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 July 31, 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 August 31, 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	15
Item 3. Controls and Procedures	28
PART II — OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Submission of Matters to a Vote of Security Holders	29
Item 5. Other Information	29
Item 6. Exhibits	30
Second Amendment to Fifth Amended and Restated Operating Agreement
Certification
Certification
Section 1350 Certification
Section 1350 Certification

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Information.

GRANITE FALLS ENERGY, LLC

Condensed Consolidated Balance Sheet

	July 31,
	2006
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	848,335
Restricted cash		222,139
Accounts receivable — trade		4,751,537
Accounts receivable — government programs		278,255
Inventory		2,450,170
Derivative instruments		2,991,614
Prepaid expenses and other current assets		394,315
Total Current Assets		11,936,365
Property and Equipment
Land and improvements		2,434,133
Railroad improvements		1,586,830
Process equipment and tanks		52,702,791
Construction in process		801,828
Administration building		225,205
Office equipment		137,805
Rolling stock		495,999
		58,384,590
Less accumulated depreciation		4,032,479
Net Property and Equipment		54,352,111
Other Assets
Deferred financing costs, net		489,022
Total Other Assets		489,022
Total Assets	$	66,777,499
LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Current portion of Long-Term Debt		3,193,317
Accounts payable		898,924
Corn payable to FCE		783,090
Payable to construction contractors		87,485
Accrued liabilities		391,985
Total Current Liabilities		5,354,800
Long-Term Debt, less current portion		20,867,677
Commitments and Contingencies
Members’ Equity
Member contributions, 31,156 units outstanding		30,250,778
Retained earnings		10,304,243
Total Members’ Equity		40,555,022
Total Liabilities and Members’ Equity	$	66,777,499

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

3

GRANITE FALLS ENERGY, LLC

Condensed Consolidated Statements of Operations

	Three Months			Three Months
	Ended			Ended
	July 31,			September 30,
	2006			2005
	(Unaudited)			(Unaudited)
Revenues	$	28,877,087		$	—
Cost of Goods Sold		14,282,353			120,114
Gross Profit		14,594,734			(120,114	)
Operating Expenses		979,620			177,722
Operating Income (Loss)		13,615,114			(297,836	)
Other Income (Expense):
Interest income		80,373			1,272
Interest expense		(552,390	)		(8,063	)
Change in value of hedging instruments		—			(1,025,576	)
Government Programs and other income		191,539			—
Total Other Income (Expense), net		(280,478	)		(1,032,367	)
Net Income (Loss)	$	13,334,637		$	(1,330,203	)
Weighted Average Units Outstanding		31,156			31,156
Net Income (Loss) Per Unit	$	428.00		$	(42.69	)

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

4

GRANITE FALLS ENERGY, LLC

Condensed Consolidated Statements of Operations

	Nine Months			Nine Months
	Ended			Ended
	July 31,			September 30,
	2006			2005
	(Unaudited)			(Unaudited)
Revenues	$	64,287,336		$	—
Cost of Goods Sold		38,423,862			120,114
Gross Profit		25,863,474			(120,114	)
Operating Expenses		2,151,635			437,971
Operating Income (Loss)		23,711,839			(558,085	)
Other Income (Expense):
Interest income		92,199			117,369
Interest expense		(1,778,850	)		(10,246	)
Change in value of hedging instruments		—			(1,025,576	)
Government Programs and other income		669,394			—
Total Other Income (Expense), net		(1,017,258	)		(918,453	)
Net Income (Loss)	$	22,694,581		$	(1,476,538	)
Weighted Average Units Outstanding		31,156			31,142
Net Income (Loss) Per Unit	$	728.42		$	(47.41	)

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

5

GRANITE FALLS ENERGY, LLC

Condensed Consolidated Statements of Cash Flows

	Nine Months			Nine Months
	Ended			Ended
	July 31,			September 30,
	2006			2005
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities:
Net income (loss)	$	22,694,581		$	(1,476,538	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization		4,025,297			10,216
Change in value of hedging instruments		(133,321	)		1,025,576
Changes in assets and liabilities:
Derivative instruments		(1,958,937	)		(1,420,000	)
Receivables		(5,029,792	)		—
Inventory		(2,433,564	)		—
Prepaid expenses		(289,259	)		(15,494	)
Interest receivable		—			7,277
Accounts payable		812,415			(186,923	)
Accrued liabilities		222,169			280,882
Net Cash Provided by (Used in) Operating Activities		17,909,588			(1,775,004	)
Cash Flows from Investing Activities:
Capital expenditures		(2,151,481	)		(129,806	)
Land		—			(285	)
Construction payable		(4,986,127	)		—
Construction in process		(3,631,644	)		(36,926,045	)
Net Cash Used in Investing Activities		(10,769,251	)		(37,056,136	)
Cash Flows from Financing Activities:
Net proceeds on short-term notes payable		15,262,475			17,001,233
Proceeds from long-term debt		700,000			—
Net payments on long-term revolver		(5,000,000	)		—
Scheduled principal payments on long-term debt		(1,152,104	)		—
Additional principal payments on long-term debt		(5,000,000	)		—
Net proceeds payments on revolving line of credit		(1,090,000	)		1,040,000
Distributions paid		(9,999,830	)		—
Payments for deferred financing costs		(17,073	)		(118,885	)
Net Cash Provided by (Used in) Financing Activities		(6,296,532	)		17,922,348
Net Increase (Decrease) in Cash and Cash Equivalents		843,805			(20,908,792	)
Cash and Cash Equivalents — Beginning of Period		4,530			21,157,557
Cash and Cash Equivalents — End of Period	$	848,335		$	248,765

— Continued —

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

6

GRANITE FALLS ENERGY, LLC

Condensed Consolidatd Statement of Cash Flows (continued)

	Nine Months		Nine Months
	Ended		Ended
	July 31,		September 30,
	2006		2005
	(Unaudited)		(Unaudited)
Supplemental Cash Flow Information
Cash paid during the period for:
Interest expense	$	1,554,146	$	19,994
Capitalized interest	$	54,141	$	—
Supplemental Disclosure of Noncash Investing, Operating and Financing Activities
Construction costs in construction payable	$	87,485	$	4,415,673
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

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 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 disclosure 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 condensed consolidated financial statements should not be regarded as necessarily indicative of results that may expected for the entire year.

Nature of Business

Granite Falls Energy, LLC 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 increased the plant size to be capable of producing up to 50 million gallons of ethanol per year. The Company’s operations permit allowed for the production of up to 47.25 million gallons of ethanol on an annualized basis through August 8, 2006. Effective August 9, 2006, the Company received an amendment to its permit to allow for production of up to 52.60 million gallons of ethanol on an annualized basis. The Company expects to increase the amount of ethanol produced above the existing nameplate in order to reach the plant’s capacity. The Company is currently in the process of amending this permit to produce up to 60 million gallons of ethanol annually. In addition, the Company produces and sells distillers dried grains as a co-product of fuel ethanol production. The plant began operating on November 13, 2005.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Granite Falls Energy, LLC and its wholly-owned subsidiary, Gopher State Ethanol, LLC. 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 end from December 31 to 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. Accordingly, in 2005 the Company’s year ended 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 July 31, 2006 (third quarter of FY 2006), the comparable information presented will be for the three months ended September 30, 2005 (third quarter of FY 2005).

8

GRANITE FALLS ENERGY, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 2006

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 are recognized as other income 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 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 other chemicals and ingredients, 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 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.

9

GRANITE FALLS ENERGY, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 2006

Fair Value of Financial Instruments

The fair value of the Company’s cash 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 (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 July 31, 2006, the Company has entered into derivative instruments to hedge (a) 11,950,000 bushels of its future corn purchases through December 2008, (b) 5,670,000 gallons of its future ethanol sales through December 2006 and (c) 850,000 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 July 31, 2006, the Company had recorded a net asset for these derivative instruments discussed above of $2,991,614. None of the positions open at July 31, 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 $555,026 and $971,803 related to its ethanol related derivative instruments for the three months and nine months ended July 31, 2006, respectively. The Company has recorded a net increase in cost of goods sold of $267,347 and $1,985,939 related to its corn and natural gas related derivative instruments for the three months and nine months ended July 31, 2006, respectively.

The derivative 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 July 31, 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 July 31, 2006:

Raw materials	$	1,233,044
Work in process		324,966
Finished goods		892,160
Totals	$	2,450,170

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 payable for $47,800 was forgiven.

10

GRANITE FALLS ENERGY, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 2006

4. REVOLVING LINE OF CREDIT

The Company entered into a Loan Agreement with First National Bank of Omaha (the “Bank”). 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 8.87% at July 31, 2006. There was no balance outstanding on this revolving line of credit at July 31, 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.

5. LONG-TERM DEBT

Long-term debt consists of the following at July 31, 2006:

Notes payable to Bank
Swap Note	$	16,700,163
Variable Note		6,683,274
Total		23,383,437
Economic Development Agency (“EDA”) Loans:
City of Granite Fall / MIF		485,540
Western Minnesota RLF		96,779
Chippewa County		95,238
Total		677,557
		24,060,994
Current Maturities		(3,193,317	)
	$	20,867,677

Note Payable to Bank:

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

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. In July 2006, the Company obtained a waiver from the Bank for the distribution made to unitholders prior to the completion of the year-end audit.

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 July 31, 2006 as follows:

11

GRANITE FALLS ENERGY, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 2006

Swap Note	Three-month LIBOR plus 3.00% or 8.30%
Long-Term Revolver	One-month LIBOR plus 3.50% or 8.87%
Variable Note	Three-month LIBOR plus 3.50% or 8.80%

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. On June 10, 2006, the Company made an additional principal payment of $5,000,000, which will be applied against the “excess cash flow” payment due for the fiscal year ending October 31, 2006.

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 8.3000% at July 31, 2006. The “notional” balance under the interest rate swap will match the principal balance of one of the Swap Notes 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 original 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.

12

GRANITE FALLS ENERGY, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 2006

6. COMMITMENTS AND CONTINGENCIES

Construction Contract for Plant

As of July 31, 2006, $87,485 is included in payable to construction contracts and will be paid upon final determination of amounts due to a warranty claim.

Water Pipeline and Treatment Facility Construction

The Company has entered into a construction agreements with contractors to design and build a water pipeline to the plant as well as additional water treatment equipment at the plant. Based on preliminary engineering work, it will cost approximately $2,400,000 to build an intake structure in the Minnesota River and build the pipeline to the plant. In order to use the river water in the production process, the Company will have to add additional water treatment equipment which is estimated to cost approximately $6,000,000. 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.

Construction Management and Operations Management Agreement

In August 2004, 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 will provide assistance in planning and will direct and monitor 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 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 nine months ended July 31, 2006, the Company incurred $516,000 and $978,500, respectively, of costs under the Operating and Management Agreement (of which $716,000 is in accounts payable at July 31, 2006).

Corn Storage and Grain Handling Agreement

The Company has 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 plus a fee of $0.05 per bushel. For the three months and nine months ended July 31, 2006, the Company had purchased $7,888,138 and $20,423,123, respectively, of corn from the member (of which $783,090 is in accounts payable at July 31, 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

13

GRANITE FALLS ENERGY, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

July 31, 2006

is from October 1 to September 30 and the Bioenergy Program is scheduled to expire after the submission of required report for the three months ended June 30, 2006.

For the three months and nine months ended July 31, 2006, the Company recognized $191,539 and $669,394, respectively, of income from the program (of which $278,255 is in accounts receivable at July 31, 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 would operate 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 of 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.

Even with an approved plan of reorganization, there was no assurance and the Company had no guarantee that the state of Minnesota would 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 indicated that is did 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, the Company and Gopher State would have been required to commence legal proceedings against the state of Minnesota and obtain a favorable court order before Gopher State will receive any ethanol producer incentive payments.

On August 7, 2006, the Minnesota Department of Agriculture informed the Company that Gopher State is ineligible to receive ethanol producer payments based upon its operation and production of ethanol at the Granite Falls facility, even though the plan of reorganization has been approved by the Bankruptcy Court. The Board of Governors has subsequently made the determination not to institute legal proceedings against the State of Minnesota and try to obtain a court order in the Company’s favor enabling the Company to receive any ethanol producer incentive payments. Accordingly, it is expected that Gopher State and Granite Falls Energy will mutually agree to terminate the lease prior to Gopher State making any payments pursuant to the lease.

14

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, variation 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 improvement 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 or 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;

• Fluctuation 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 agricultural, oil or automobile industries;

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

• Changes and advances in ethanol production technology; and

• Competition from alternate 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 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.

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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 nameplate production capacity of 50 million gallons per year, although our environmental permits only allowed us to produce up to 47.25 million gallons on an annualized basis through August 8, 2006. Effective August 9, 2006, we received an amendment to our environmental permit allowing our plant to now produce up to 52.60 million gallons of ethanol on an annualized basis. 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 grains and the costs related to 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 by 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, depreciation and manufacturing chemicals. The cost of corn is largely impacted by geopolitical supply and demand factors. Prices for natural gas, manufacturing chemicals and denaturant 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 nine months ended July 31, 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 third fiscal quarter of 2005 and our third fiscal quarter of 2006, it is important that you keep this in mind.

Results of Operations — Three Months Ended July 31, 2006

     The following table shows the results of our operations for our third fiscal quarter ended July 31, 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
	July 31, 2006
	(Unaudited)
Income Statement Data	Amount			Percent
Revenues	$	28,877,087			100.0	%
Cost of Sales	$	14,282,353			49.5	%
Gross Profit	$	14,594,734			50.5	%
Operating Expenses	$	979,620			3.4	%
Operating Income	$	13,615,114			47.1	%
Interest Expense	$	(552,390	)		(1.9	)%
Government Programs and Other Income	$	191,539			0.7	%
Interest Income	$	80,373			0.3	%
Net Income	$	13,334,637			46.2	%

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Revenues

     Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distiller’s grains. The following table shows the sources of our revenue for the three months ended July 31, 2006:

			Percentage of
Revenue Sources	Amount		Total Revenue
Ethanol Sales	$	27,150,809		94.0	%
Distiller’s Grains Sales		1,726,278		6.0
Total Revenue	$	28,877,087		100.0	%

     We expect the sale price of fuel ethanol to remain steady 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.” We anticipate producing up to our plant’s capacity within the next quarter and 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 our production 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 product for the three months ended July 31, 2006, was $14,282,353 or 49.5% of our revenues. We do not expect this percentage to change with the expected increase in production given the steady 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 (58.8% of cost of sales for our quarter ended July 31, 2006) and natural gas (12.6% of cost of sales for our quarter ended July 31, 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 million bushels produced nationally. Higher production amounts allowed ethanol plants to purchase corn cheaply throughout 2005, which widened profit margins for many ethanol plants in the current year. We expect corn prices to remain at relatively low levels into the 2005-2006 marketing year; however, variables such as crop yields and storage availability will likely cause market uncertainty and create corn price volatility as the harvest season begins. A U.S. Department of Agriculture report published in August 2006 estimates the 2006 corn crop at 10.975 billion bushels, down approximately 1 percent from the previous year, yet if realized, the 2006 crop would be the third largest on record. 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 realized during the 2006 harvest 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 Expenses

     Our general and administrative expenses for the three months ended July 31, 2006, were $979,620 or 3.4% of our revenues. We expect that general and administrative expenses will be a constant percentage of revenues for the rest of the fiscal year. This category includes management fees payable to Glacial Lakes Energy, which totaled $516,000 for the three months ended July 31, 2006.

Government Programs

     Revenue from government programs for the three months ended July 31, 2006, equaled 0.7% of our revenue

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and totaled $191,539. The amounts recognized under the USDA Commodity Credit Corporation Bioenergy Program are based upon 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 was issued stating that the June 30, 2006, payment is the final payment to be made pursuant to the program because the funds allocated to the program have been exhausted. As a result, we do not expect to receive any future payments under the program.

Interest Expense and Interest Income

     Interest expense for the three months ended July 31, 2006, was equal to 1.9% of our revenue and totaled $552,390. We expect this percentage will 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. Interest income for the three months ended July 31, 2006, totaled $80,373, which was the result of higher amounts of available funds in short-term investments.

Distribution to Unit Holders

     On July 10, 2006, our board approved a cash distribution of $320.96 per membership unit to all unit holders of record as of June 30, 2006, for a total distribution of $9,999,829.76. The cash distribution was approved by our primary lender, First National Bank of Omaha, and we made the distribution on July 31, 2006.

Results of Operations — Nine Months Ended July 31, 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 nine months ended July 31, 2006:

	Nine Months Ended
	July 31, 2006
	(Unaudited)
Income Statement Data	Amount			Percent
Revenues	$	64,287,336			100.0	%
Cost of Sales	$	38,423,862			59.8	%
Gross Profit	$	25,863,474			40.2	%
Operating Expenses	$	2,151,635			3.3	%
Operating Income	$	23,711,839			36.9	%
Interest Expense	$	(1,778,850	)		(2.7	)%
Government Programs and Other Income	$	669,394			1.0	%
Interest Income	$	92,199			0.1	%
Net Income	$	22,694,581			35.3	%

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Revenues

     Our revenues from operations come from two primary sources: sales of fuel ethanol and sales of distiller’s grains. The following table shows the sources of our revenue for the nine months ended July 31, 2006:

			Percentage of
Revenue Sources	Amount		Total Revenue
Ethanol Sales	$	59,440,163		92.4	%
Distiller’s Grains Sales		4,847,173		7.6
Total Revenue	$	64,287,336		100.0	%

     We expect the sale price of fuel ethanol to remain steady 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.” We anticipate producing up to our plant’s capacity within the next quarter and 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 our production 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 product for the nine months ended July 31, 2006, was $38,423,862 or 59.8% of our revenues. We do not expect this percentage to change with the expected increase with steady 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 (56.6% of cost of sales for the nine months ended July 31, 2006) and natural gas (21.8% of cost of sales for the nine months ended July 31, 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 million bushels produced nationally. Higher production amounts allowed ethanol plants to purchase corn cheaply throughout 2005, which widened profit margins for many ethanol plants in the current year. We expect corn prices to remain at relatively low levels into the 2005-2006 marketing year; however, variables such as crop yields and storage availability will likely cause market uncertainty and create corn price volatility as the harvest season begins. Domestic and export demand for US corn is at an all time high. Although carryout supplies for the 2006 marketing year appear adequate, any production shortfall realized during the 2006 harvest 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 expenses for the nine months ended July 31, 2006, were $2,151,635 or 3.3% of our revenues. We expect that general and administrative expenses will be a constant percentage of revenues for the rest of the fiscal year. This category includes management fees payable to Glacial Lakes Energy, which totaled $978,500 for the nine months ended July 31, 2006.

Government Programs

     Revenue from government programs for the three months ended July 31, 2006, equaled 1.0% of our revenue and totaled $669,394. The amounts recognized under the USDA Commodity Credit Corporation Bioenergy

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Program are based upon 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 was issued stating that the June 30, 2006, payment is the final payment to be made pursuant to the program because the funds allocated to the program have been exhausted. As a result, we do not expect to receive any future payments under the program.

Interest Expense and Interest Income

     Interest expense for the nine months ended July 31, 2006, was equal to 2.7% of our revenue and totaled $1,778,850. We expect this percentage will be consistent during the remainder of the fiscal year as the decrease in outstanding balances will be offset by increases in interest rates on variable rate debt. Interest income for the nine months ended July 31, 2006, totaled $92,199, which was the result of higher amounts of available funds in short-term investments.

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.

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 July 31, 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, Inc. 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 amended permits (effective August 9, 2006) allow us to operate up to 52.60 million gallons per year, which is greater than our production capacity of 50 million gallons per year. In addition, some of our permits require additional action in order for us to 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 and Water Discharge Permits. Our previous Air Emissions Permit and National Pollution Discharge Elimination System (“NPDES”) Permit allowed 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 major 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 were 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 permits. MPCA is reviewing the claims made in the letter and is preparing a response to the environmental group. In early August 2006, we withdrew our water discharge amendment application so as not to have two amendments being reviewed at the same time. Also in early August 2006, we requested a minor amendment to add approximately 5 million gallons of capacity to our permits. On August 9, 2006, we received approval from MPCA to increase our production to a rate of 50.10 million gallons per year of 200 proof ethanol or 52.60 million gallons per year of fuel ethanol.

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     Under both the previous Air Emissions Permit and the 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 were in full compliance with the rate of the amended Air Emissions Permit level.

     Our previous and our current amended NPDES permit will be in effect through December 2008. We previously requested a variance from MPCA to discharge certain minerals into a local creek. In early August 2006, we withdrew the requested variance and are now working with a new water treatment system (see discussion below) to become a “zero discharge” plant. If we are successful in becoming a “zero discharge” plant, we will prepare a new environmental assessment worksheet (“EAW”), and potentially, we will no longer be required to have a NPDES permit. We are also having discussions with the City of Granite Falls, Minnesota to utilize its wastewater treatment facility as a back-up treatment facility for our discharge water if we experience problems with our new water treatment equipment.

     Water Permits. We obtained a three-year conditional, 240 million gallon per year water appropriation permit from the Minnesota Department of Natural Resources (“DNR”), which will remain in effect through December 2008. We currently 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 of 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 2005.

     Based on the current water levels in our wells and to provide a redundant source of water, we have started the process to obtain water from the Minnesota River. In August 2006, we obtained an amendment to our water appropriation permit from the DNR and the Army Corps of Engineers to allow us to draw the 240 million gallons of water from either the existing wells or from the Minnesota River. Based on preliminary engineering work, it will cost approximately $2,400,000 to build an intake structure in the river and build a water pipeline to the plant. We have easements with two landowners that would allow us to bring a 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 approximately $6,000,000. 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 based on improvements they need to make to their water treatment system and receiving the discharge water from our production process.

     Further Expansion of our Plant. We are considering expanding the production capacity of the plant, however, the feasibility of any expansion plans are dependent upon our ability to obtain the appropriate environmental permits. Our water appropriation permit would have to be amended to allow for any increase in our plant’s capacity. Accordingly, we expect to submit an application to the DNR and the Army Corps of Engineers to increase our water appropriation from 240 million gallons per year to 520 million gallons per year. The amendment to the water appropriation permit will require us to submit a new Environmental Assessment Worksheet (“EAW”). Currently, our plan is to wait for the completion of the new water treatment equipment so our new EAW shows that we are a “zero discharge” facility and therefore that we do not need a NPDES permit. With the amended water appropriation permit and the new EAW, we expect to request a major amendment to our Air Emissions Permit that would allow us be permitted to operate well above a rate of 100 million gallons per year. Our inability to obtain the necessary environmental permits will significantly influence our plans to expand the plant.

Contracting Activity

     Management, Supply and Marketing Agreements. We have secured all of the material contracts necessary operate our ethanol plant. Glacial Lakes managed plant construction and plant startup, 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.

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     Farmers Cooperative 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 (related through each of them having ownership in the Company) 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 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.

     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 production 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 was to qualify Gopher State to receive ethanol producer payments. However, the Minnesota Department of Agriculture recently informed us that Gopher State is ineligible to receive ethanol producer payments based upon its operation and production of ethanol at our facility.

     On May 3, 2005, we entered into an agreement with Gopher State Ethanol, LLC 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 provided that if we were successful in receiving ethanol producer incentive payments, we would 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 the 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 the lessee in the name of both parties. As of July 31, 2006, the required permits and licenses have not been received, and, accordingly, no monthly payments have been made.

     By letter dated August 7, 2006, the Minnesota Department of Agriculture informed us that Gopher State is ineligible to receive ethanol producer payments based upon its operation and production of ethanol at our facility, even though the plan of reorganization has been approved by the Bankruptcy Court. Our board has subsequently made the determination not to institute legal proceedings against the State of Minnesota and try to obtain a court

22

order in our favor enabling us to receive any ethanol producer incentive payments. Accordingly, it is expected that Gopher State and Granite Falls Energy will mutually agree to terminate the lease prior to Gopher State making any payments pursuant to the lease.

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 capital and 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. For the next twelve months, we estimate that (a) our total operating costs will be approximately $75,784,000, (b) the capital expenditures for the intake structure and water pipeline from the Minnesota River will be approximately $2,400,000 and (c) the capital expenditures for the additional water treatment equipment will be approximately $6,000,000. These are only estimates 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 or water treatment 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 involved primarily in plant operations. Our employees underwent training at Glacial Lakes.

     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 that we produce. Ethanol sales constitute the majority of our revenues. Beginning in September 2005, the 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. Our ethanol price levels remained relatively steady for the quarter ended July 31, 2006. Increased demand, firm crude oil and gas markets, public acceptance, 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 the 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 (the “Act”) did not

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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 2% oxygenate requirement, as effective nationwide May 6, 2006. However, the Clear Air Act also contains an oxygenate fuel requirement for areas classified as carbon monoxide non-attainment areas. These areas are required to establish an oxygenated fuel 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 the 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 to ethanol. For instance, if gasoline price 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”) requirement 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 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 of supply outpaces demand.

     Legislation was recently introduced in the Senate and House that would strike the $0.54 per gallon secondary tariff on imported ethanol due to concerns that the recent spike in retail gasoline prices are a result of ethanol supplies. The proposed legislation seems misguided in light of recent reports by the Energy Information Agency (“EIA”). The EIA estimates that 130,000 barrels (5,460,000 gallons) per day of ethanol are needed to replace the volume of MTBE refiners have chose to remove from the gasoline pool. The most recent EIA report shows that U.S. ethanol production has soared to 302,000 barrels (12,684,000 gallons) 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 and plant expansions come on-line. Nevertheless, if the legislation is passed, the price of ethanol may decrease, negatively affecting our earnings.

     The Act also expands 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 2010. 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.

     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 used as an aviation fuel and as a hydrogen source for fuel cells. In the U.S., there are currently about 3 million flexible fuel vehicles capable of operating on E85 and 400 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 September 11, 2006), there are currently 102 ethanol plants in operation nationwide that have the capacity to annually produce approximately 4.88 billion gallons. In addition, there are 43 new ethanol

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plants and 7 expansions of existing ethanol plants under construction constituting another 2.96 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 increased requirement of 7.5 billion 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 its refined components and by clean air standards mandated by federal agencies 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 or that it will reduce fuel efficiency to such an extent that it costs more to use ethanol than it does to use gasoline. 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 ethanol that is 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 to sell our product and negatively affect our profitability.

     We also sell distiller’s dried 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, which has resulted in a larger supply. Continued increased supply of dried distiller’s grains on the market from other plants could reduce the price we will be able to charge for our distiller’s dried grains. This could have a negative impact on our revenues. During the first eight months of 2006, 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 becoming familiar with distiller’s grains and beginning to incorporate our distiller’s grains into their rations instead of using corn.

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

     Our costs of our goods consist 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. A U.S. Department of Agriculture report published in August 2006 estimates the 2006 corn crop at 10.975 billion bushels, down approximately 1 percent from the previous year, yet if realized, the 2006 crop would be the third largest on record. 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 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

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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, 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 July 31, 2006, the fair values of our derivative instruments are reflected as an asset in the amount of $2,991,614. 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 July 31, 2006, the Company has entered into derivative instruments to hedge (a) 11,950,000 bushels of its future corn purchases through December 2008, (b) 5,670,000 gallons of its future fuel ethanol sales through December 2006 and (c) 850,000 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. At July 31, 2006, no derivative contracts were designated as hedges and all changes in market value have been recognized in the statement of operations. The following amounts were recognized in the statements of operations:

	Three Months			Nine Months
	Ended			Ended
	July 31,			July 31,
	2006			2006
Increase (decrease) in revenues from ethanol sales	$	(555,026	)	$	(971,803	)
(Increase) decrease in cost of corn ground		(521,616	)		(1,334,340	)
(Increase) decrease in cost of natural gas used		254,259			(651,599	)

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 the notes payable to the City of Granite Falls or 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.

Liquidity and Capital Resources

Short-Term Debt Sources

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     On December 16, 2004, 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 8.87% at July 31, 2006. There was no balance outstanding on this revolving line of credit at July 31, 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 has provided a construction loan for approximately $34,000,000 that would convert to term loans upon completion of construction.

     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. In July 2006, the Company obtained a waiver from the Bank for the distribution made to unitholders prior to the completion of the year-end audit.

     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 July 31, 2006, as follows:

Swap Note	Three-month LIBOR plus 3.00% or 8.30%
Long-Term Revolver	One-month LIBOR plus 3.50% or 8.87%
Variable Note	Three-month LIBOR plus 3.50% or 8.80%

     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. On June 10, 2006, the Company made an additional principal payment of $5,000,000, which will be applied against the “excess cash flow” payment due for the fiscal year ending October 31, 2006.

     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 8.30% at July 31, 2006. The “notional” balance under the interest rate swap will

27

match the principal balance of one of the Swap Notes 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”):
Original amount:	$500,000
Interest Rate:	1.00%
Principal and Interest Payments:	Semi-Annual
Maturity Date:	June 15, 2014
Western Minnesota Revolving Loan Fund (“RLF”):
Original amount:	$100,000
Interest Rate:	5.00%
Principal and Interest Payments:	Semi-Annual
Maturity Date:	June 15, 2016
Chippewa County:
Original 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.

     If interest rates increase, we will have higher interest payments, which could adversely affect our net income.

Grants and Government Programs

     For the three months and nine months ended July 31, 2006, the Company recognized $191,539 and $669,394, respectively, of income from the USDA Commodity Credit Corporation Bioenergy Program. The amounts recognized under the USDA Commodity Credit Corporation Bioenergy Program are based upon 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 was issued stating that the June 30, 2006, payment is the final payment to be made pursuant to the program because the funds allocated to the program have been exhausted. As a result, we do not expect to receive any future payments under the program.

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 defined in Rule 13a-15(e)

28

under the Securities Exchange Act of 1934, as amended) as of July 31, 2006. Based upon 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 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 July 31, 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.

     On June 13, 2006, a duly called annual meeting of the members was held. There were 18,986 membership units represented in person or by proxy, thereby meeting the quorum requirement for a members meeting. The members approved the following amendments to the Company’s Fifth Amended and Restated Operating Agreement dated August 12, 2004:

1.	The reduction of the voting requirements for the election of Governors through the use of plurality (straight) voting rather than a majority of the membership units entitled to vote in the election. Of the membership units represented, 18,838 units voted in favor, 15 units voted against and 133 units abstained.
2.	The deletion of a provision that requires the Company to redeem membership interests of deceased members and the insertion of a provision that permits a decedent’s executor, personal representative, administrator or trustee to transfer any membership interests owned by the decedent. Of the membership units represented, 18,658 units voted in favor, 212 units voted against and 116 units abstained.

     Additionally, the members voted to re-elect Scott Dubbelde as a Governor. Of the membership units represented at the annual meeting, 12,240 units voted in favor, 140 units voted against and 6,606 units abstained.

Item 5. Other Information.

     None.

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

Exhibit No.	Exhibit
3.2	Second Amendment to the Fifth Amended and Restated Operating Agreement.
31.1	Certificate Pursuant to 17 CFR 240.15d-14(a).
31.2	Certificate Pursuant to 17 CFR 240.15d-14(a).
32.1	Certificate Pursuant to 18 U.S.C. § 1350.
32.2	Certificate Pursuant to 18 U.S.C. § 1350.

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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
September 13, 2006	Thomas Branhan
	General Manager/CEO
	/s/ Michael Nealon
September 13, 2006	Michael Nealon
	Chief Financial Officer

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EX-3.2

Exhibit 3.2

GRANITE FALLS COMMUNITY ETHANOL PLANT, LLC

(FORM OF) FIFTH AMENDED AND RESTATED OPERATING AND

MEMBER CONTROL AGREEMENT

     THIS FIFTH AMENDED AND RESTATED OPERATING AND MEMBER CONTROL AGREEMENT (the “Agreement”) is made and entered into as of August 12, 2004 by Granite Falls Community Ethanol Plant, LLC, a Minnesota limited liability company (the “Company”). This document has been duly adopted by the Board of Governors of the Company and supersedes and replaces the Fourth Amended and Restated Operating Agreement and Member Control Agreement. This Agreement is binding retroactively on all Members to the date of organization of the Company. The Effective Date of this Fifth Amended and Restated Operating Agreement is August 12, 2004.

     In consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1
DEFINITIONS

     As used in this Agreement, the following terms shall have the following meanings:

     1.1 “Act” shall mean the Minnesota Limited Liability Company Act, as amended from time to time.

     1.2 “Affiliate” means and includes, with respect to another Person, any of the following: i) any Person directly or indirectly owning, controlling, or holding with power to vote ten percent or more of the outstanding voting securities of such other Person, ii) any Person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other Person, iii) any Person directly or indirectly controlling, controlled by, or under common control with such other Person, iv) any executive officer, governor, trustee or partner of such other Person, or v) any legal entity on which such Person acts as an executive officer, governor, trustee, or partner.

     1.3 “Agreement” shall mean this Fifth Amended and Restated Operating and Member Control Agreement, as originally executed or as amended, modified, supplemented or restated from time to time.

     1.4 “Capital Account Balance” shall have the meaning set forth in Section 5.1.

     1.5 “Capital Contribution” shall mean, in the case of any Member as of any date of determination, the aggregate amount of cash, property, or services rendered, or a promissory note or other binding obligation to contribute cash or property or to perform services that such Member shall have contributed to the Company on or prior to such date and a Member’s share of any of the Company’s liabilities as determined in accordance with the Code and Treasury Regulations (or, if such Member is not the original holder of the Interest of such Member, the

1

Capital Contribution with respect to the Interest). In the event that any capital is returned to a Member, such Member’s Capital Contribution shall be adjusted to reflect such return.

     1.6 “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time and any successor statute or subsequent codification or recodification of the federal income tax laws of the United States.

     1.7 “Company” shall mean Granite Falls Community Ethanol Plant, LLC, a Minnesota limited liability company, as such limited liability company may from time to time be constituted, or any successor in interest for such limited liability company.

     1.8 “Distribution” shall mean any distribution pursuant to Section 5.4 by the Company of cash to the Members or any Distribution in Kind.

     1.9 “Distribution in Kind” shall have the meaning set forth in paragraph (b) of Section 5.4.

     1.10 “Financial Rights” means a Member’s rights to share in Profits and Losses and in Distributions.

     1.11 “Governance Rights” means all a Member’s rights as a member of the Company other than Financial Rights and the right to assign Financial Rights.

     1.12 “Governor” shall mean one or more Persons designated by the Members to be members of the Board of Governors. The “Board of Governors” or “Board” shall manage the Company as provided in Section 6.

     1.13 “Interest” shall mean, in the case of any Member at any time, such Member’s share of the Profits and Losses of the Company at such time and the right of such Member to receive distributions of the Company assets to which such Member may be entitled as provided in this Agreement and applicable law, and the right of such Member to vote and participate in the management of the Company as provided in this Agreement (i.e., Governance and Financial Rights).

     1.14 “Losses” shall mean the net losses and deductions of the Company determined in accordance with accounting principles consistently applied from year to year employed under the method of accounting adopted by the Company and as reported separately or in the aggregate, as appropriate, on the tax return of the Company filed for federal income tax purposes.

     1.15 “Majority in Interest” shall mean the affirmative vote of those Members holding more than fifty percent (50%) of the Percentage of Membership Units in the Company. With respect to the Board, “Majority of the Board” shall mean the affirmative vote of more than fifty percent (50%) of the Governors. Except as otherwise provided in this Agreement, all actions requiring approval or vote of Members shall be taken by and approved upon voting based upon Membership Units and Percentage of Membership Units.

     1.16 “Member” means a Person reflected in the required records of the Company as the owner of one or more Membership Units of the Company who has signed this Agreement, such Person’s heirs, executors, administrators, personal representatives and successors and any assigns of Membership Units, Governance Rights or Financial Rights as permitted by the Act, the

2

Articles of Organization and this Agreement and as reflected in the required records of the Company. When the Governance Rights and Financial Rights attributable to a Membership Unit have been separated and such separation is reflected in the required records of the Company, references to Member shall mean the holder of the Governance Rights or Financial Rights related to such Membership Unit as appropriate in the context.

     1.17 “Officer” shall mean a Member or other Person designated by the Board or Members as provided in section 6.11.

     1.18 “Person” shall mean an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an estate, an unincorporated organization or any other entity or a government or any department or agency thereof.

     1.19 “Percentage Interest” means the percentage figure calculated by dividing a Member’s Capital Account Balance at any given time by the total sum of the capital Account Balances of all Members.

     1.20 “Percentage of Memberships Units” means the percentage figure calculated by dividing a Member’s Membership Units at any given time by the total Membership Units of the Company issued and outstanding.

     1.21 “Pro Rata” means the ratio computed by dividing the units of each Member to whom a particular provision of this Agreement is stated to apply by the aggregate of the Units of all Members to whom that provision is stated to apply.

     1.22 “Profits” shall mean the net income and gains of the Company determined in accordance with accounting principles consistently applied from year to year employed under the methods of accounting adopted by the Company and as reported separately or in the aggregate, as appropriate, on the tax return of the Company filed for federal income tax purposes. Profits includes taxable income, capital gain, and income exempt from taxation.

     1.23 “Publicly Traded Partnership” shall mean a partnership whose interest are traded on an established securities market, or are readily tradable on a secondary market (or the substantial equivalent thereof).

     1.24 “Qualified Matching Service Program” shall mean a matching service that satisfied the requirements of a qualified matching service within the meaning of the Treasury Regulation Section 1.7704-1(g)(2), as amended from time to time, during limited time periods specified and approved by Board from time to time, in its sole discretion.

     1.25 “Transfer” or derivations thereof, of a Unit or Interest means, as a noun, the sale, assignment, exchange, pledge, hypothecation or other disposition of a Unit or Interest, or any part thereof, directly or indirectly, or the sale, assignment, exchange, pledge, hypothecation, or other disposition of a controlling interest in the equity securities of a Member, and as a verb, voluntarily to transfer, sell, assign, exchange, pledge, hypothecate or otherwise dispose of.

     1.26 “Treasury Regulations” shall mean the regulations of the United States Department of the Treasury pertaining to the income tax, as from time to time in force.

     1.27 “Units” or “Membership Units” means the unit of measurement used to quantify

3

the Members’ ownership interests in the Company. The Board may issue an unlimited number of Membership Units. Each Membership Unit consists of Governance Rights and Financial Rights and the right to assign together or separately such Governance Rights or Financial Rights in accordance with the Act, the Articles of Organization and this Agreement. When the Governance Rights and Financial Rights attributable to a Membership Unit have been separated and such separation is reflected in the required records of the Company under the Act, references to Membership Unit shall mean the Governance Rights or Financial Rights related to such Membership Unit as appropriate in the context. Except as otherwise provided in this Agreement, and unless the Board from time to time by resolution fixes the relative rights and preferences of different classes or series of Membership Units, all Membership units shall be ordinary Membership units of one class, without series, with one vote per Membership Unit on all matters and having equal rights and preferences in all other matters. No Member shall have any preemptive rights to acquire additional Membership Units.

     1.28 “Value” shall mean, with respect to any Capital Contributions or Distributions, if cash, the amount of such cash, or if not cash, the value of such Capital Contribution or Distribution calculated pursuant to paragraph (d) of Section 5.4.

SECTION 2
INITIAL DATE, PARTIES AND TERMS OF AGREEMENT

     2.1 Formation. The original parties to this Agreement organized a limited liability company under the provisions of the Act by delivering Articles of Organization to the Secretary of State of the State of Minnesota for filing. The Board may take such further actions as it deems necessary or advisable to permit the Company to conduct business as a limited liability company in any jurisdiction. The rights and liabilities of the Members under the Agreement shall be as provided by Minnesota law.

     2.2 Name. The name of the company shall be Granite Falls Community Ethanol Plant, LLC, or any other name permitted by the Act as the Members shall afterwards designate by appropriate amendment to the Company’s Articles or organization.

     2.3 Principal office. The principal office of the Company shall be at 2448-540th Street, Suite 1, Granite Falls, Minnesota 56241 (P.O. Box 216) or such place as the Board may, from time to time, designate by appropriate amendment to the Company’s Articles of Organization and/or this Agreement. The Board may establish additional places of business for the Company when and where required by the business of the Company.

     2.4 Initial Date and Parties.

          (a) This Agreement was first made on February 21, 2002 and was initially agreed to by the Company and all persons who on that date were Members of the Company.

          (b) Ownership rights in the Company are measured by Units. The Company shall maintain a membership register at its principal office or by a duly appointed agent of the Company setting forth the name, address, capital contribution and number of Units held by each Member which shall be modified from time to time as Transfers occur or as additional Units are issued pursuant to the provisions hereof.

     2.5 Subsequent Parties. No person may become a Member of the Company without

4

first assenting to and signing this Agreement. Any act by the Company to offer or provide member status, or reflect that status in the Company’s required records, automatically includes the condition that the person becoming a member first assents to and signs this Agreement. Furthermore, no Member may offer to assign or assign Governance Rights or Membership Units unless the assignee has assented to and signed this Agreement.

     2.6 Relationship with Articles of Organization. If a provision of this Agreement differs from a provision of the Company’s Articles of Organization, then to the extent allowed by law, this Agreement shall govern.

     2.7 Tax Matters and Partnership Status. The members acknowledge that the Company will be treated as a “partnership” for federal and Minnesota state tax purposes. The Members further intend, that as a result of this Agreement, and except for federal and state tax purposes, the Company shall not be a partnership (including limited partnership) or joint venture; and no member or governor shall be a partner or joint venturer of any other member. All provisions of this Agreement, and the Company’s Articles of Organization are to be so construed.

     2.8 Fiscal Year. The fiscal year of the Company shall begin on January 1st of each year and end on December 31st of each year. The fiscal year in which the Company shall terminate shall end on the date of termination of the Company.

     2.9 Intent of this Agreement.

          (a) The parties to this Agreement have reached an understanding concerning various aspects of (i) their business relationship with each other and (ii) the organization and operation of the company and its business. They wish to use rights created by statute to record and bind themselves to that understanding.

          (b) The parties intend for this Agreement to control, to the extent stated or fairly implied, the business and affairs of the company, including the Company’s governance structure and the Company’s dissolution and winding up, as well as the relations among the Company’s Members.

     2.10 Advice of counsel. Each Person signing this Agreement:

          (a) Understands that this Agreement contains legal binding provisions;

          (b) Has had the opportunity to consult with that Person’s own lawyers; and

          (c) Has either consulted that lawyer or consciously decided not to consult a lawyer.

SECTION 3
BUSINESS OF THE COMPANY

     The Company may engage in any lawful business activity; and this Agreement shall be construed in light of such purpose.

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SECTION 4
CAPITAL CONTRIBUTIONS

     4.1 Initial Paid-In Capital

          (a) Prior to the date of this Agreement, the initial Members of the Company (the “Founders”) contributed cash to the capital of the Company as set forth in the required records of the Company.

          (b) The Board of Governors, in its sole discretion, may from time to time by majority vote, accept additional subscriptions for Membership Units in the Company, or grant options, warrants or other rights to purchase or otherwise acquire Membership Units, all on such terms as the Board may determine. Under acceptance of any such subscription, the Company shall promptly enter into a subscription agreement (and any agreement referred to therein), without the requirement of any further act, approval or vote of any other Person and such subscription agreement will, along with execution of agreement to be bound by this Agreement be deemed to satisfy all the conditions hereof.

          (c) Each Founder shall be entitled, notwithstanding Section 10.1, to transfer such Founder’s Interest on a one time basis to another Person and at the Founder’s discretion; provided, however, that the Transferee’s ownership in all respects complies with the terms hereof and the Transferee becomes bound by all the terms and conditions set forth herein.

     4.2 Additional capital Contributions. No Member shall be required to make any additional contributions to the Capital of the Company. No Member shall be obligated to satisfy any negative Capital Account Balance, except to the extent expressly set forth herein. No Member shall be paid interest on any Capital Contribution.

     4.3 Maximum Ownership. There is no limit on the number of Units or Percentage Interest that any Member may own.

     4.4 Withdrawal or Reduction of Members’ Capital Contributions.

          (a) No Member has the right to withdraw all or any part of the Member’s Capital Contribution or to receive any return on any portion of the Member’s Capital Contribution, except as may be otherwise specifically provided in this Agreement. Under circumstances involving a return of any Capital Contribution, no Member has the right to receive property other than cash.

          (b) Unless the Board from time to time by resolution fixes the relative rights and preferences of different classes or series of Membership Units, no Member shall have priority over any other Members, either as to the return of Capital Contributions or as to Losses and Profits, or distributions, except as otherwise provided herein.

     4.5 Loans from Governors and Members. The Company may borrow money from and enter into other transactions with any Governor or Member or their Affiliates only in compliance with Section 6.14. Borrowing from or engaging in other transactions with one or more Governors or Members does not obligate the Company to provide comparable opportunities to other Governors or Members. Any loan made by a Governor or Member to the Company shall be evidenced by a promissory note made payable from the Company to such Governor or Member.

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Loans by a Governor or Member to the Company shall not be considered Capital Contributions and shall be repaid pursuant to Section 5.4(a) below.

     4.6 Loans by Company to Members. Unless otherwise approved by the Board of Governors, the Company will not make any loans to Members.

     4.7 Prohibition on Loans to Governors and Executive Officers. Despite anything otherwise in this Agreement to the contrary, the Company shall note directly or indirectly, including through any subsidiary, extend or maintain credit, arrange for the extension of credit or renew an extension of credit, in the form of a personal loan to or for any governor or executive officer.

SECTION 5
ALLOCATIONS AND DISTRIBUTIONS

     5.1 Capital Accounts. A “Capital Account” shall be established for each Member on the books of the Company and maintained in accordance with Section 1.7040-1(b)(2) of the Treasury Regulations, as amended from time to time.

          (a) To each Member’s Capital Account shall be credited:

               (i) the cash and the value of any property other than cash contributed by such Member to the capital of the Company;

               (ii) such Member’s allocable share of Profits, and any items of income or gain which are specifically allocated to the Member; and

               (iii) the amount of any company liabilities assumed by such Member of which are secured by any property of the Company distributed to such Member.

     The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed to the Company by the maker of the note shall not be credited to the Capital Account of any Member until the Company makes a taxable disposition of the note or until (and only to the extent) principal payments are made on the note.

          (b) To each member’s Capital Account there shall be debited:

               (i) the amount of cash and the Value of any property other than cash distributed to such Member pursuant to Section 5.4;

               (ii) such Member’s allocable share of Losses and any items of expense or loss which are specially allocated to the Member; and

               (iii) the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company.

Provided; however, all of the foregoing to be determined in accordance with the rules set forth in Section 1.704-1(b)(2)(iv) of the Treasury Regulations, as amended from time to time.

     5.2 Allocation of Profits. Profits of the Company shall be allocated to the Members

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according to their Percentage of Membership Units.

     5.3 Allocation of Losses. Losses of the Company shall be allocated to the Members according to their Percentage of Membership Units.

     5.4 Distributions.

          (a) The Board of Governors shall determine, in its sold discretion, whether to distribute or retain all or any portion of the Profits. The Governors may distribute cash to the Members irrespective of Profits. All cash distributions shall be made to the Members in accordance with paragraph (c) of this Section 5.4; provided, however, no Member has a right to any distribution prior to the dissolution of the Company without the approval of the Board; provided, further, notwithstanding any other language herein no distributions in dissolution will be made until all loans from all Members, including all principal and interest, are repaid in full. Such repayments shall be made on a Pro Rata basis. Nothing herein shall be construed as requiring the making of distributions prior to the repayment of loans from unrelated parties.

          (b) The Board may agree to distribute to the Members in kind any property held by the Company. Any such distribution of the property shall be referred to herein as a “Distribution in Kind.” The value of any such Distribution in Kind at the time of such distribution shall be determined in accordance with paragraph (d) of this Section 5.4 and such distribution shall be made to the Members in accordance with paragraph (c) of this Section 5.4. Distribution in Kind, made pursuant to this paragraph (b), shall be subject to such restrictions and conditions as the Board shall have determined are necessary or appropriate in order for such distributions to be made in accordance with applicable law. Notwithstanding the foregoing, Distributions in Kind shall not be allowed, unless they are (i) distributions of readily marketable securities, (ii) distributions of cash from a liquidating trust established for the dissolution of the Company and the liquidation of its assets in accordance with this Agreement or (iii) distributions of in-kind property in which the Members have been advised of the risks associated with such property, the Members have been offered the election of receiving in-kind property distributions and only the Members who accept the offer of in-kind property actually receive in-kind property.

          (c) Subject to Section 5.5, and distribution of Profits in accordance with this Section 5.4, and any distribution, other than Profits or cash pursuant to paragraph (a) of this Section 5.4 or Distribution in Kind pursuant to paragraph (b) of Section 5.4, shall be made to the Members according to their Percentage of Membership Units.

          (d) The Value of any Distribution in Kind as of any date of determination (or in the event such date is a holiday or other day that is not a business day, as of the next preceding business day) shall be the estimated fair market value of the property distributed.

          (e) All distributions are subject to set-off by the Company for any past-due obligation of the members to the Company.

     5.5 Other Allocation Rules.

          (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Board, using any permissible method under Section 706 of the Code and the Treasury Regulations thereunder.

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          (b) The Members are aware of the income tax consequences of the allocations made by this Section 5 and hereby agree to be bound by the provisions of this Section 5 in reporting their shares of Company income and loss for income tax purposes.

          (c) Unless approved by the Board, in advance, all Allocations and Distributions (and K-1s reflecting the same) made by the Company shall be based on the record ownership of Membership units at the time for which such allocations or distributions are attributable. For example, it shall be a Member’s responsibility in the event of a transfer of a Membership Interest in the Company (permitted under this Agreement) to request Board approval with respect to allocations or distributions being made to any transferee that arise from allocations or distributions attributable to a prior year where, at year end, the transferring member was the record owner of the Membership Units.

          (d) Notwithstanding any provision herein to the contrary, in the event of Termination and Dissolution of the Company, sale of substantially all of its assets, or other action causing a distribution to Members other than in the ordinary course of business of the Company, the Board shall be authorized and shall adjust the distribution to any member (to include Founding Member) so that the Member will receive first, a distribution based upon the Members Percentage Interest as required by law and generally accepted principles of accounting, to the extent necessary to equalize all Members Capital Account Balances, and thereafter by Percentage of Membership Units.

     5.6 Transfer of Capital Accounts. In the event all or a portion of an Interest in the Company is Transferred in accordance with the terms of the Articles of Organization and this Agreement, the transferee shall succeed to that portion of the Capital Account of the transferor which is allocable to the transferred Interest.

SECTION 6
MANAGEMENT OF THE COMPANY

     6.1 Management.

          (a) The Company shall be managed by a Board of Governors whose members are elected, designated or appointed in accordance with Section 6.1(c). All powers of the Company shall be exercised by or under the authority of, and the business affairs of the Company managed under the directions of the Board of Governors in accordance with this Agreement. Individual Governors or Officers designated by the Board from time to time may act for or on behalf of the Company and execute all agreements on behalf of the Company and otherwise bind the Company as to third parties without the consent of the Members or remainder of the Board of Governors; provided, however, that with respect to those issues requiring approval of the Members under the Act or as set forth in this Agreement, such approval must first be obtained; and further provided that except for those acts for which the approval of the Board of Governors is required by this Agreement, and except for those powers or acts specifically reserved to the Board of Governors by this Agreement, the Board of Governors shall have authority to appoint a management company to manage the business and affairs of the Company in accordance with agreements reached by the Board and any such management company from time to time.

          (b) The salaries and other compensation, if any, of the Governors for management services shall be fixed annually by a vote of a Majority of the Board.

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          (c) The Board of Governors shall be comprised of natural persons as stated in the Articles of Organization. The Board of Governors shall consist of the following:

               (i) Subject to Section 6.1(c)(vix), the Board of Governors shall consist of seven (7) individuals.

               (ii) So long as it is a member and holds no less than 20% of the issued and outstanding Membership Units of the Company, Glacial Lakes Energy, LLC (“Glacial Lakes”) shall designate two (2) members to serve on the Board of Governors (the “glacial Lakes Appointees”), and an alternate (the “Glacial Lakes Alternate”) to serve as described below. Glacial Lakes shall promptly appoint any replacements for such individuals if they resign and/or retire from the Board of Governors or from service as an alternate. If a Glacial Appointee is not available for, or during any part of, a meeting of the Board of Governors or to take action in writing in lieu of such a meeting, the Glacial Alternate is entitled to act as a Governor at such meeting, or during such part, or to take such action in writing (but only on behalf of one Glacial Appointee, if both are unavailable). In any event, if Glacial Lakes is no longer a member of the Company or holds less that 205 of the issued and outstanding Membership Units of the Company, then the Glacial Lakes Appointees and the Glacial Lakes Alternate shall be deemed to have resigned and, unless the provisions of Section 6.1(c)(iii) apply, the Glacial Lakes Appointees shall be replaced as At-Large Additional Governors under Section 6.1(c)(v).

               (iii) If Glacial Lakes sells a number of its Membership Units comprising at least 20% of the issued and outstanding Membership Units of the Company to a single person or entity that is not an Affiliate of Glacial Lakes, the buyer of such Membership Units (the “Glacial Successor”) shall succeed to Glacial Lakes’ right to designate two (2) members to serve on the Board of Governors (the “Glacial Successor Appointees”), and the alternate (the “Glacial Successor Alternate”). The Glacial Successor’s right to designate the Glacial Successor Appointees and the Glacial Successor Alternate will terminate (and such Appointees and Alternate shall be deemed to have resigned and the Glacial Successor Appointees shall be replaced as At-Large Additional Governors under Section 6.1(c)^©) upon the earlier of (x) the sale or other disposition of all or substantially all of the Glacial Successor’s assets, (y) the sale or other disposition (including whether by equity sale to, or merger or consolidation with or into, another person or entity) of a majority of the capital securities, or voting securities, of the Glacial Successor or (z) the date that the Glacial Successor no longer holds at least 20% of the issued and outstanding Membership Units of the Company. Glacial Lakes shall have no other right to assign the appointment of Governors or an alternate except as provided by this Section 6.1(c)(iii).

               (iv) So long as it is a member and holds no less than 5% of the issued and outstanding Membership Units of the Company, Fagen, Inc. (“Fagen”) shall designate one (1) member to serve on the Board of Governors (the “Fagen Appointee”). Fagen shall promptly appoint any replacements for the Fagen Appointee in the event of his or her resignation and/or retirement from the Board of Governors. In the event that Fagen is no longer a member of the Company or holds less than 5% of the issued and outstanding Membership Units in the Company, then the Fagen Appointee shall be deemed to have resigned and Fagen’s Appointee shall be replaced as an At-Large Additional Governor under Section 6.1(c)(v).

               (v) The remaining four Governors (the “At-Large Governors”), together with any Governor to be elected to fill a vacancy created by the deemed resignation above of a former Glacial Lakes, Fagen or Glacial Successor Appointee (an “At-Large Additional

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Governor”) shall be elected by the members of the Company. However, Glacial Lakes, Glacial Successor and Fagen shall not be entitled to vote with respect to the election of the At-Large Governors or any At-Large Additional Governor if Glacial Lakes, the Glacial Successor and/or Fagen, as applicable, continues to have the right to separately appoint one or more Governors above. The At-Large Governors and any At-Large Additional Governors shall together (by majority vote of all such Governors) designate an alternate (the “At-Large Alternate”) to serve as follows. If any At-Large Governor or At-Large Additional Governor is not available for, or during any part of, a meeting of the Board of Governors or to take action in writing in lieu of such a meeting, the At-Larg Alternate is entitled to act as a Governor at such meeting, or during such part, or to take such action in writing (but only on behalf of one At-Large Governor or At-Large Additional Governor, if more than one is unavailable). The At-Large Governors and any At-Large Additional Governors shall together have the right to fill vacancies in the At-Large Governor and At-Large Additional Governor positions by majority vote.

               (vi) The manner of election as to the At-Large Governors and any At-Large Additional Governors shall be by affirmative vote of a Majority in Interest of the members (excluding Glacial Lakes, the Glacial Successor and Fagen to the extent noted above) and as follows: at the First Annual Meeting of Members after the date hereof, one (or if greater, one-third rounded down to the nearest whole number) of the At-Large Governors and any At-Large Additional Governors shall be elected for a 3-year term (“Class One”); at the Second Annual Meeting of the Members after the date hereof, a second one (or if greater, one-half rounded down to the nearest whole number) of the total number of At-Large Governors and any At-Large Additional Governors that did not stand for election in Class One shall be elected to 3-year term (“Class Two”); and at the Third Annual Meeting of Members after the date hereof, the remaining At-Large Governors and At-Large Additional Governors shall be elected for a 3-year term (“Class Three”).

               (vii) Each Governor shall serve until his or her successor is duly elected or, if earlier, until such Governor’s death, actual or deemed resignation or removal.

               (viii) Each alternate, as designated above, shall be entitled to attend all Board functions and to receive and shall receive all information provided to the Governors; provided, however, that if legal counsel to the Company concludes that providing or sharing particular information with an alternate would jeopardize the Company’s attorney-client privilege, then the Company may withhold such information from the alternate.

               (vix) The right is reserved to the Board of Governors to establish two (2) additional board seats upon such criteria as approved unanimously by the Board of Governors.

     6.2 Authority of the Board of Governors. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, and except as limited, restricted or prohibited by the express provisions of this Agreement, the Board of Governors shall have and may exercise on behalf of the Company, all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Company. Such powers shall include, without limitation, the power to:

          (a) Expend Company funds in connection with the operation of the Company’s business or otherwise pursuant to this Agreement;

          (b) Employ and dismiss from employment any and all employees, agents,

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independent contractors, attorneys and accountants;

          (c) Prosecute, settle or compromise all claims against third parties, compromise, settle or accept judgment on, claims against the Company and execute all documents and make all representations, admissions and waivers in connection therewith;

          (d) Borrow money on behalf of the Company from any Person, issue promissory notes, drafts and other negotiable and nonnegotiable instruments and evidences of indebtedness, secure payment of the principal of any such indebtedness and the interest thereon by mortgage, pledge, property of the Company, whether at the time owned or thereafter acquired;

          (e) Hold, received, mortgage, pledge, lease, transfer, exchange, otherwise dispose of, grant options with respect to, and otherwise deal in the exercise all rights, powers, privileges and other incidents of ownership or possession with respect to all property of whatever nature held or owned by, or licensed to, the Company;

          (f) Lend any of the Company property with or without security;

          (g) Have and maintain one or more offices within or without the State of Minnesota;

          (h) Open, maintain and close bank accounts and money market mutual funds accounts, and draw checks and other orders for the payment of monies;

          (i) Engage accountants, custodians, consultants and attorneys and any and all other agents and assistants (professional and nonprofessional) and pay such compensation in connection with such engagement that the Board of Governors determines is appropriate;

          (j) Enter into, execute, make, amend, supplement, acknowledge, deliver and perform any and all contracts, agreements, licenses, and other instruments, undertakings and understandings that the Board determines is necessary, appropriate or incidental to carrying out the business of the Company;

          (k) Establish one or more committees of the Board, including an audit committee in compliance with the Securities Exchange Act of 1934, as amended, and a compensation committee.

          (l) File a petition in bankruptcy on behalf of the Company; and

          (m) Delegate to the Chairman, President and other Officers, such responsibility and authority as the Board deems necessary or appropriate from time to time.

     In exercising its powers, the Board of Governors may (i) rely upon and shall be protected from acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, or document believed by him or her to be genuine and to have been signed or presented by the proper party of parties; (ii) consult with counsel, accountants, and other experts selected by him or her and any opinion of an independent counsel, accountant or expert shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by the Board of Governors in good faith and in accordance with such opinion; and (iii) execute any of his or her powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys.

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     6.3 Obligations of the Board of Governors. The Board of Governors shall:

          (a) Devote to the Company and apply to the accomplishment of Company purposes so much of the Board of Governors time and attention as they determine to be necessary or advisable to manage properly the affairs of the Company;

          (b) Maintain accounting records from which a Company Capital Account Balance can be determined for each Member;

          (c) Execute, file, record or publish all certificates, statements and other documents and do all things appropriate for the formation, qualification and operation of the Company and for the conduct of its business in all appropriate jurisdictions;

          (d) Employ attorneys to represent the Company when necessary or appropriate;

          (e) Use their best efforts to maintain the status of the Company as a “limited liability company” for state law purposes, and as a “partnership” for federal income tax purposes;

          (f) Have fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, and not employ or permit others to employ such funds or assets (including any interest earned thereon) in any manner except for the benefit of the Company; and

          (g) Maintain a current list of the names, last known addresses and Percentage Interest of each Member at the Company’s principal office.

     6.4 Resignation of Governor. Any Governor may resign as Governor of the Company upon written notice to the Board of Governors.

     6.5 Removal of a Governor. One or both of the Glacial Lakes Appointees may be removed from time to time with or without cause by Glacial Lakes. One or both of the Glacial Successor Appointees may be removed from time to time with or without cause by the Glacial Successor. The Fagen Appointee may be removed from time to time with or without cause by Fagen. Any other Governor may be removed from time to time with or without cause by a Majority in Interest of Members. However, Glacial Lakes, Glacial Successor and Fagen shall not be entitled to vote with respect to the removal of any At-Large Governors or any At-Large Additional Governor if Glacial Lakes, the Glacial Successor and/or Fagen, as applicable, continues to have the right to separately appoint one or more Governors under Section 6.1(c).

     6.6 Board Voting Requirements for Certain Issues.

     During such time that Glacial Lakes is a member of the Company and holds at least 20% of the issued and outstanding Membership Units of the Company, the following actions shall require the minimum vote, as set forth in each item, of the full Board of governors before such decisions are binding or effective on the Company:

(i) Hiring of a manager or entering into an agreement to have management services provided to the company shall require a two-thirds (2/3) vote.

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(ii)	The initial hiring of any marketer(s) or entering into an agreement to have marketing services provided to the Company (regarding the sale of ethanol, distillers grain, or any other products produced or sold by the Company) shall require a three-fourths (3/4) vote and any hiring thereafter shall require a two-thirds (2/3) vote.
(iii)	The sale, lease, exchange or other disposition of any assets of the Company out of the ordinary course of business, except for sales of ethanol, distillers grain, or any other products produced or sold by the Company, the sale, lease, exchange or other disposition of all or substantially all of the Company’s assets or the merger or consolidation of the Company with or into any other Person shall require a three-fourths (3/4) vote.
(iv)	Construction, whether repair, remodeling or new, exceeding an estimated cost of $1 million shall require a three-fourths (3/4) vote.
(v)	Material changes (in excess of $50,000) in the plans or specifications of the Company’s proposed ethanol plant and the contract to design and construct the plant shall require a three-fourths (3/4) vote;
(vi)	Approval of the amount and terms of debt financing and all documents and agreements entered into in connection therewith to construct and finance the start-up costs of the proposed ethanol plant shall require a three-fourths (3/4) vote;
(vii)	The annual operating and capital budgets for each fiscal year shall require a two-thirds (2/3) vote;
(viii)	Any contract, obligation, liability, disbursement or lawsuit settlement outside of the ordinary course of business in excess of $100,000 which is not part of the then-current fiscal year’s approved Annual Operating or capital Budget (provided that necessary expenditures to meet operational emergencies at the proposed ethanol plan may be incurred prior to such approval if immediate action is required for the safety or operation of the proposed plant shall require a three-fourths (3/4) vote;
(ix)	Any investment in excess of $100,000 which is not part of the then current fiscal year’s approval Annual Capital Budget shall require a three-fourths (3/4) vote;
(x)	Other than in connection with the Company’s proposed initial public offering of Membership Units, the acceptance of additional capital contributions, the issuance of additional Membership Units, or the Issuance of options or warrants to purchase Membership Units shall require a three-fourths (3/4) vote;
(xi)	The determination of the gross asset values of the Company property shall require a three-fourths (3/4) vote;
(xii)	Except as provided by Section 10 or in connection with the Company’s

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proposed initial public offering of membership Units, the admission of additional or substitute members and the others of such admission shall require a three-fourths (3/4) vote;

(xiii)	The sufficiency of any legal opinion required or the waiver of any such legal opinion shall require a two-thirds (2/3) vote;
(xiv)	Any tax elections made under this Agreement shall require a three-fourths vote (3/4) vote;
(xv)	Any amendment to the Articles or this Agreement shall require a three-fourths (3/4) vote;
(xvi)	The employment or termination of legal counsel shall require a unanimous vote and account and auditing firms a two-thirds vote (provided, however, that at any time that the Company is subject to the provisions of the Sarbanes-Oxley Act of 2002, the engagement and dismissal of the Company’s independent accountants shall vest solely with the Company’s Audit Committee);
(xvii)	Entering into any new corn procurement agreement, or amending the FCE Corn Procurement Agreement in effect on the Effective Date of this Agreement, shall require a unanimous vote.

     6.7 Voting Requirements for Certain Items Reserved for Member Approval. During such time that Glacial Lakes is a member of the Company and holds at least 20% of the issued and outstanding Membership Units of the Company, the following actions require Member approval (in addition to such other Member or Board approvals required by this Agreement) of a minimum two-thirds (2/3) vote of Membership Units of the Company at a meeting of Members at which a quorum is present:

(i)	Issue Membership Units in the Company (subsequent to the final closing of the Company’s proposed initial public offering of Membership Units) at less than $1,000 per unit;
(ii)	Sell, lease, exchange or otherwise dispose of all or substantially all of the assets of the Company;
(iii)	Merger or consolidation of the Company with or into any other Person;
(iv)	A change in the business purpose of the Company; or
(v)	Voluntary dissolution of the Company.

     6.8 Meetings of the Board. Meetings of the Board may be called by the Chairman of the Board or any two (2) Governors and shall be held at the principal place of business of the Company, or elsewhere as the notice of such meeting shall direct. Except as otherwise expressly provided in this Agreement, the Articles, or the Act, the affirmative vote of a majority of the Governors present at a duly convened meeting of the Board at which a quorum is present shall constitute the act of the Board.

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     6.9 Place of Meeting. The Board may designate any place, either in or out of the State of Minnesota, as the place of meeting for any meeting. If no designation is made, the place of meeting shall be the Company’s principal office. Governors may attend any such meeting in person or by telephone or video conference call.

     6.10 Notice of Meeting. Written or oral notice of every meeting of the Board, stating the place, date and hour of the meeting, and the purpose or purposes for which the meeting is called, shall be given by the Secretary of the Company to each other Governor at leave seventy-two (72) hours prior to the meeting, unless such notice is waived in accordance with Section 9 hereof.

     6.11 Quorum. The presence of a Majority of the Governors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting, a majority of the Governors represented may adjourn the meeting from time to time without further notice. If proper notice is not given, or waived, there must be at least one (1) Governor of or appointed by Glacial Lakes present in order to conduct business.

     6.12 Officers.

          (a) The Board may elect a Chairman, Vice Chairman, President, and one or more Vice Presidents, from among its Governors. The Board shall elect a Chief Manager, Treasurer and Secretary. Officers need not be Governors. Any two (2) or more offices may be held by the same person.

          (b) The Officers of the Company shall be elected annually by the Board at the first meeting of the Board held after each annual meeting of Members. If the election of Officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently possible. Vacancies may be filled or new offices created and filled at any meeting of the Board. Each Officer shall hold office until his or her successor shall have been duly elected and qualified or until his or her death, or until he or she shall resign or shall be removed in the manner hereinafter provided. Election or appointment of an Officer or agent shall not of itself create contract rights.

          (c) Any Officer or agent may be removed by the Board at any time with or without cause, but such removal does not affect the contract rights, if any, with the Company of the person so removed.

          (d) A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board for the unexpired portion of the term. An Officer may resign at any time by delivering notices to the Company. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the Company accepts the future effective date, the Board may fill the pending vacancy before the effective date if the Board provides that the successor does not take office until the effective date.

     6.13 Liabilities of Governors. In carrying out their duties hereunder, the Governors shall not be liable to the Company or to any Member for any Member for any actions taken in good faith and reasonably believed by them to be in the best interest of the Company or in reliance of the provisions of this Agreement or the Articles or for good faith errors of judgment.

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The Governors shall not be expected to devote their full time and attention to the affairs of the Company, but shall devote such amounts to time and attention as are reasonable and appropriate in their good faith judgment under the circumstances prevailing from time to time.

     6.14 Indemnification of the Governors, their Affiliates and Control Person.

          (a) Neither the Governors nor any Officer shall be liable to the Company or any member for any act or omission based upon errors of judgment or other fault in connection with the business or affairs of the Company if the Board determines that such course of conduct was in the best interest of the Company and did not result from the negligence or misconduct of such Governor or Officer.

          (b) To the fullest extent permitted by law, the Governors and Officers (each such person being referred to herein as an “Indemnitee”) shall be indemnified and held harmless by the Company from and against any and all losses, claims, damages, settlements and other amounts arising from any and all claims (including attorneys fees and expenses, as such fees and expenses are incurred), demands, actions, suits or proceedings (civil, criminal, administrative or investigative), in which they may be involved as a party or otherwise, by reason of their management of the affairs of the Company whether or not they continue to be such at the time any such liability or expense is paid or incurred; provided that Indemnitee shall not be entitled to the foregoing indemnification if a court or competent jurisdiction shall have determined that such losses, claims, damages, liabilities, expense or such other amounts resulted primarily from the negligence or misconduct of such Indemnitee. The termination of a proceeding by judgment, order, settlement or conviction upon a plea of nolo contendre or its equivalent, shall not, of itself, create any presumption that such losses, claims, damages, liabilities, expenses or such other amounts resulted primarily from the negligence or misconduct of any Indemnitee or that the conduct giving rise to such liability, was not in the best interest of the Company. The Company shall also indemnify any Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the Company to procure a judgment in its favor by reason of the fact that such Indemnitee is or was an agent of the Company, against any losses, claims, damages, liabilities, expenses or any other amounts incurred by such Indemnitee in connection with the defense or settlement of such action; provided that no Indemnitee shall be entitled to the foregoing indemnification if a court of competent jurisdiction shall have determined that any such losses, claims, damages, liabilities, expenses or such other amounts resulted from the negligence or misconduct of such Indemnitees. To the extent permitted by law, the Company may advance any Indemnitee any expenses (including, without limitation, attorneys’ fees and expenses) incurred as a result of any demand, action, suit or proceeding referred to in this paragraph (b) provided that (i) the legal action relates to the performance of duties or services by the Indemnitee on behalf of the Company, and (ii) the Indemnitee gives a full recourse promissory note to the Company for the amounts of such advances payable in the event that the Indemnitee is determined to be not entitled to indemnification hereunder.

          (c) The indemnification provided by paragraph (b) of this Section 6.13 shall not be deemed to be exclusive of any other rights to which an Indemnitee may be entitled under any agreement as a matter of law, in equity or otherwise, and shall continue as to an Indemnitee who has ceased to have an official capacity and shall inure to the benefit of the heirs, successors and administrators of such Indemnitee.

          (d) Any indemnification pursuant to this section will be payable only from the

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Company’s net assets.

          (e) Notwithstanding anything to the contrary contained in Section 6.13, the Company and any person acting as broker-dealer shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless one or more of the following conditions are met:

               (i) There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular Indemnitee;

               (ii) Such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular Indemnitee; or

               (iii) A court of competent jurisdiction approves a settlement of the claims against a particular Indemnitee and finds that indemnification of the settlement and related costs should be made, and the court of law considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.

          (f) In addition to the provisions of Section 6.13(b) above, the advancement of Company funds to an Affiliate for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following additional conditions are satisfied:

               (i) The legal action is initiated by a third party who is not a Member, or the legal action is initiated by a Member and a court of competent jurisdiction specifically approves such advancement; and

               (ii) The promissory note to the Company for repayment of advanced funds in cases where the Affiliate is found not to be entitled to indemnification shall provide for repayment with the applicable legal rate of interest thereon.

     6.15 Transactions with the Governors or their Affiliates. Subject to the other express provisions of this Agreement, the Board, on behalf of the Company, may enter into contracts with the Governors, Officers or Members (or their Affiliates), provided that any such transaction shall be on terms no more favorable to the Governors, Officers or Members (or their Affiliates) than generally afforded to non-affiliated parties in a similar transaction. All such transactions shall be approved by a majority of the disinterested Governors if such Governors, as fiduciaries, determine such self-dealing arrangements are in the best interest of the Company.

     6.16 Conflicts of Interest. Subject to the other express provisions of this agreement, the Governors at any time and from time to time may engage in and possess interest in other business ventures of any and every type and description, independently or with others, including one in competition with the Company, with no obligation to offer to the Company or any other Member the right to participate therein.

     6.17 Limitations. Notwithstanding the other provisions of this Agreement to the contrary, the Company shall comply with the following provisions:

          (a) Lending Practices. On financing made available to the Company by any

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Affiliate, the Affiliate may not receive interest in excess of the lesser of the Affiliate’s cost of funds or the amounts which would be charged by unrelated lending institutions on comparable loans for the same purpose. The Affiliate shall not impose a prepayment charge or penalty in connection with such financing and the Affiliate shall not receive points or other financing charges. The Affiliate shall be prohibited from providing Permanent Financing for the Company. For purposes of this Section, “Permanent Financing” shall mean any financing with a term in excess of 12 months. Despite the foregoing, any Affiliate shall not be precluded from providing financing to the Company, including Permanent Financing, on such terms, and with such interest, prepayment charges or penalties and points or other financing charges, as are not less favorable to the Company as the terms and conditions imposed by a non-Affiliate lender to the Company participating in the same (or in the same series of), or in similar, transactions with the company.

          (b) Sales and Leases to the Company. The Company shall not purchase or lease assets in which an Affiliate has an interest unless the assets are sold upon terms fair to the Company and at a price not to exceed the lesser of cost or fair market value as determined by a person with no material current or prior business or personal relationship with the Affiliate who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Company, and who is qualified to perform such work. Notwithstanding the foregoing, the Affiliate may purchase assets in its own name (and assume loans in connection therewith) and temporarily hold title thereto, for the purposes of facilitating the acquisition of the assets, the borrowing of money, obtaining financing for the Company or completion of construction of the assets, provided that (i) the assets are purchased by the Company for a price no greater than the cost of the assets to the Affiliate, (ii) all income generated by, and expenses associated with, the assets so acquired shall be treated as belonging to the Company and (iii) there are no other benefits arising out of such transaction to the Affiliates apart from compensation otherwise permitted by this Agreement.

     Despite any of the above, this Section 6.17(b) shall not apply as to any transaction described or contemplated in the Company’s Registration Statement (as defined in Section 8.1) hereof) to the extent such transaction is approved in the manner described in Section 6.15 hereof. Without limitation, the exception provided by this paragraph applies to (i) the proposed construction of the Company’s ethanol plant by Fagen, Inc. and (ii) the proposed supply of corn to the Company by the Farmers Cooperative Elevator Company.

     6.18 Rebates, Kickbacks and reciprocal Arrangements. No rebates or give-ups may be received by the Company nor may the Company participate in any reciprocal business arrangements which would circumvent the other provisions of this Agreement, including the restrictions on dealing with Affiliates. The Company shall not directly or indirectly pay or award any commissions or other compensation to any person engaged to sell Units or give investment advice to a potential Member; provided, however, that this clause shall not prohibit the payment to a registered broker-dealer or other properly licensed person of normal sales commissions for selling Units.

     6.19 Commingling. The Company’s funds shall not be commingled with the funds of any other person except through a master fiduciary account pursuant to which a separate sub-trust account is established for the benefit of the Company.

     6.20 Expenses and Payments. All expenses of the Company shall be billed to and paid by the Company.

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     6.21 Investments in Other Companies. The Company shall be permitted to invest in general partnerships or joint ventures with non-Affiliates that own and operate specific assets. However, in the event of such an investment, the Company must have an equity interest possessing the power to direct or cause the direction of the management and policies of the general partnership or joint venture including (i) review of all contracts entered into by the general partnership or joint venture entity, (ii) causing a sale or refinancing of the general partnership or joint venture entity’s assets or its interest therein, (iii) approval of budgets and major capital expenditures, (iv) the right to veto any sale or refinancing of the general partnership or joint venture entity’s assets and (v) exercising a right of first refusal on any sale or refinancing by the joint venture partner of its interest in the general partnership of joining venture entity’s assets. No duplicate fees shall be allowed with regard go the management or operation of the general partnership or joint venture entity. All other investments in other companies are prohibited.

SECTION 7
RIGHTS AND OBLIGATIONS OF MEMBERS

     7.1 Limitation of Liability. Each Member’s liability shall be limited as set forth in this Agreement, the Act and other applicable law.

     7.2 Company Debt Liability. A member will not be personally liable for any debts or losses of the Company beyond his or her respective Capital Contributions except as provided in Section 7.6 or as otherwise required by law.

     7.3 Liability to Third Parties. No Member or Governor is liable for the debts, obligations or liabilities of the Company, whether arising in contract, tort or otherwise, including under a judgment, decree or order of a court.

     7.4 Lack of Authority. No Member (other than a Governor or an Officer as provided under Section 6 has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company or to incur and expenditures on behalf of the Company.

     7.5 Member Liability to the Company. A Member who receives a Distribution made by the Company in violation of this Agreement or the Act is liable to the Company to the extent provided by the Act.

     7.6 Representations and Warranties. Each Member herby represents and warrants to the Company that: (i) the Member has full power and authority to execute and agree to this Agreement and to perform its obligations here under, and that all actions necessary for the due authorization, execution, delivery and performance of this Agreement by that Member have been duly taken; (ii) the Member has duly executed and delivered this Agreement; and (iii) the Member’s authorization, execution, delivery, and performance of this Agreement do not conflict with any other agreement or arrangement to which the Member is a party or by which the Member is bound.

     7.7 Member Information.

          (a) In addition to the other rights specifically set forth in this Agreement, each member is entitled to the information to which that Member is entitled to have access pursuant to the Act, under the circumstances therein stated.

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          (b) The Members acknowledge that, from time to time, they may receive information from or concerning the Company in the nature of trade secrets, the release of which may damage the Company or Persons with which it does business. Each Member shall hold in strict confidence any trade secret information that it receives concerning the Company that is identified as being confidential (and if that information is provided in writing, that is so marked) and may not disclose it to any Person other than another member or Governor, except for disclosures (i) compelled by law (but the Member must notify a Governor promptly of any request for that information, before disclosing it, if legal and practicable); (ii) to Persons to whom that Member’s Interest may be transferred as permitted by this Agreement, but only if the recipients have agreed to be bound by the provisions of this Section 7.7, or (iii) of information that the Member also has received from a source independent of the Company and the Member reasonably believes that source obtained the information without breach of any obligation of confidentiality. The Members acknowledge that breach of the provisions of this Section 7.7 may cause irreparable injury to the Company for which monetary damages are inadequate, difficult to compute, or both. Accordingly, the Members agree that the provisions of this Section 7.7 may be enforced by specific performance.

     7.8 Membership Certificates. “Membership Certificates” in the form determined by the Board may be delivered representing all Interests to which Members are entitled. If issued, such Member Certificates shall be separately numbered, and shall be entered in the books of the Company and on the Membership Register, as they are issued. Each Member Certificate shall state on the face thereof the holder’s name, the Interests and such other matters as may be required by applicable laws. Each such Membership Certificate shall be signed by a Governor of the Company. The signature of the Governor upon the Membership Certificates may be by facsimile. Subject to Section 10, upon surrender to the Company of a Membership Certificate for Interests duly endorsed or accompanied by proper evidence of succession, assignment or authority to Transfer, it shall be the duty of the Company to issue a new Membership Certificate to the person entitled thereto, cancel the old Membership Certificate and record the transaction upon its books and records and the Membership Register. Each member herby agrees that the following legend, as the same may be amended by the Board in its sole discretion, may be placed upon any counterpart of this Agreement, the Articles, or any other document or instrument evidencing ownership of Units:

     The sale, pledge, hypothecation, assignment or transfer of the ownership interest represented by this CERTIFICATE OF OWNERSHIP is subject to the terms and conditions of the Operating and Member Control Agreement of Granite Falls Community Ethanol Plant, LLC, as amended form time to time. Copies of the Operating and Member Control Agreement may be obtained upon written request to the Board of Governors of Granite Falls Community Ethanol Plant, LLC.

SECTION 8
MEETINS OF MEMBERS

     8.1 Voting Power. Except as otherwise provided herein, the affirmative vote of Members holding a Majority of the total Percentage of Membership Units represented at a meeting at which there is a quorum present shall be the act of the Members. Commencing from and after the date of effectiveness (the “Registration Statement Effective Date”) of the Company’s Registration Statement on Form SB-2 filed with the U.S. Securities and Exchange Commission in February 2004, SEC File No. 333-112567 (the “Registration Statement”), the

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Members may, to the extent permitted by law, effect the following transactions (and, except as provided by Section 6.7, without any action by the Governors, despite any contrary provision in this Agreement) by the affirmative vote of the holders of a majority of the outstanding Membership units: (i) the amendment of this Agreement; (ii) the dissolution of the Company; (iii) the removal and/or replacement of a Governor; or (iv) the approval or disapproval of the sale of all or substantially all of the Company’s assets not in the ordinary course of business.

     8.2 No Cumulative Voting. No Member shall be entitled to cumulative votes for the election of Governors or otherwise.

     8.3 Meetings of Members. The annual meeting of Members shall be held on such date as the Board shall by resolution specify within a period commencing on January 1 and ending on June 30 in each year, beginning with 2005. At each annual meeting, Members shall conduct such business as may be properly presented to such meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. Special meetings of Members of the Company may be called by the Chairman of the Board by any three (3) Governors, or by a Member or Members holding at least a ten percent (10%) Percentage Interest and shall be held at the principal place of business of the Company, or elsewhere as the notice of such meeting shall direct. Members may attend any such meeting in person or by proxy.

     8.4 Place of Meeting. The Board of Governors may designate any place, either in or out of the State of Minnesota, as the place of meeting for any meeting. If no designation is made, the place of meeting shall be the Company’s principal office.

     8.5 Notice of Meetings. Written notice stating the date, time and place of the meeting and, as to a special meeting, a description of the purpose or purposes for which the meeting is called, shall be mailed or provided in person not fewer than fifteen (15) nor more than sixty (60) calendar days before the date of the meeting, by or at the direction of the Board of Governors to each Member of record at time of notice entitled to vote at the meeting. If mailed, such notice is effective when mailed addressed to the Member’s address shown in the Company’s current record of Members, with postage prepaid.

     8.6 Quorum. The presence of Members holding 40% or more of the Percentage of Membership Units in the Company in person or by proxy shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting, a majority of the Percentage of Membership Units represented may adjourn the meeting from time to time without further notice.

     8.7 Matters Submitted for Member Vote which Involve an Interested Governor. A Governor may not vote or consent on matters submitted to the Members regarding the removal of the Governor or regarding any transaction between the Company and the Governor. IN determining the existence of the requisite percentage in interest of the Company necessary to approve a matter on which a Governor may not vote or consent, the Membership Units owned by the Governor shall be excluded.

SECTION 9
WAIVER AND CONSENT

     9.1 Written Waiver. Whenever any notice whatsoever is required to be given under the provisions of this Agreement or under the provisions of the Articles or the Act, waiver thereof

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in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

     9.2 Waiver by Attendance. A Member’s or Governor’s attendance at a meeting of the Members or Governors, respectively: (i) waives objection to lack notice or defective notice of the meeting, unless the Member or Governor at the beginning of the meeting or promptly upon the Member’s or Governor’s arrival objects to holding the meeting or transacting business at the meeting, and (ii) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the Member or Governor objects to considering the matter when it is presented.

     9.3 Consent to Action without Meeting. Any action required or permitted to be taken by the Members or Mangers by vote, pursuant to this Agreement ob y law, may be taken without a meeting as provided by law. Any action required or permitted to be taken at a Board of Governors meeting may be taken by written action signed by all of the Governors.

SECTION 10
TRANSFER OF MEMBERSHIP INTERESTS

     10.1 Restriction on Transfer. No Member shall Transfer all or any portion of an Interest without the prior written Consent of the Board of Governors which consent may be withheld in the sole discretion of the Board. Notwithstanding anything contained herein to the contrary, no Member shall Transfer any Unit if, in the determination of the Board, such Transfer would cause the Company to be treated as a Publicly Traded Partnership, and any Transfer of Unit(s) not approved by the Board of Governors or that would result in a violation of the restrictions in this Agreement or applicable law shall be null and void with no force or effect whatsoever, and the intended transferee shall, acquire no rights in such Unit.

     10.2 Permitted Transfers. Subject to Section 10.1 above, any Transfer of Units made in accordance with the following provisions will constitute a “Permitted Transfer” for purposes of this Agreement.

          (a) A Transfer by a Member and any related persons (as defined in the Code) in one or more transactions during any thirty (30) calendar day period of Interests representing in the aggregate more than two percent (2%) of the total Interests in the Company.

          (b) A Transfer or series of related Transfers by one or more Members (acting together) which involves the Transfer of fifty percent (50%) or more of the outstanding Units; or

          (c) Transfers of Units effected through a qualified Matching Services Program; or

          (d) A Transfer by gift or bequest only to a spouse or child of such transferring Member, or to a trust established for the benefit of such spouse or child, or to an existing Member of the Company upon ten (10) days prior written notice to the Company of such gift.

     10.3 Conditions Precedent to Transfers. The Board of Governors, in its sole discretion, may elect not to recognize any Transfer of Units unless and until the Company has received:

          (a) An opinion of Company counsel (whose fees and expenses shall be borne by

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the Company), together if required by the Board as a condition of Transfer, an opinion of the transferor’s counsel (whose fees and expenses shall be borne by the transferor), satisfactory in form and substance to the Board that such Transfer may be lawfully made without registration or qualification under applicable state and federal securities laws, or such Transfer is properly registered or qualified under applicable state and federal securities laws and if requested by the Company that such Transfer will not cause the Company to be treated as a Publicly Traded Partnership;

          (b) Such documents and instruments of conveyance executed by the transferor and transferee as may be necessary or appropriate in the option of counsel to the Company to effect such Transfer, except that in the case of a Transfer of Units involuntarily by operation of law, the Transfer shall be confirmed by presentation of legal evidence of such Transfer, in form and substance satisfactory to the Company;

          (c) The transferor’s Membership Certificate;

          (d) The transferee’s taxpayer identification number and sufficient information to determine the transferee’s initial tax basis in the interests transferred, and any other information reasonable necessary to permit the Company to file all required federal and state tax returns and other legally required information, statements or returns;

          (e) Evidence satisfactory in form and substance to the Board that the transferee meets the maximum Unit ownership limitation set for in Section 4.3 of this Agreement; and

          (f) Other conditions on the Transfer of Units adopted by the Board from time to time as it deems appropriate in its sole discretion.

     10.4 Death of Member.

          (a) Upon the death of any Member, the estate or personal representative of the deceased Member shall have the right and option to request the Company repurchase the deceased Member’s Interest subject to and in accordance with the applicable Code and Treasury Regulations regarding Publicly Traded Partnership. If the estate or personal representative exercise such right and option the Company shall, subject to Section 10.4(b) below, purchase the deceased Member’s Interest at the Fair Market Value of such Interest in effect at the date of death as determined in accordance with Section 10.10 below, and on the terms and conditions set forth in Section 10.5 and Section 10.6 below. This right n adoption may be exercised by the deceased Member’s estate or personal representative by providing written notice to the Company within one hundred twenty (120) days after the date of the Member’s death; provided, however, the Company will not repurchase such interest earlier than sixty (60) days after receipt of the written notice from the estate of personal representative requesting the purchase.

          (b) Any Transfer pursuant to this Section 10.4 shall be subject to a determination by the Board that such Transfer shall not cause the Company to be deemed a Publicly Traded Partnership, and such Transfer shall be affected in accordance with this Agreement, the Code and applicable Treasury Regulations, and shall be further subject to the prior approval of the Board which may be withheld in its sole discretion.

     10.5 Payment Terms. If the purchase price for an Interest transferred pursuant to

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Section 10.4 above exceeds five thousand dollars ($5,000.00), the Company shall have the option to pay for the Interest purchased by paying five thousand dollars ($5,000.00) at Closing (as defined below) and executing a promissory note for the balance of the purchase price. The promissory note shall be paid in five (5) equal annual installments due on the anniversary date of the Closing and shall accrue interest per annum at a rate determined by the Board which shall not be less than the then current prime rate established by any major bank selected by the Board for loans to the bank’s most creditworthy commercial borrowers. The Company may prepay the promissory note, in whole or in part, at any time without penalty or premium.

     10.6 Events in Connection with the sale of Interests,

          (a) If there is a sale of Interest under Section 10.4 of this Agreement to the Company, the closing (“Closing”) shall occur at a time mutually agreeable to the parties and in accordance with the time periods set forth in the applicable provision of this Agreement; provided, however, the Closing shall not occur until at least sixty (60) days after the Company’s receipt of notice from the estate or personal representative requesting the Company repurchase the deceased Member’s Interest, but in no event later than one hundred twenty (120) days after the date of the Company’s receipt of such notice.

          (b) In the event of a sale of Interest under Section 10.4 of this Agreement to the Company, the purchase price shall be increased or decreased, as the case may be, by an amount equal to any indebtedness owed the deceased Member by the Company, or the deduction of any indebtedness owed the Company by the deceased Member, or both.

          (c) In the event of the sale of Interests under this Agreement by a Member, all rights of the Member with respect to the Interest, including the right to vote such Interest and to receive distribution, shall terminate at Closing, except for the Member’s right to receive payment therefor.

     10.7 Redemption of Interests.

          (a) A Member (the “Requesting Member”) may request redemption of his or her Interest upon no less than sixty (60) calendar days’ prior written notice to the Board of Governors. The Board, in its sole discretion, shall determine whether to redeem such Interest and the Board is under no obligation to redeem any Interest or any Requesting Member.

          (b) Notwithstanding anything contained herein to the contrary, any redemption pursuant to this Section 10.7 shall be subject to a determination by the Board, in its sole discretion, that such redemption shall not cause the Company to be deemed a Publicly Traded Partnership, and such redemption shall be affected in accordance with this Agreement, the code and applicable Treasury Regulations, and shall be further subject to the prior approval of the Board which may be withheld in its sole discretion.

     10.8 Redemption Payment.

          (a) Upon the redemption of a Member under Section 10.7, the Requesting Member shall be entitled to a payment equal to the Fair Market Value of such Member’s Interest in the Company as of the date of the Company’s receipt of the Member’s request for redemption (the “Redemption Payment”); provided, however, if the remaining Members of the Company

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agree to dissolve the Company in accordance with Section 13.1 of this Agreement, then in no event shall such Member be entitled to a Redemption Payment by such Member will be entitled to such Member’s share of the assets of the Company pursuant to Section 13.3 below.

          (b) The Redemption Payment shall not be paid until at least sixty (60) days after the Company’s receipt of the notice from the Requesting Member required under Section 10.7(a) above. The Redemption Payment shall be paid in cash, or if the Redemption Payment exceeds five thousand dollars ($5,000), the Company shall have the option to pay the Redemption Payment by paying five thousand dollars ($5,000) upon the effective date of the redemption and executing a promissory note for the balance of the Redemption Payment. Such note shall be dated and delivered on the effective date of the withdrawal and shall be paid in five (5) equal annual installments due on the anniversary date of the withdrawal and shall accrue interest per annum at a rate determined by the Board which shall not be less than the then current prime rate established by any major bank selected by the Board for loans to the Bank’s most creditworthy commercial borrowers. The Company may prepay the promissory note, in whole or in part, at any time without penalty or premium.

          (c) The Redemption Payment shall be increased or decreased, as the case may be, by an amount equal to any indebtedness owed the Requesting Member by the Company, or the deduction of any indebtedness owed the Company by the Requesting Member, or both. All rights of the Member with respect to the Interest, including the rights to vote such Interest and to receive distributions, shall terminate at Closing, except for the Member’s right to receive payment therefor upon the effective date of the redemption which shall be determined in accordance with Section 10.9 below.

     10.9 Effective Date of Transfer.

          (a) Any Transfer of a Unit shall be deemed effective as of the day of the month and year: (i) which the Transfer occurs (as reflected by the form of assignment); and (ii) the transferee’s name and address and the nature and extent of the Transfer are reflected in the records of the Company; provided, however, the effective date of a Transfer for purposes of allocation of Profits and Losses and for Distributions shall be determined pursuant to section 10.9(b) below. Any transferee of a Unit shall take subject to the restrictions on transfer imposed by this Agreement.

          (b) The Board, in its sole discretion, may establish interim periods in which transfers may occur (the “Interim Transfer Periods”); provided, however, the Board shall provide Members reasonable notice of the Interim Transfer Periods and advance notice of any change to the Interim Transfer Periods. For purposes of making allocations of Profits and Losses, and Distributions, the Company will use the interim closing of the books method (rather than a daily proration of profit or loss for the entire period) and recognize the Transfer as of the first day following the close of Interim transfer Period in which the Member complied with the notice, documentation and information requirements of Article 10. All distributions on or before the end of the applicable Interim Transfer Period in which such requirements have been substantially complied with shall be made to transferor and all distributions thereafter shall be made to the transferee. The Board the authority to adopt other reasonable methods and/or conventions.

          (c) The Board shall have the power and authority to adopt another reasonable method and/or convention with respect to such allocations and distributions; provided neither the Company, the Board, any Governor nor any Member shall incur any liability for making

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allocations and distributions in accordance with the provisions of this Section 10.9 (other than tax liabilities which may be incurred by Members), whether or not the Board or any Governor or the Company or any Member has knowledge of any Transfer of ownership of any Interest in the Company.

     10.10 Fair Market Value. Upon the Transfer of any Interest pursuant to Section 10.4, or the redemption of an Interest pursuant to Section 10.7, the purchase price or Redemption Payment shall be equal to the Fair Market Value of the Interest. “Fair Market Value” of an Interest on any date shall, unless otherwise specifically provided in this Agreement, be equal to the most recent fair market valuation determination of the per Unit value of the Company by the Board in good faith; provided, that such valuation shall be calculated on a basis as consistent as practicable from period to period. The Board may, in its sole discretion, employ the advice of independent and qualified professionals in the determination of the Fair Market Value, but is not under any obligation to do so. The Fair Market Value of the Company shall be determined at least annually. Valuations shall generally be preformed, at the discretion of the Board, as of the end of each fiscal year of the Company’s operations at the annual meeting of the Board; however, the Board, in its sole discretion, may have fair market valuations of the Company performed at any time or from time to time during any year and, except as otherwise specifically provided in this agreement, shall utilize the results of the most recent valuation in determining the Fair Market Value of an Interest for purposes of this Agreement. No Member or any party other than the Board shall have the right to require or request that a new or more recent valuation be performed for purposes of determining the Fair Market Value of the Company or an Interest hereunder. The Company shall not establish the Fair Market Value more than four (4) times during the Company’s taxable year.

     10.11 Expenses. Except as otherwise expressly provided herein, all expenses of the Company incident to the admission of the transferee to the Company as a Member shall be charged to and paid by the transferring Member.

SECTION 11
RECORDS, FINANCIAL AND TAX REPORTING

     11.1 Records and Accounting. The books of account and other records of the Company shall be maintained at the Company’s principal place of business. The Company shall prepare its financial statements using generally accepted accounting principles, consistently applied. The Board shall cause to be prepared and distributed to the Members an annual report within 120 days after the end of the company’s fiscal year. The annual report shall contain:

          (a) a balance sheet as of the end of each fiscal year and statements of income, Member’s equity and cash flow for the year then ended, and accompanied by an auditor’s report containing an opinion of an independent certified public accountant;

          (b) a report of the material activities of the Company during the period covered by the report; and

          (c) a report setting forth distributions to Members for the period covered which separately identifies distributions from (i) cash flow from operations during the period, (ii) cash flow from operations during a prior period which have been held as reserves, (iii) proceeds from the disposition of company assets and (iv) reserves from the gross proceeds of the offering originally obtained from the Members.

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     The Company may alternatively satisfy the above requirements by distributing to Members a copy of the Company’s annual report on Form 10-K or 10-KSB as filed with the U.S. Securities and Exchange Commission.

     11.2 Tax Information. The Board will use its best efforts to cause to be delivered, within 75 days after the end of each fiscal year of the Company, to the Members and Persons who were Members during such fiscal year all information concerning the Company necessary to enable such Member or Person to prepare such Member’s (or Person’s) Federal and state income tax returns for such fiscal year, including a statement indicating such Member’s (or Person’s) share of Profits, Loses, deductions and credits for such fiscal year for federal and state income tax purposes, and the amount of any Distribution made to or for the account of such Member or Person during such fiscal year pursuant to this Agreement.

     11.3 Tax Returns. The Board shall cause income tax returns for the Company to be prepared and timely filed in accordance with applicable law.

     11.4 Tax Matter Member. The Board shall designate, from time to time, a Member to perform all duties imposed by Sections 6221 and 6232 of the Code as “tax matter partner” of the Company. The Company shall indemnify, to the full extent permitted by law, the tax matter partner from and against any damages and losses (including attorneys’ fees) arising out of or incurred in connection with any action taken or omitted to be taken by in carrying out responsibilities as tax matter partner, provided such action taken or omitted to be taken does not constitute fraud, gross negligence or willful misconduct.

     11.5 Access to Books and Records.

          (a) A Member of the Company shall be entitled to inspect and copy to the extent provided by law and during regular business hours at the Company’s principal office the required records to be kept by the company under the Act if he or she gives the Company written notice of his or her demand at least five business days before the date on which he or she wishes to inspect and copy.

          (b) The Company shall update an alphabetical list of Members and their addresses, business telephone numbers and Company ownership information (“the Member List”) at least quarterly to reflect changes in the information contained therein. The Company shall mail a copy of the Member List to any Member properly requesting the Member List within ten days of the request. The copy of the Member List shall be printed in alphabetical order, on white paper and in a readily readable type size (in no event smaller than 10-point type). The Company may charge a reasonable fee for copy work.

          (c) The purposes for which a Member may request a copy of the Member List include, without limitation, matters relating to Members’ voting rights under this Agreement and the exercise of Members’ rights under federal proxy laws.

          (d) If the Company neglects or refuses to exhibit, produce or mail a copy of the Member List as properly requested, the Company shall be liable to any Member properly requesting the list for the costs, including attorneys’ fees, incurred by that Member for compelling the production of the Member List, and for actual damages suffered by any Member by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests

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for inspection or for a copy of the Member List is to secure such list of Members or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Member relative to the affairs of the Company. The Company may require the Member requesting the Member List to represent that the list is not requested for a commercial purpose unrelated to the member’s interest in the Company. The remedies provided hereunder to Members requesting copies of the Member List are in addition to, and shall not in any way limit, other remedies available to Members under federal law, or the laws of any state.

SECTION 12
FISCAL AFFAIRS

     12.1 Elections.

          (a) The Board of Governors may elect to adjust the basis of the assets of the Company for federal income tax purposes in accordance with Section 754 of the Code in the event of a distribution of Company property as described in Section 734 of the Code or a transfer by any Member of the Interest of such Member in the Company as described in Section 743 of the Code.

          (b) The Board of Governors at, any time and from time to time, may also make such other tax elections as it deems necessary or desirable, in its discretion.

     12.2 Interim Closing of the Books. There shall be an interim closing of the books of account of the Company (i) at any time a taxable year of the Company shall end pursuant to the Code, and (ii) at any other time determined by the Board of Governors to be required for good accounting practice or otherwise appropriate under the circumstances.

SECTION 13
TERMINATION AND DISSOLUTION

     13.1 Events Requiring Termination and Dissolution. The Company shall be dissolved upon the occurrence of any event, which would make unlawful the continuing existence of the Company, or in accordance of the Act, as amended from time .to time (a “Liquidating Event”).

     13.2 Winding Up Period. Upon the occurrence of a Liquidating Event, the Company shall continue solely for the purpose of winding up its affairs man orderly manner, liquidating its assets, and satisfying the claims of its credits and Members. No Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up the Company’s business and affairs. To the extent not inconsistent with the foregoing, all covenants and obligations in this Agreement shall continue in full force and effect until such time as the assets of the Company have been distributed pursuant to this Section and the Company has terminated. The Board shall be responsible for overseeing the winding up and liquidation of the Company, shall take full account of the Company’s liabilities and assets, shall cause the assets to be liquidated as promptly as is consistent with obtaining the value thereof, and shall cause the proceeds therefrom, to the extent sufficient therefor, to be applied and distributed in the manner required by the Act. Without limiting the generality of the foregoing, the Board of Governors, in carrying out such winding up and distribution, shall have full power and authority to sell the Company’s assets, or any part thereof, or to distribute the same in kind to the Members.

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     13.3 Distribution.

          (a) Upon the occurrence of a Liquidating Event and the dissolution of the Company, the affairs of the Company shall be wound up in accordance with Section 13.2 above. The Fair Market Value of the assets of the Company shall be determined, with the value of any real or personal property held by the Company being determined in accordance with paragraph (d) of Section 5.4 and the Fair Market Value of any other assets held by the Company (other than cash) being determined by an independent appraiser selected by the Board. Thereupon, the assets of the Company shall be distributed in the following manner and order: (i) to the claims of all creditors of the Company, including Members who are creditors, to the extent permitted by law, in satisfaction of liabilities of the Company, other than liabilities for distributions to Members; (ii) to Members and former Members in satisfaction of liabilities for distribution, pursuant to or as required by the Act, and (iii) subject to sections 5.4 and 5.5, to the Members with positive Capital Account Balances in accordance with their Percentage Interests. Each such Member entitled to a distribution of any assets of the company, pursuant to clause (iii) of this paragraph (a), shall receive such Member’s share of such assets in cash or, to the extent otherwise permitted in this Agreement, in kind, and the portion of such share that is received in cash may vary from Member to Member, all as the Board of Governors in their discretion my decide. If distributions to any Member upon termination of the Company are insufficient to return to such Member the full amount of such member’s Capital Contribution, such Member shall have no recourse against the Board of Governors, the Company or against any other Member.

          (b) In the discretion of the Board, a Pro Rata portion of the distributions that would otherwise be made to the Members pursuant to Section 13.3(a) hereof may be;

               (i) distributed to the trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company and paying any contingent or unforeseen liabilities of the Company or of the Members arising out of or in connection with the Company. The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Board, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to Section 13.3(a) hereof; or

               (ii) withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Company, provided that such withheld amounts shall be distributed to the Members as soon as practicable.

     13.4 Deficit Capital Account Balance. The Members shall have no liability to the Company, to the other Members, or to the creditors of the Company on account of any deficit balance in such Member’s capital Account Balance except to the extent such deficit arises from the failure of the Member of the Member to contribute the full amount of its capital contribution. The Company shall be solely responsible for payment of liabilities to its creditors.

SECTION 14
MISCELLANEOUS

     14.1 Notices. All Notices or other communications under this Agreement shall be in writing (unless otherwise expressly provided, herein) and shall be considered properly given if

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delivered by hand or mailed by first class United States Mail, postage prepaid, addressed in care of the respective Members or Governors at their last-known address. Notice may also be delivered by means of a confirmed telecopy, provided the original of the notice is also promptly deposited in the United States Mail, first class, postage prepaid, addressed to the Members or Governors at such address. Notice of change of address shall be given to the Company by hand or first class United States Mail, after the date or receipt of which notice, the change of address shall be effective, unless actual receipt of a notice is required by an express provision hereof, any such notice shall be deemed to be effective as of the earliest of (a) the date of delivery or confirmed telecopy; or (b) the third business day following the date of deposit with the United States Post Office or in a regularly maintained receptacle for the deposit of United States Mail. Any refusal to accept delivery of any such communication shall be considered successful delivery thereof.

     14.2 Insurance. The Company may purchase and maintain insurance on behalf of any person who is or was a Governor, Member, employee or agent of the Company or is or was serving at the request of the Company as a Governor, member, officer, governor, employee or agent of another limited liability company, corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of his or her status as such.

     14.3 Successors. This Agreement and all of the terms and provisions thereof shall be binding upon the Governors and all Members and their respective legal representatives, heirs, successors and permitted assigns.

     14.4 Applicable Law. This Agreement and the rights and obligations of the Members thereunder shall be construed and interpreted under the laws of the State of Minnesota without regard to its conflict of law principals.

     14.5 Amendments.

          (a) Prior to the Registration Statement Effective Date, and unless the Act or this Agreement requires differently, this Agreement may be modified or amended upon the Super-Majority Vote of the Board of Governors or upon an affirmative vote of two-thirds (2/3) of the total Percentage of Membership Units represented at a meeting at which there is a quorum present. Upon the modification or amendment of this Agreement, the Board shall promptly execute such amendments or other documents as the Company deems appropriate to reflect such amendments under the law of the State of Minnesota.

          (b) “Super-Majority Vote” shall mean the affirmative vote of two-thirds (2/3) or more of the Board of Governors.

          (c) Beginning on the Registration Statement Effective Date, the Board of Governors may take action under (a) above to modify or amend this Agreement only if the modification or amendment does not adversely affect the rights of Members. If the modification or amendment would adversely affect Members’ rights, then the modification or amendment must be approved by the holders of a majority (or such greater proportion as otherwise required in this Agreement) of the outstanding Membership Units.

     14.6 Waiver of Partition. Each of the Members of the Company irrevocably waives any right to maintain any action for partition with respect to the property of the Company.

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     14.7 Company Property. The legal title to any real or personal property or interest therein now or hereafter acquired by the Company shall be owned, held or operated in the name of the Company, and no Member, individually, shall have any ownership interest in such property.

     14.8 Acceptance of Prior Acts by New Members. Each Person becoming a Member, by becoming a Member, ratifies all action duly taken by the company, pursuant to the terms of this Agreement, prior to the date such person becomes a Member.

     14.9 Section Headings. The division of this Agreement into sections, subsections and exhibits is for convenience of reference only and shall not affect the interpretation or construction of this Agreement.

     14.10 Severability. In the event that one or more of the provisions contained in this Agreement or any portions thereof are unenforceable or are declared invalid for any reason whatsoever such enforceability or invalidity shall not affect the enforceability or validity of the remaining terms or portions of this Agreement, and each such unenforceable or invalid portion hereof shall be severable from the remainder of this Agreement and the remainder of this Agreement shall be interpreted as if such unenforceable or invalid provision or portion thereof had not been included as a part thereof.

     14.11 Agreement for Further Execution. At any time or times, upon the request of the Board, the Members agree to sign and swear to any certificate required by the Act, to sign and swear to any amendment to or cancellation of such certificate whenever such amendment or cancellation is required by law or by this Agreement, and to cause the filing of any of the same of record wherever such filing is required by law.

     14.12 Time. Time is an essential element to the performance of this Agreement by each Member.

     14.13 Copies Reliable and Admissible. This Agreement shall be considered to have been executed by a person if there exists a photocopy, facsimile copy, or a photocopy of a facsimile copy of an original hereof or of a counterpart hereof which has been signed by such person. Any photocopy, facsimile copy, or photocopy of facsimile copy of this Agreement or a counterpart hereof shall be admissible into evidence in any proceeding as though the same were an original.

     14.14 Entire Agreement. This Agreement is the sole operating agreement of the Company and constitutes the entire agreement among the parties; it supersedes any prior agreements or understandings among the parties, oral or written, all of which are hereby canceled.

     14.15 Gender. Whenever the context shall require each term stated in either the singular or plural shall include the singular and the plural, and the masculine or neuter pronouns shall include the masculine, the feminine and the neuter

     14.16 No waiver. No failure or delay on the part of any Member in exercising any rights under this Agreement, or in insisting on strict performance of any covenant or condition contained in this Agreement, shall operate as a waiver of any of such Member’s rights hereunder.

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     14.17 Submission to Jurisdiction. Each of the parties to this Agreement hereby submits to the jurisdiction of and agrees that suit will only be brought in the state (Yellow Medicine County) or federal court sitting in the State of Minnesota (the “Minnesota Court”) in any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. Each party also agrees not to bring any action or proceeding arising out of or relating to this Agreement or the transactions contemplated thereby in any other court except as may be necessary to enforce any judgment or order of the Minnesota Court. Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other party with respect thereto.

     14.18 Specific Performance. Each of the parties acknowledges and agrees that the other party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties agrees that the other parties shall be entitled, without posting a bond or other collateral, to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in the Minnesota Court, in addition to any other remedy to which it may be entitled at law or in equity.

     14.19 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

     14.20 Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company.

     IN WITNESS WHEREOF, the undersigned has hereunto affixed its signature.

GRANITE FALLS COMMUNITY ETHANOL PLANT, LLC
By	/s/ Paul Enstad
	Paul Enstad, Chairman

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FIRST AMENDMENT TO THE FIFTH AMENDED AND RESTATED
OPERATING AND MEMBER CONTROL AGREEMENT OF
GRANITE FALLS COMMUNITY ETHANOL PLANT, LLC

     THIS FIRST AMENDMENT TO THE FIFTH AMENDED AND RESTATED OPERATING AND MEMBER CONTROL AGREEMENT OF GRANITE FALLS COMMUNITY ETHANOL PLANT, LLC dated August 12, 2004 (the “Operating Agreement”) is adopted and approved effective as of the 28th day of April, 2005, by the affirmative vote the holders of a majority of the outstanding Membership Units of Granite Falls Community Ethanol Plant, LLC pursuant to Section 322B.37 of the Minnesota Statutes and pursuant to Section 8.1 of the Operating Agreement of the Company at a Meeting of the Members held on April 28, 2005.

     The Operating Agreement is amended as follows:

Amendment to Section 1.7	Section 1.7 is amended by deleting Section 1.7 in its entirety and substituting in lieu thereof the following:
		1.7 “Company” shall mean Granite Falls Energy, LLC, a Minnesota limited liability company, as such limited liability company may from time to time be constituted, or any successor in interest for such limited liability company.
Amendment to Section 2.8	Section 2.8 is amended by deleting Section 2.8 in its entirety and substituting in lieu thereof the following:
		2.8 Fiscal Year. The fiscal year of the Company shall begin on November 1st of each year and end on October 31st of each year. The fiscal year in which the Company shall terminate shall end on the date of termination of the Company.

     I, Julie Oftedahl-Volstad, do hereby certify that I am the duly elected, qualified, and acting Secretary of the Company, and further certify that the above amendment was duly adopted by a majority of the members of the Company at a meeting of the members held on April 28, 2005, in accordance with the provisions of the Company’s Operating Agreement.

/s/ Julie Oftedahl-Volstad  

Julie Oftedahl-Volstad, Secretary 

APPROVED:

/s/ Paul Enstad
Paul Enstad, Chairman

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SECOND AMENDMENT TO THE FIFTH AMENDED AND RESTATED
OPERATING AND MEMBER CONTROL AGREEMENT OF
GRANITE FALLS COMMUNITY ETHANOL PLANT, LLC

     THIS SECOND AMENDMENT TO THE FIFTH AMENDED AND RESTATED OPERATING AND MEMBER CONTROL AGREEMENT OF GRANITE FALLS COMMUNITY ETHANOL PLANT, LLC dated August 12, 2004 (the “Operating Agreement”) is adopted and approved effective as of the 13th day of June, 2006, by the affirmative vote of the holders of a majority of the outstanding Membership Units of Granite Falls Community Ethanol Plant, LLC pursuant to Section 322B.37 of the Minnesota Statutes and pursuant to Section 8.1 of the Operating Agreement of the Company at a Meeting of the Members held on June 13, 2006.

The Operating Agreement is amended as follows:

Amendment to Section 6.1(c)(vi)	Section 6.1(c)(vi) is amended by deleting the following language:
		“The manner of election as to the At-Large Governors and any At-Large Additional Governors shall be by affirmative vote of a Majority in Interest of the members (excluding Glacial Lakes, the Glacial Successor and Fagen to the extent noted above)”
	and substituting in lieu thereof the following:
		The manner of election as to the At-Large Governors and any At-Large Additional Governors shall be by affirmative vote of a Plurality in Interest of the members (excluding Glacial Lakes, the Glacial Successor and Fagen to the extent noted above), so that the nominees receiving the greatest number of votes relative to all other nominees are elected as Governors”
Amendment to Section 10.2	Section 10.2 is amended by adding the new subsection (e) as follows:
		10.2(e) A Transfer to the transferor’s executor, personal representative, administrator or trustee to whom such Units are transferred involuntarily by operation of law or judicial decree.
Amendment to 10.4(a)	Section 10.4(a) is amended by deleting Section 10.4(a) in its entirety.
Amendment to 10.10	Section 10.10 is amended by deleting the reference to Section 10.4.

     I, Julie Oftedahl-Volstad, do hereby certify that I am the duly elected, qualified, and acting Secretary of the Company, and further certify that the above amendment was duly adopted by the holders of a majority of the outstanding Membership Units of the Company at a duly convened meeting of the members held on June 13, 2006, in accordance with the provisions of the Company’s Operating Agreement.

/s/ Julie Oftedahl-Volstad  

Julie Oftedahl-Volstad, Secretary 

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APPROVED:

/s/ Paul Enstad
Paul Enstad, Chairman

2

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO 17 CFR 240.15d-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: September 13, 2006	/s/ Thomas Branhan
	Thomas Branhan, General Manager/CEO

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO 17 CFR 240.15d-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: September 13, 2006	/s/ Michael Nealon
	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 July 31, 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  

Thomas Branhan, General Manager/CEO 

Dated: September 13, 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 July 31, 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  

Michael Nealon, Controller and Chief Financial Officer 

Dated: September 13, 2006