FALLS ENERGY, LLC
By	/s/ Julie Oftedahl-Volstad
Its Secretary/Treasurer

STATE OF MINNESOTA	)
	) ss.
COUNTY OF YELLOW MEDICINE	)

     The foregoing instrument was acknowledged before me this 24th day of February, 2006, by Julie Oftedahl-Volstad the Secretary/Treasurer of Granite Falls Energy, LLC, a Minnesota limited liability company, on behalf of said company.

/s/ Gregory L. Holmstrom

Notary Public

My Commission Expires Jan. 31, 2010

This Instrument Drafted By:
Briggs and Morgan, Professional Association
2200 First National Bank Building
St. Paul, Minnesota 55101

S-1

EXHIBIT A

Legal Description of Mortgaged Premises

Land Description — 46.70 Acre Parcel

That part of the East Half of the Northeast Quarter of Section 1, Township 115 North, Range 39 West of the Fifth Principal Meridian, Granite Falls Township, Chippewa County, Minnesota, described as follows:

Commencing at the northwest corner of Parcel 3, as shown on the record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, on file in the office of the Chippewa County Recorder; thence on an assumed bearing of South 1 degree 56 minutes 15 seconds West, along the west line of Parcel 3, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT No. 12-1, a distance of 182.53 feet to southerly right of way boundary line of the railroad, which is also the southwest corner of said Parcel 3 and the point of beginning of the land to be described; thence on a bearing of South 87 degrees 01 minutes 14 seconds West, along the southerly right of way line of the railroad, a distance of 911.97 feet to the west line of the East Half of the Northeast Quarter of said Section 1; thence on a bearing of South 0 degrees 44 minutes 38 seconds West, along the west line of the East Half of the Northeast Quarter of said Section 1, a distance of 2290.26 feet to the northwest corner of Parcel 213, as shown on the record plat entitled MINNESOTA DEPARTMENT OF TRANSPORTATION RIGHT OF WAY PLAT NO. 12-24, on file in the office of the Chippewa County Recorder; thence on a bearing of South 88 degrees 21 minutes 26 seconds East, along the north boundary line of said Parcel 213, a distance of 729.81 feet; thence on a bearing of North 47 degrees 28 minutes 37 seconds East, along the boundary line of said Parcel 213, a distance of 143.46 feet to the west line of Parcel 1, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1; thence on a bearing of North 3 degrees 18 minutes 35 seconds East, along the west line of said Parcel 1, a distance of 1123.61 feet to the northwest corner of said Parcel 1; thence continuing on a bearing of North 3 degrees 18 minutes 35 seconds East, along the west line of Parcel 2, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, a distance of 75.63 feet; thence on a bearing of North 1 degree 56 minutes 15 seconds East, along the west line of Parcel 2, as shown on said record plat entitled STATE HIGHWAY RIGHT OF WAY PLAT NO. 12-1, a distance of 1064.80 feet to the point of beginning.

EXHIBIT B

Permitted Encumbrances

     1. Mortgage dated December 16, 2004, filed in the County Recorder’s office of Chippewa County December 17, 2004, as Document No. A000263783, from Granite Falls Energy, LLC, formerly Granite Falls Community Ethanol Plant, LLC, to First National Bank of Omaha in the amount of $37,500,000.00.

EX-10.6

EXHIBIT 10.6

TERMINATION OF DEVELOPMENT AGREEMENTS

     THIS TERMINATION OF DEVELOPMENT AGREEMENTS (the “Amendment”), dated as of the 1^st day of February, 2006, by and between the CITY OF GRANITE FALLS (the “City”), a Minnesota municipal corporation, and GRANITE FALLS ENERGY, LLC, a Minnesota limited liability company, as successor to Granite Falls Community Ethanol Plant, LLC (the “Developer”)

WITNESSES:

     WHEREAS, the City and the Developer have entered into a Development Agreement, dated as of February 2, 2001 (the “2001 Development Agreement”) and a Development Agreement, dated as of October 8, 2004 (the 2004 Development Agreement”, and together with the 2001 Development Agreement, the “Development Agreements”) in connection with the construction of an approximately 40,000,000 gallon per year dry mill ethanol production plant in the City (the “Project”); and

     WHEREAS, the City and the Developer have determined that it is in the best interests of both parties to terminate the Development Agreements and cancel the promissory notes executed by the Developer in the amount of $47,800 and $20,000 evidencing the Developer’s obligation to repay the loans made by the City under the 2001 Development Agreement and the 2004 Development Agreement, respectively (the “Notes”), upon the execution and delivery of the Promissory Note in the amount of $700,000 from the Developer to the City evidencing the Developer’s obligation to repay the loan made by the City under the Loan Agreement dated as of the date hereof between the City and the Developer; and

     WHEREAS, the City and the Developer have both duly authorized this Termination of Development Agreements; and

     NOW, THEREFORE, the City and the Developer agree as follows:

     1. Notwithstanding the terms of the Development Agreements, the Development Agreements are hereby terminated and cancelled and the Developer and the City shall be released from all of their respective duties, obligations and responsibilities under the Development Agreements as of the date hereof.

     2. On the date hereof the City cancel the Notes which shall be deemed satisfied and paid in full and no further payments shall be due or payable thereunder.

     IN WITNESS WHEREOF, the City and the Developer have caused this Termination of Development Agreement to be duly executed on the date first written above.

GRANITE FALLS ENERGY, LLC
By	/s/ Julie Oftedahl-Volstad
Its Secretary/Treasurer

S-1

CITY OF GRANITE FALLS, MINNESOTA
By:	/s/ Dave Smiglewski
	Mayor
By:	/s/ William Lavin
	City Manager

S-2

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO 17 CFR 240.13(a)-14(a)
(SECTION 302 CERTIFICATION)

I, Thomas Branhan, certify that:

1.	I have reviewed this quarterly report on Form 10-QSB of Granite Falls Energy, LLC;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Granite Falls Energy, LLC, as of, and for, the periods presented in this report;
4.	Granite Falls Energy, LLC’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Granite Falls Energy, LLC, and have:

a)	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Granite Falls Energy, LLC, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of Granite Falls Energy, LLC’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any changes in Granite Falls Energy, LLC’s internal control over financial reporting that occurred during Granite Falls Energy, LLC’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Granite Falls Energy, LLC’s internal control over financial reporting.

5 Granite Falls Energy, LLC’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Granite Falls Energy, LLC’s auditors and the audit committee of Granite Falls Energy, LLC’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Granite Falls Energy, LLC’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in Granite Falls Energy, LLC’s internal controls over financial reporting.

Date:	June 12, 2006	/s/ Thomas Branhan
		General Manager/CEO

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO 17 CFR 240.13(a)-14(a)
(SECTION 302 CERTIFICATION)

I, Michael Nealon, certify that:

1.	I have reviewed this quarterly report on Form 10-QSB of Granite Falls Energy, LLC;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Granite Falls Energy, LLC, as of, and for, the periods presented in this report;
4.	Granite Falls Energy, LLC’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Granite Falls Energy, LLC, and have:

a)	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Granite Falls Energy, LLC, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of Granite Falls Energy, LLC’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any changes in Granite Falls Energy, LLC’s internal control over financial reporting that occurred during Granite Falls Energy, LLC’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Granite Falls Energy, LLC’s internal control over financial reporting.

5 Granite Falls Energy, LLC’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Granite Falls Energy, LLC’s auditors and the audit committee of Granite Falls Energy, LLC’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Granite Falls Energy, LLC’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in Granite Falls Energy, LLC’s internal controls over financial reporting.

Date:	June 12, 2006	/s/ Michael Nealon
		Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the quarterly report on Form 10-QSB of Granite Falls Energy, LLC (the “Company”) for the period ended April 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas Branhan, General Manager/CEO of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

          /s/ Thomas Branhan

General Manager/CEO

Dated: June 12, 2006

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-QSB of Granite Falls Energy, LLC (the “Company”) for the period ended April 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Nealon, Chief Financial Officer and Controller, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

          /s/ Michael Nealon

Controller and Chief Financial Officer

Dated: June 12, 2006