10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2017.

Or

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                    to                    .

Commission File Number 000-51825

Heron Lake BioEnergy, LLC

(Exact name of registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization) 41-2002393 (IRS Employer Identification No.)

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

Registrant’s telephone number, including area code: (507) 793-0077

Securities registered pursuant to Section 12(b) of the Act:	Securities registered pursuant to Section 12(g) of the Act:
None	Class A Units

Name of Exchange on which registered: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐    No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ☐    No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒

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

Large Accelerated Filer ☐		Accelerated Filer ☐
Non-Accelerated Filer ☒	(do not check if a smaller reporting company)	Smaller Reporting Company ☐
Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Act) Yes ☐    No ☒

As of April 30, 2017, the aggregate market value of the 32,199,012 Class A units held by non-affiliates (computed by reference to the most recent offering price of Class A membership units) was approximately $9,659,704.  The units are not listed on an exchange or otherwise publicly traded. Additionally, the membership units are subject to significant restrictions on transfer under the registrant’s operating and member control agreement. In determining this value, the registrant has assumed that all of its governors, chief executive officer, chief financial officer, Granite Falls Energy, LLC and beneficial owners of 5% or more of its outstanding membership units are affiliates, but this assumption shall not apply to or be conclusive for any other purpose.

As of April 30, 2017, all of the 15,000,000 Class B units were held by an affiliate of the Company.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of January 29, 2018, there were 62,932,107 Class A units and 15,000,000 Class B units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive Proxy Statement for the registrant’s 2018 Annual Meeting of Members are incorporated by reference into Part III.

INDEX

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	32
Item 2.	Properties	32
Item 3.	Legal Proceedings	33
Item 4.	Mine Safety Disclosures	33
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	54
Item 8.	Financial Statements and Supplementary Data	56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	77
Item 9A.	Controls and Procedures	77
Item 9B.	Other Information	78
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	78
Item 11.	Executive Compensation	78
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	78
Item 13.	Certain Relationships and Related Transactions, and Director Independence	78
Item 14.	Principal Accounting Fees and Services	78
PART IV
Item 15.	Exhibits, Financial Statement Schedules	79
SIGNATURES		82

1

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties, including, but not limited to the following:

· Fluctuations in the prices of grain, utilities and ethanol, which are affected by various factors including weather, production levels, supply, demand, and availability of production inputs;

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

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

· Fluctuations in the price of crude oil and gasoline;

· Ethanol may trade at a premium to gasoline at times, causing a disincentive for discretionary blending of ethanol beyond the requirements of the federal Renewable Fuels Standard (“RFS”) and resulting in a negative impact on ethanol prices and demand;

· Changes in federal and/or state laws and environmental regulations including elimination, waiver or reduction of the Renewable Fuels Standard, may have an adverse effect on our business;

· Any impairment of the transportation, storage and blending infrastructure that prevents ethanol from reaching markets;

· Any effect on prices of distillers’ grains resulting from actions in international markets;

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

· The effect of our risk mitigation strategies and hedging activities on our financial performance and cash flows;

· Alternative fuel additives may be developed that are superior to, or cheaper than ethanol;

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

· Our ability to profitably operate the ethanol plant and maintain positive margins and generate free cash flow, which may impact our ability to meet current obligations, invest in our business, service our debt and satisfy the financial covenants contained in our credit agreement with our lender;

· Changes in interest rates or the lack of credit availability;

· Our ability to make distributions in light of financial covenants in our credit facility;

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

· The supply of ethanol rail cars in the market has fluctuated in recent years and may affect our ability to obtain new tanker cars or negotiate new leases at a reasonable fee when our current leases expire;

· Any delays in shipping our products by rail and corresponding decreases in our sales or production as a result of shipping delay and ethanol storage constraints;

· Our units are subject to a number of transfer restrictions, no public market exists for our units, and we do not expect one to develop.

Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in Part I, Item 1A. “Risk Factors” of this Form 10-K.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future.  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 with these cautionary statements. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended October 31 and the associated quarters of those fiscal years.

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INDUSTRY AND MARKET DATA

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry, the market for our products and competition is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the U.S. ethanol industry, as well as other publicly available information from governmental agencies or publications. Although we believe these sources are reliable, we have not independently verified the information.

AVAILABLE INFORMATION

Our principal executive offices are located at 91246 390th Avenue, Heron Lake, Minnesota 56137, and our telephone number is 507-793-0077.  We make available free of charge on or through our Internet website, www.heronlakebioenergy.com, all of our reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  The SEC also maintains an internet site (http://www.sec.gov) through which the public can access our reports.  We will provide electronic or paper copies of these documents free of charge upon request.

PART I

When we use the terms “Heron Lake BioEnergy”, “Heron Lake”, or “HLBE” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and our operations at our ethanol production facility located near Heron Lake, Minnesota. When we use the terms the “Company”, “we”, “us”, “our” or similar words in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to Heron Lake BioEnergy and its wholly owned subsidiary, HLBE Pipeline Company, LLC, through which HLBE holds a 73.0% controlling interest in Agrinatural Gas, LLC (“Agrinatural”).

Additionally, when we refer to “units” in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to the Class A units of Heron Lake BioEnergy.

ITEM 1.    BUSINESS

Overview

Heron Lake BioEnergy, LLC was organized as a Minnesota limited liability company on April 12, 2001 under the name “Generation II, LLC”.  In June 2004, we changed our name to Heron Lake BioEnergy, LLC.    

In July 2013, Granite Falls Energy, LLC (“Granite Falls” or “GFE”) acquired a controlling interest in the Company from Project Viking, L.L.C. GFE, now a related party, owns an ethanol plant located in Granite Falls, Minnesota. As of January 29, 2018, GFE owns approximately 31.4% of our outstanding Class A membership units and 100.0% of our outstanding Class B Units, for total ownership of approximately 50.7%, an decrease from its prior ownership percentage of approximately 50.6% due to its April 1, 2017 purchase of approximately 55,000 Class A Units in a private transaction with a HLBE unitholder at a price of $0.85 per unit.  As a result of its majority ownership, GFE has the right to appoint five (5) of the nine (9) governors to our board of governors under our member control agreement.

We operate a dry mill fuel-grade ethanol plant in Heron Lake, Minnesota.  Since beginning operation of our ethanol plant on September 21, 2007, our primary business has been the production and sale of ethanol and co-products, including dried distillers’ grains and since February 2012, non-edible corn oil. Our plant was originally constructed as a coal fired plant but was converted to natural gas in November 2011. 

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Our ethanol plant has a nameplate capacity of 50 million gallons per year.  On July 10, 2015, the Minnesota Pollution Control Agency approved a major amendment to our air emission permit which increased our permitted production capacity from 59.9 million gallons to approximately 72.3 million gallons of undenatured fuel-grade ethanol on a twelve-month rolling sum basis.  We are currently operating above our stated nameplate capacity at an annual rate of approximately 65 million gallons and intend to continue to take advantage of the additional production allowed pursuant to our permit as long as we believe it is profitable to do so.

In fiscal years 2017, 2016, and 2015, we sold approximately 64.0 million gallons, 61.4 million gallons,  and 59.3 million gallons of ethanol, respectively.

Our wholly owned subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural is a natural gas pipeline company that was formed to construct, own, and operate the natural gas pipeline that provides natural gas to the Company’s ethanol production facility and other customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.  Rural Energy Solutions, LLC (“RES”) owns the remaining 27%  non-controlling interest in Agrinatural.

Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.   Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

· Ethanol Production.   Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

· Natural Gas Pipeline. The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

Before intercompany eliminations, revenues from our natural gas pipeline segment represented 2.7%, 2.5%, and 2.4% of our total consolidated revenues in the years ended October 31, 2017, 2016, and 2015, respectively.  After accounting for intercompany eliminations for fees paid by the Company to Agrinatural for natural gas transportation services pursuant to our natural gas transportation agreement, Agrinatural’s revenues represented 1.1%, 0.9%, and 0.9%, of our consolidated revenues for the fiscal years ended October 31, 2017, 2016, and 2015, respectively, and have little to no impact on the overall performance of the Company.

We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol, distillers’ grains, corn oil and natural gas transportation.  Refer to Note 15,  “Business Segments”, of the notes to audited consolidated financial statements for financial information about our financial reporting segments.

Financial Information

Please refer to “ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” for information about our revenue, profit and loss measurements and total assets and liabilities and “ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” for our consolidated financial statements and supplementary data.

Ethanol Production Segment

Revenues from our ethanol production segment have represented 98.9%, 99.1%, and 99.1%  of our revenues in the years ended October 31, 2017, 2016, and 2015 respectively.    

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Principal Products

The principal products from our ethanol production are fuel-grade ethanol, distillers’ grains, non-edible corn oil and miscellaneous sales of distillers’ syrup, a by-product of the ethanol production process.  We did not introduce any new products or services as part of our ethanol production segment during our fiscal year ended October 31, 2017. 

The table below shows the approximate percentage of our total revenue which is attributable to each of our principal products for each of the last three fiscal years.

	Fiscal Year 2017	Fiscal Year 2016	Fiscal Year 2015
Ethanol	80.3%	78.6%	76.9%
Distillers' Grains	13.6%	15.5%	19.4%
Corn Oil	4.5%	4.4%	2.4%
Misc. Syrup Sales	0.5%	0.6%	0.4%

Ethanol

Ethanol is a type of alcohol produced in the U.S. principally from corn.  Ethanol is ethyl alcohol, a fuel component made primarily from corn in the U.S. but can also be produced from various other grains. Ethanol is primarily used as:

· an octane enhancer in fuels;

· an oxygenated fuel additive that can reduce ozone and carbon monoxide vehicle emissions;

· a non-petroleum-based gasoline substitute; and

· as a renewable fuel to displace consumption of imported oil.

Ethanol produced in the U.S. is primarily used for blending with unleaded gasoline and other fuel products as an octane enhancer or fuel additive.  Ethanol is most commonly sold as E10 (10% ethanol and 90% gasoline), which is the blend of ethanol approved by the U.S. Environmental Protection Agency (“EPA”) for use in all American automobiles. Increasingly, ethanol is also available as E85, a higher percentage ethanol blend (85% ethanol and 15% gasoline) approved by the EPA for use in flexible fuel vehicles.

Distillers’ Grains

The principal co-product of the ethanol production process is distillers’ grains, a high protein and high-energy animal feed ingredient primarily marketed to the dairy and beef industries.  Dry mill ethanol processing creates three primary forms of distillers’ grains: wet distillers’ grains, modified wet distillers’ grains, and dried distillers’ grains with solubles.  Most of the distillers’ grains that we sell are in the form of dried distillers’ grains and modified/wet distillers’ grains.  Modified/wet distillers’ grains are processed corn mash that has been dried to approximately 50% moisture and has a shelf life of approximately 7 days.  Modified/wet distillers’ grains are often sold to nearby markets.  Dried distillers’ grains with solubles are corn mash that has been dried to approximately 10% to 12% moisture.  It has an almost indefinite shelf life and may be sold and shipped to any market and fed to almost all types of livestock.

Corn Oil

We  also extract a portion of the crude corn oil contained in our distillers’ grains which we market separately from our distillers’ grains.  The corn oil that we produce is not food grade corn oil and therefore cannot be used for human consumption. Corn oil is used primarily as a biodiesel feedstock and as a supplement for animal feed.

Corn Syrup

We also occasionally sell excess corn syrup in liquid syrup form to livestock feeders.  The excess syrup results from a plant upset, or when the amount of syrup produced during the drying process exceeds our distillers’ grains’ dryer capacity. Corn syrup is used primarily as a feed additive to moisten dry feed stuffs such as hay.

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Principal Product Markets

As described below in “Distribution of Principal Products”, we market and distribute all of our ethanol, distillers’ grains and corn oil through professional third party marketers. Our marketers make all decisions with regard to where our products are marketed and we have little control over the marketing decisions they make.  

Our ethanol, distillers’ grains and corn oil are primarily sold in the domestic market; however, as markets allow, our products can be, and have been, sold in the export markets. We expect our marketers to explore all markets for our products, including export markets. We believe that there is some potential for increased international sales of our products. Nevertheless, due to high transportation costs, and the fact that we are not located near a major international shipping port, we expect our products to continue to be marketed primarily domestically. 

Ethanol Markets

The markets in which our ethanol is sold will depend primarily upon the efforts of Eco-Energy, Inc. (“Eco-Energy”), which buys and markets our ethanol. There are local, regional, national, and international markets for ethanol.  The principal markets for our ethanol are petroleum terminals in the continental U.S.  The principal purchasers of ethanol are generally wholesale gasoline distributors or blenders.

We believe that local markets will be limited and must typically be evaluated on a case-by-case basis.  Although local markets may be the easiest to service, they may be oversold because of the number of ethanol producers near our plant, which may depress the price of ethanol in those markets.

Typically, a regional market is one that is outside of the local market, yet within the neighboring states.  Some regional markets include large cities that are subject to anti-smog measures in either carbon monoxide or ozone non-attainment areas, or that have implemented oxygenated gasoline programs, such as Chicago, St. Louis, Denver, and Minneapolis.  We consider our primary regional market to be large cities within a 450-mile radius of our ethanol plant.  In the national ethanol market, the highest demand by volume is primarily in the southern U.S. and the east and west coast regions.

We expect a majority of our ethanol to continue to be marketed and sold domestically. In addition, as domestic production of ethanol continues to expand, we anticipate increased international sales. Over our past fiscal year, exports of ethanol have increased with Brazil receiving the largest percentage of ethanol produced in the United States and Canada in second place. India, the Philippines and South Korea have also been top destinations.   However, ethanol export demand is more unpredictable than domestic demand and tends to fluctuate over time as it is subject to monetary and political forces in other nations. For example, a strong US Dollar is a force that may negatively impact ethanol exports from the United States.  Additionally, the imposition of tariffs and duties on ethanol imported from the U.S. can also negatively impact domestic export demand.

Although exports to China also substantially increased during 2016 over 2015,  China imported negligible volumes during 2017.  This reduction was due to China’s increase of the tariff on ethanol imported from the U.S. and Brazil to 30% as of January 1, 2017, compared to a 5% tariff in 2016.  However, on September 13, 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. There is no assurance the recently issued joint plan will lead to increased imports of US ethanol. 

During 2017 Brazil also adopted import quotas on imported ethanol, which is expected to negatively impact U.S. exports. On September 1, 2017, Brazil’s Chamber of Foreign Trade, or CAMEX, issued an official written resolution, imposing a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter. The ruling is valid for two years. According to the RFA, during September 2017, Brazil fell out of the top two customers of U.S. ethanol exports which is most likely the result of the implementation of the 20% tariff on imported ethanol. Exports to Brazil in September 2017 decreased by 20% compared to August 2017 exports and by 70% compared to the peak in May 2017. These tariffs have had, and likely will continue to have, a negative impact on the export market demand and prices for ethanol produced in the United States.

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On June 27, 2017, Mexico’s Energy Regulatory Commission (“CRE”) approved the use of 10% ethanol blends, effective immediately, up from 5.8%, in all but three of its largest cities: Mexico City, Guadalajara and Monterrey,  which could lead to increased exports to Mexico.  However, several lawsuits were filed in Mexico challenging the June 2017 decision by the CRE to approve the use of 10% ethanol blends.  Although four of these lawsuits were dismissed, a fifth lawsuit was allowed to proceed for judicial review, despite precedent set by the Mexico Supreme Court for dismissal. The CRE is expected to defend its position before the judge makes a final decision. Should the judge rule in favor of the plaintiff, the case will go to the Mexico Supreme Court.

We transport our ethanol primarily by rail.  In addition to rail, we service certain regional markets by truck from time to time.  We believe that regional pricing tends to follow national pricing less the freight difference.

Distillers’ Grains Markets

We sell distillers’ grains as animal feed for beef and dairy cattle, poultry, and hogs. Most of the distillers’ grains that we sell are in the form of dried distillers’ grains.  Currently, the U.S. ethanol industry exports a significant amount of dried distillers’ grains, which may increase as worldwide acceptance grows.  However, according to the U.S. Grains Council, total U.S. distiller’s grains exports through October 2017 were approximately 3% lower than distiller’s grains exports for the same period last year with Mexico, Turkey, South Korea, Canada, Thailand and Indonesia.

 Historically, the United States ethanol industry exported a significant amount of distillers’ grains to China and Vietnam. However, during 2016, China began an anti-dumping and countervailing duty investigation related to distillers’ grains imported from the U.S. which contributed to a decline in distillers’ grains shipped to China during 2016. In January 2017, the Chinese issued final tariffs on U.S. distillers’ grains. The Chinese distillers’ grains anti-dumping tariffs range from 42.2% to 53.7% and the anti-subsidy tariffs range from 11.2% to 12%. The imposition of these duties has resulted in a significant decline in demand from this top importer requiring U.S. producers to seek out alternative markets.  In November 2017, the China Ministry of Commerce announced that the anti-subsidy tariffs would be repealed.  While the anti-subsidy tariffs may be removed, the substantial anti-dumping duties remain.  As a result, there is no guarantee that distillers’ grains exports to Chinese will resume.

Additionally, exports of U.S. distillers’ grains to Vietnam had halted completely due to Vietnam’s imposition of stricter regulations on fumigation in December 2016. However, in a statement issued September 1, 2017, the U.S. Grains Council announced that Vietnam is lifting its suspension of U.S. distillers’ grains imports and easing fumigation requirements.  The lift of this suspension may result in increased exports to Vietnam; however, there is no guarantee that the Vietnamese export market will achieve significant growth.

We also sell modified wet distillers’ grains, which typically have a shelf life of a maximum of 7 days.  This provides for a much smaller, more local market and makes the timing of its sale critical. Further, because of its moisture content, the modified wet distillers’ grains are heavier and more difficult to handle. The customer must be close enough to justify the additional handling and shipping costs. As a result, modified wet distillers’ grains are principally sold only to local feedlots and livestock operations.

Various factors affect the price of distillers’ grains, including, among others, the price of corn, soybean meal and other alternative feed products, the performance or value of distillers’ grains in a particular feed market, and the supply and demand within the market.  Like other commodities, the price of distillers’ grains can fluctuate significantly.

Corn Oil Markets

Our corn oil is primarily sold to biodiesel manufacturers and, to a lesser extent, feed lot and poultry markets. We generally transport our corn oil by truck to users located primarily in the upper Midwest.

Distribution of Principal Products

Our ethanol plant is located in Heron Lake, Minnesota in Jackson County. We selected the plant site because of its accessibility to road and rail transportation and its proximity to grain supplies.  The ethanol plant has the facilities necessary to load ethanol and distillers’ grains onto trucks and rail cars.  It is served by the Union Pacific Railroad. Our site is in close proximity to major highways that connect to major population centers such as Minneapolis, Minnesota; Chicago, Illinois; and Detroit, Michigan.

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Ethanol Distribution

Eco-Energy is our ethanol marketer.  Pursuant to our marketing agreement with Eco-Energy, it has agreed to purchase and market the entire ethanol output of our ethanol plant.  Additionally, Eco-Energy arranges for the transportation of our ethanol.  We pay Eco-Energy a marketing fee based on a percentage of the applicable sales price per gallon of ethanol sold, as well as a fixed lease fee for rail cars leased from Eco-Energy. The marketing fee was negotiated based on prevailing market-rate conditions for comparable ethanol marketing services.

The term of our agreement with Eco-Energy expires on December 31, 2019.  However, the agreement provides for automatic renewals for additional consecutive terms of three years unless either party provides written notice to the other at least 90 days prior to the end of then-current term.

Distillers’ Grains Distribution

Gavilon Ingredients, LLC (“Gavilon”) serves as the distillers’ grains marketer for our plant pursuant to a distillers’ grains off-take agreement.  Pursuant to our agreement with Gavilon, Gavilon purchases all of the distillers’ grains produced at our ethanol plant.  We pay Gavilon a service fee for its services under this agreement. The contract commenced on November 1, 2013 with an initial term of six months, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 60 days to the other party.

Corn Oil Distribution

RPMG, Inc. (“RPMG”) markets the corn oil produced at our ethanol plant pursuant to a corn oil marketing agreement.  We pay RPMG a commission based on each pound of corn oil sold by RPMG under the agreement.

We independently market and sell the excess corn syrup occasionally produced from the distillation process at our plant to local livestock feeders.

Dependence on One or a Few Major Customers

As discussed above, we have exclusive ethanol marketing agreements with Eco-Energy. Additionally, we have agreements with Gavilon and RPMG to market all of the distillers’ grains and corn oil, respectively, produced at the plant. We rely on Eco-Energy, RPMG and Gavilon for the sale and distribution of all of our products, therefore, we are highly dependent on Eco-Energy, RPMG and Gavilon for the successful marketing of our products. Any loss of these companies as our marketing agents for our ethanol, distillers’ grains, or corn oil could have a negative impact on our revenues.

Seasonality of Ethanol Sales

Since ethanol is predominantly blended with conventional gasoline for use in automobiles, ethanol demand tends to shift in relation to gasoline demand. As a result, we experience some seasonality of demand for ethanol in the summer months related to increased driving. In addition, we experience some increased ethanol demand during holiday seasons related to increased gasoline demand.

Pricing of Corn and Ethanol

We expect that ethanol sales will represent our primary revenue source and corn will represent our primary component of cost of goods sold.  Therefore, changes in the price at which we can sell the ethanol we produce and the price at which we buy corn for our ethanol plant present significant operational risks inherent in our business. Trends in ethanol prices and corn prices are subject to a number of factors and are difficult to predict.

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The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. With the volatility of the weather and commodity markets, we cannot predict the future price of corn. Historically, ethanol prices have tended to correlate with corn prices, wholesale gasoline prices, with demand for and the price of ethanol increasing as supplies of petroleum decreased or appeared to be threatened, crude oil prices increased and wholesale gasoline prices increased. However, the prices of both ethanol and corn do not always follow historical trends. 

Generally, higher corn prices will produce lower profit margins and, therefore, negatively affect our financial performance.  If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to operate profitably because of the higher cost of operating our plants.  Because the market price of ethanol is not directly related to corn prices, we, like most ethanol producers, are not able to compensate for increases in the cost of corn through adjustments in our prices for our ethanol although we do see increases in the prices of our distillers’ grains during times of higher corn prices.Given that ethanol sales comprise a majority of our revenues, our inability to adjust our ethanol prices can result in a negative impact on our profitability during periods of high corn prices.

Ethanol prices were higher during fiscal year 2017 compared to fiscal year 2016.  Ethanol prices were higher during the fiscal year ended October 31, 2017 due to increased export demand which offset increased industry-wide production.  Management expects additional volatility for the price of ethanol in 2018.  Ethanol supply and demand both are expected to increase in 2018, which may lead to market imbalances.  Due to low ethanol and feedstock prices, exports grew in 2017 and are projected to continue to grow in 2018.  This is positive for the ethanol industry, but does introduce additional risk as international demand is more volatile than domestic demand.  U.S. gas demand was flat year over year in 2017, while ethanol as a percentage of the fuel supply increased slightly.  A decrease in demand for either gasoline or ethanol blends would adversely impact the price of ethanol, which could result in a material adverse effect on our business, results of operations and financial condition. 

Sources and Availability of Raw Materials

The primary raw materials used in the production of ethanol at our plant are corn and natural gas.  Our ethanol plant also requires significant and uninterrupted amounts of electricity and water.  We have entered into agreements for our supply of electricity, natural gas, and water.

Corn Procurement

Ethanol production requires substantial amounts of corn. The cost of corn represented approximately 72.9%, 74.4%, and 74.1% of our cost of sales for the years ended October 31, 2017, 2016, and 2015, respectively.  At our current production rate of approximately 65 million gallons of ethanol per year, we need to procure approximately 22.5 million bushels of corn per year for our dry mill ethanol process.  We believe our facility has sufficient corn storage capacity, with the capability to store approximately 8 days of corn supply.

We generally purchase corn through spot cash, fixed-price forward, basis only, and futures only contracts. Our fixed-price forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered.  These forward contracts are at fixed prices indexed to Chicago Board of Trade (“CBOT”) prices. Our corn requirements can be contracted in advance under fixed-price forward contracts or options. The parameters of these contracts are based on the local supply and demand situation and the seasonality of the price. For delayed pricing contracts, producers will deliver corn to us, but the pricing for that corn and the related payment will occur at a later date. We may also purchase a portion of our corn on a spot basis. For our spot purchases, we post daily corn bids so that corn producers can sell to us on a spot basis.

Typically, we purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota. We compete with ethanol producers in close proximity for the supplies of corn we will require to operate our plant.  There are 8 ethanol plants within an approximate 50 mile radius of our plant. The existence of other ethanol plants, particularly those in close proximity to our plant, increase the demand for corn and may result in higher costs for supplies of corn. We also compete with other users of corn, including ethanol producers regionally and nationally, producers of food and food ingredients for human consumption (such as high fructose corn syrup, starches, and sweeteners), producers of animal feed and industrial users.

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Since corn is the primary raw material we use to produce our products, the availability and cost of corn can have a significant impact on the profitability of our operations. Corn prices were lower during our 2017 fiscal year as a result of several consecutive years of favorable corn crops which has increased the amount of corn available to us. As a result of these favorable corn crops, we have not had difficulty securing the corn we need to operate the ethanol plant at prices that have allowed us to operate profitably. If we experience a drought or other unfavorable weather condition during our 2018 fiscal year, the price we pay for corn and the availability of corn near our plant could be negatively impacted. If we experience a localized shortage of corn, we may be forced to purchase corn from producers who are farther away from our ethanol plant which can increase our transportation costs.

Natural Gas Procurement

The primary source of energy in our manufacturing process is natural gas.  The cost of natural gas represented approximately 6.7%, 5.6%, and 6.9% of our cost of sales for the years ended October 31, 2017, 2016, and 2015, respectively. 

We do not anticipate any problems securing the natural gas we require to continue to operate our plant at capacity during our 2018 fiscal year or beyond.  We have a facilities agreement with Northern Border Pipeline Company, which allows us to access an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We also have entered into a firm natural gas transportation agreement with our majority owned subsidiary, Agrinatural.  Under the terms of the firm natural gas transportation agreement, Agrinatural will provide natural gas to the plant with a specified price per MMBTU for a term ending on October 31, 2021, with one automatic renewal option to extend the term an additional five years. 

We also have a base agreement for the sale and purchase of natural gas with Constellation NewEnergy—Gas Division, LLC.  We buy all of our natural gas from Constellation and this agreement runs until March 31, 2019.

The prices for and availability of natural gas are subject to volatile market conditions.  These market conditions often are affected by factors beyond our control such as higher prices as a result of colder than average weather conditions or natural disasters, overall economic conditions and foreign and domestic governmental regulations and relations.  Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol and more significantly, dried distillers’ grains for our customers.  Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition.

Electricity

Our plant requires a continuous supply of electricity. We have an agreement in place to supply electricity to our plant. We do not anticipate any problems securing the electricity that we require to continue to operate our plant at capacity during our 2018 fiscal year or beyond.

Water

Our plant also requires a continuous supply of water, which we obtain pursuant to an industrial water supply agreement with the City of Heron Lake and Jackson County, Minnesota. We do not anticipate any problems securing the water that we require to continue to operate our plant at capacity during our 2018 fiscal year or beyond.

Risk Management and Hedging

The profitability of our operations is highly dependent on the impact of market fluctuations associated with commodity prices.  We use various derivative instruments as part of an overall strategy to manage market risk and to reduce the risk that our ethanol production will become unprofitable when market prices among our principal commodities and products do not correlate.  

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In order to mitigate our commodity and product price risks, we enter into hedging transactions, including forward corn, ethanol, distillers’ grains and natural gas contracts, in an attempt to partially offset the effects of price volatility for corn and ethanol.  However, we are not always presented with an opportunity to lock in a favorable margin and our plant’s profitability may be negatively impacted during periods of high grain prices. We also enter into over-the-counter and exchange-traded futures, swaps and option contracts for corn, ethanol and distillers’ grains, designed to limit our exposure to increases in the price of corn and manage ethanol price fluctuations.  

Although we believe that our hedging strategies can reduce the risk of price fluctuations, the financial statement impact of these activities depends upon, among other things, the prices involved and our ability to physically receive or deliver the commodities involved.  Our hedging activities could 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 corn and ethanol prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.

Hedging arrangements expose us to the risk of financial loss in situations where the counterparty to the hedging contract defaults or, in the case of exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold.  There are also situations where the hedging transactions themselves may result in losses, as when a position is purchased in a declining market or a position is sold in a rising market. Hedging losses may be offset by a decreased cash price for corn and natural gas and an increased cash price for ethanol and distillers’ grains.

We have established a risk management committee which assists the board and our risk management manager to, among other things, establish appropriate policies and strategies for hedging and enterprise risk. We continually monitor and manage our commodity risk exposure and our hedging transactions as part of our overall risk management policy.  As a result, we may vary the amount of hedging or other risk mitigation strategies we undertake, and we may choose not to engage in hedging transactions.  Our ability to hedge is always subject to our liquidity and available capital.

Process Improvement

We are continually working to develop new methods of operating the ethanol plant more efficiently.  We continue to conduct process improvement activities in order to realize these efficiency improvements.

Patents, Trademarks, Licenses, Franchises and Concessions

We do not currently hold any patents, trademarks, franchises or concessions. We were granted a license by ICM, Inc. to use certain ethanol production technology necessary to operate our ethanol plant. The cost of the license granted by ICM was included in the amount we paid to Fagen, Inc. to design and build our ethanol plant.

Competition

Ethanol Competition

We sell our ethanol in a highly competitive market.  Ethanol is a commodity product where competition in the industry is predominantly based on price. On a national scale, we are in direct competition with numerous other ethanol producers.  According to the RFA, as of October 27, 2017, there are approximately 214 biorefineries with a total nameplate capacity of approximately 16.2 billion gallons of ethanol per year, with an additional six plants under expansion or construction with capacity to produce an additional 463 million gallons.  However, the RFA estimates that approximately 2.6% of the ethanol production capacity in the U.S. was not operating as of October 27, 2017. 

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The following table identifies the top five largest ethanol producers in the U.S. along with their production capacities.

	Nameplate Capacity
Company	(mmgy)
Poet Biorefining	1,662
Archer Daniels Midland	1,616
Green Plains, Inc.	1,370
Valero Renewable Fuels	1,265
Flint Hills Resources LP	820
Updated: October 27, 2017, Renewable Fuels Association

Each of the large ethanol producers above are capable of producing significantly more ethanol than we produce. These producers and other large producers are, among other things, capable of producing a significantly greater amount of ethanol or have multiple ethanol plants that may help them achieve certain benefits that we could not achieve with one ethanol plant. This could put us at a competitive disadvantage to other ethanol producers.

Larger ethanol producers may have an advantage over us from economies of scale and stronger negotiating positions with purchasers.  Large producers own multiple ethanol plants and may have flexibility to run certain facilities while shutting or slowing down production at their other facilities. This added flexibility may allow these producers to compete more effectively, especially during periods when operating margins are unfavorable in the ethanol industry.

Some large producers own ethanol plants in geographically diverse areas of the U.S. and as result, may be able to more effectively spread the risk they encounter related to feedstock prices. Some of our competitors are owned subsidiaries of larger oil companies, such as Valero Renewable Fuels and Flint Hills Resources. Because their parent oil companies are required to blend a certain amount of ethanol each year, these competitors may be able to operate their ethanol production facilities at times when it is unprofitable for us to operate our ethanol plant. Further, new products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us and harm our business.

A majority of the U.S. ethanol plants, and therefore, the greatest number of gallons of ethanol production capacity, are concentrated in the corn-producing states of Iowa, Nebraska, Illinois, Indiana, Minnesota, South Dakota, Ohio, Wisconsin, Kansas, and North Dakota.  According to the RFA, as of October 27, 2017, Minnesota  is one of the top producers of ethanol in the U.S. with 21 ethanol plants producing an aggregate of approximately 1.5 billion gallons of ethanol per year.Therefore, we face increased regional and local competition because of the location of our ethanol plant. 

Eco-Energy markets out ethanol primarily on a regional and national basis.  We compete with other ethanol producers both for markets in Minnesota and markets in other states. We believe that we are able to reach the best available markets through the use of our experienced marketer and by the rail delivery methods we use. We believe that we can compete favorably with other ethanol producers due to our proximity to ample grain, natural gas, electricity and water supplies at favorable prices.

In addition to intense competition with domestic producers of ethanol, we have faced increased competition from ethanol produced in foreign countries. Depending on feedstock prices, ethanol imported from foreign countries may be less expensive than domestically-produced ethanol.  However, foreign demand, transportation costs and infrastructure constraints may temper the market impact on the U.S. Ethanol imports have been lower in recent years and ethanol exports have been higher. However, if demand for imported ethanol were to increase again, demand for domestic ethanol may be reduced, which could lead to lower domestic prices and lower operating margins. Large international companies with much greater resources than ours have developed, or are developing, increased foreign ethanol production capacities. Many international suppliers produce ethanol primarily from inputs other than corn, such as sugar cane, and have cost structures that may be substantially lower than U.S. based ethanol producers including us. Many of these international suppliers are companies with much greater resources than us with greater production capacities.

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Competition from Alternative Fuels and Other Fuel Additives

Alternative fuels and alternative ethanol production methods are continually under development. New ethanol products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us and harm our business.

We anticipate increased competition from renewable fuels that do not use corn as the feedstock. Many of the current ethanol production incentives are designed to encourage the production of renewable fuels using raw materials other than corn. One type of ethanol production feedstock that is being explored is cellulose. Cellulose is found in wood chips, corn stalks and rice straw, amongst other common plants. Several companies and researchers have commenced pilot projects to study the feasibility of commercially producing cellulosic ethanol. Additionally, a few companies have begun construction or completed commercial scale cellulosic ethanol plants. If this technology can be profitably employed on a commercial scale, it could potentially lead to ethanol that is less expensive to produce than corn based ethanol. Cellulosic ethanol may also capture more government subsidies and assistance than corn based ethanol. This could decrease demand for our product or result in competitive disadvantages for our ethanol production process.

In addition to competing with ethanol producers, we also compete with producers of other gasoline oxygenates.  Many gasoline oxygenates are produced by other companies, including oil companies.  The major oil companies have significantly greater resources than we have to develop alternative products and to influence legislation and public perception of ethanol. Historically, as a gasoline oxygenate, ethanol primarily competed with two gasoline oxygenates, both of which are ether-based: MTBE (methyl tertiary butyl ether) and ETBE (ethyl tertiary butyl ether).  While ethanol has displaced these two gasoline oxygenates, the development of ethers intended for use as oxygenates is continuing and we will compete with producers of any future ethers used as oxygenates.

A number of automotive, industrial and power generation manufacturers are developing alternative fuels and clean power systems using fuel cells, plug-in hybrids, electric cars or clean burning gaseous fuels. Electric car technology has recently grown in popularity, especially in urban areas. While there are currently a limited number of vehicle recharging stations, there has been increased focus on developing these recharging stations to make electric car technology more feasible and widely available in the future. Additional competition from these other sources of alternative energy, particularly in the automobile market, could reduce the demand for ethanol, which would negatively impact our profitability.

Distillers’ Grains Competition

The amount of distillers’ grains produced annually in North America has increased significantly as the number of ethanol plants increased.  We compete with other producers of distillers’ grains products both locally and nationally, with more intense competition for sales of distillers’ grains among ethanol producers in close proximity to our ethanol plant.  These competitors may be more likely to sell to the same markets that we target for our distillers’ grains.

Distillers’ grains are primarily used as an animal feed, competing with other feed formulations using corn and soybean meal. As a result, we believe that distillers’ grains prices are positively impacted by increases in corn and soybean prices. In recent years the U.S. ethanol industry has increased exports of distillers’ grains which management believes has positively impacted demand and prices for distillers’ grains in the U.S. However, with the recent imposition of Chinese import duties on U.S. distillers’ grains,  distillers’ grains exports have been negatively impacted, increasing the domestic supply of distillers’ grains. Increased domestic supply has had a corresponding negative impact on distillers’ grains prices and has decreased the price of distillers’ grains as compared to a comparable volume of corn. In the event these distillers’ grains exports continue to decrease, it could result in increased competition among ethanol producers for sales of distillers’ grains and could negatively impact distillers’ grains prices in the U.S.

Government Ethanol Supports

The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the federal Renewable Fuels Standard (the “RFS”). The RFS is a national program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage.

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Under the RFS, the EPA is supposed to pass an annual rule that establishes the number of gallons of different types of renewable fuels that must be used in the U.S. by refineries, blenders, distributors and importers whichis called the renewable volume obligations (“RVOs”). The EPA has the authority to waive the mandates in whole or in part if one of two conditions is met: 1) there is inadequate domestic renewable fuel supply, or 2) implementation of the mandate requirement severely harms the economy or environment of a state, region or the U.S.

The RFS sets the statutory RVO for corn-based ethanol at 15 billion gallons beginning in 2016 and each year thereafter through 2022.  On November 23, 2016, the EPA announced the final rule for 2017 RVOs, which was set at 15.0 billion gallons for corn-based ethanol.  This rule is set at 100% of the original conventional biofuel requirement of 15.0 billion gallons, and is considered a favorable outcome by the industry.

On July 5, 2017, the United States Environmental Protection Agency (“EPA”) released a proposed rule to set the 2018 renewable volume requirements (“RVOs”) for conventional ethanol at 15.0 billion gallons while lowering the RVO for advanced alternatives, reducing overall RVOs to 19.24 billion gallons for 2018.

On October 19, 2017, EPA Administrator Pruitt issued a letter to several U.S. Senators representing states in the Midwest reiterating his commitment to the text and spirit of the RFS. He stated that the EPA would meet the November 30, 2017 deadline for issuing final 2018 volume requirements, that the EPA’s preliminary analysis suggests that final volume requirements should be set at amounts at or greater than those provided in the July proposed rule for 2018.  On November 30, 2017, the EPA announced the final 2018 RVOs, and consistent with EPA Administrator Pruitt’s October 2017 letter, set the RVOsfor conventional ethanol at 15.0 billion gallons, advanced biofuels at 4.29 billion gallons and cellulosic ethanol at 0.29 billion gallons, for overall RVOs of 19.29 billion gallons for 2018.  Although this final rule achieves the statutory RVO for conventional corn-based ethanol originally set by Congress when the RFS was enacted, it reduces the overall RVOs below the overall statutory level of 26 billion gallons. 

The following chart illustrates the potential U.S. ethanol demand based on the schedule of minimum usage established by the RFS program through the year 2022 (in billions of gallons):

						Maximum Amount of Corn-based
		Total Renewable	Cellulosic	Biodiesel	Advanced Biofuel	Ethanol That Can Be Used to
Year	RVO Source	Fuel RVO	Ethanol RVO	RVO	RVO	Satisfy Total Renewable Fuel RVO
2017	RFS Statute	24.00	5.50	-	9.00	15.00
	EPA Final Rule(1)	19.28	0.31	2.00	4.28	15.00
2018	RFS Statute	26.00	7.00	-	11.00	15.00
	EPA Final Rule(2)	19.29	0.29	2.10	4.29	15.00
2019	RFS Statute	28.00	8.50	-	13.00	15.00
2020	RFS Statute	30.00	10.50	-	15.00	15.00
2021	RFS Statute	33.00	13.50	-	18.00	15.00
2022	RFS Statute	36.00	16.00	-	21.00	15.00

(1)Final EPA RFS RVOs for 2017 issued November 2016.

(2)Final EPA RFS RVOs for 2018 issued November 2017

Current ethanol production capacity exceeds the EPA’s 2017 and 2018 RVOs that can be satisfied by corn-based ethanol.  According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed RVOs were more than 20% below statutory levels, in September 2017, the EPA Administrator Pruitt directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. Since the final 2018 RVOs are more than 20% below statutory levels, if 2019 RVOs are also more than 20% below statutory levels, the RVO reset will be triggered under RFS.  As a result, the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022. If the statutory RVOs are reduced as a result of reset, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

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Beginning in January 2016, various ethanol and agricultural industry groups petitioned a federal appeals court to hear a legal challenge to of the EPA’s decision to reduce the total renewable fuel volume requirements for 2014-2016 through use of its “inadequate domestic supply” waiver authority.  On July 28, 2017, the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the petitioners, concluding that the EPA erred in its exercise of “inadequate domestic supply” waiver authority by considering demand-side constraints. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016, and remanded to the EPA to address the 2016 total renewable fuels volume requirements. While management believes the decision should benefit the ethanol industry overall by clarifying the EPA's waiver analysis is limited to consideration of supply-side factors only, no direct impact on the Company is expected from the decision.

Management anticipates that there will be further legal challenges to the EPA's reduction in the volume requirements, including the final rules for 2017 and 2018. However, if the EPA's decision to reduce the volume requirements under the RFS is allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Beyond the federal mandates, there are limited domestic markets for ethanol.  Further, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress.  If such efforts are successful in further reducing or repealing the blending requirements of the RFS, a significant decrease in ethanol demand may result and could have a material adverse effect on our results of operations, cash flows and financial condition, unless additional demand from exports or discretionary or E85 blending develops.

Most ethanol that is used in the U.S. is sold in a blend called E10. E10 is a blend of 10% ethanol and 90% gasoline. E10 is approved for use in all standard vehicles. Estimates indicate that gasoline demand in the U.S. is approximately 140 billion gallons per year. Assuming that all gasoline in the U.S. is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 14.0 billion gallons per year.  This is commonly referred to as the “blend wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is being used in the U.S. and it discounts the possibility of additional ethanol used in higher percentage blends such as E15 and E85. These higher percentage blends may lead to additional ethanol demand if they become more widely available and accepted by the market.

There is growing availability of E85 for use in flexible fuel vehicles, however it is limited due to lacking infrastructure. In addition, the industry has been working to introduce E15 to the retail market since the EPA approved its use vehicles model year 2001 and newer. However, wide spread adoption of E15 is hampered by regulatory and infrastructure hurdles in many states, as well as consumer acceptance. Additionally, sales of E15 may be limited because: (i) it is not approved for use in all vehicles; (ii) the EPA requires a label that management believes may discourage consumers from using E15; and (iii) retailers may choose not to sell E15 due to concerns regarding liability. In addition, different gasoline blendstocks may be required at certain times of the year in order to use E15 due to federal regulations related to fuel evaporative emissions. This may prevent E15 from being used during certain times of the year in various states. As a result, management believes that E15 may not have an immediate impact on ethanol demand in the U.S. 

Many in the ethanol industry believe that it will be difficult to meet the stator RFS RVOs in future years without an increase in the percentage of ethanol that can be blended with gasoline for use in standard (non-flex fuel) vehicles. In EPA Administrator Pruitt’s October 2017 letter, he also stated that the EPA is actively exploring its authority to remove arbitrary barriers to the year-rounds use of E15 and other mid-level ethanol blends so that E15 may be sold throughout the year without disruption. However, it is unclear what regulatory framework, if any, will emerge.

Obligated parties use renewable identification numbers (“RINs”) to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. In November 2016, the EPA also proposed denying a petition to change the point of obligation under the RFS to the parties that own the gasoline before it is sold. EPA Administrator Pruitt’s October 2017 letter stated that the EPA would soon finalize a decision to deny the request to change the point of obligation for RINs from refiners and importers to blenders and that the EPA will not pursue regulations to allow ethanol exports to generate RINs.  Management believes that these statements represent actions that would likely have a positive impact on the ethanol industry either directly or indirectly.

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Compliance with Environmental Laws and Other Regulatory Matters

Our business subjects us to various federal, state, and local environmental laws and regulations, including: those relating to discharges into the air, water, and ground; the generation, storage, handling, use, transportation, and disposal of hazardous materials; and the health and safety of our employees. These laws and regulations require us to obtain and comply with numerous permits to construct and operate our ethanol plant, including water, air, and other environmental permits.  The costs associated with obtaining these permits and meeting the conditions of these permits have increased our costs of construction and production.  Additionally, compliance with environmental laws and permit conditions in the future could require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment, as well as significant management time and expense.  A violation of these laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations, and/or plant shutdown, any of which could have a material adverse effect on our operations.  Although violations and environmental non-compliance still remain a possibility following our conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

Our air permit requires certain on-going performance testing to be completed periodically to ensure compliance with minor source emission limits. On May 12, 2017, we submitted a letter to the Minnesota Pollution Control Agency (“MPCA”) regarding the certain non-compliant results from on-going performance testing required under our air permit. Since reporting to MPCA, The Company cooperated with MPCA’s review of the non-compliant tests and maintained open communication with MPCA staff to resolve the matter.  On October 17, 2017, we entered into a stipulation agreement with MPCA relating to the non-compliant test results.  Under the stipulation agreement, we agreed to pay a civil penalty of $63,500, which was paid in October 2017.

For the fiscal year ended October 31, 2017, we incurred costs and expenses of approximately $265,000 complying with environmental laws, including civil penalties for non-compliance.  Although we have been successful in obtaining all of the permits currently required, any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources in complying with such regulations.

On January 13, 2015, we submitted an efficient producer petition to the EPA which was approved by the EPA on March 12, 2015.  In the approval determination, the EPA’s analysis indicated that we achieved at least a 20.1% reduction in GHG emissions for their non-grandfathered volumes compared to the baseline lifecycle GHG emissions. Pursuant to the award approval, we are only authorized to generate RINs for our plant’s non-grandfathered volumes if we can demonstrate that all ethanol produced at the plant during an averaging period (defined as the prior 365 days or the number of days since the date of the EPA efficient producer pathway approval) meets the 20% GHG reduction requirement. To make this demonstration, we must comply with the compliance plan we developed and keep certain records as specified in the EPA’s approval.  Additionally, we must register with the EPA as a renewable fuel producer for the non-grandfathered volumes.  Although we believe we will be able to maintain continuous compliance with the 20% reduction in GHG emissions requirement, there is no guarantee that we will do so.  If we do not maintain continuous compliance with the 20% reduction in GHG emissions requirement, we will not be able issue RINs for the non-grandfathered volumes of ethanol produced at our plant.  As a result, we may be forced to rely on export sales for these non-grandfathered volumes of ethanol, which could adversely affect our operating margins, which, in turn could adversely affect our results of operations, cash flows and financial condition.

The California Air Resources Board, or CARB, has adopted a Low Carbon Fuel Standard, or LCFS, requiring a 10% reduction in average carbon intensity of gasoline and diesel transportation fuels from 2010 to 2020.  After a series of rulings that temporarily prevented CARB from enforcing these regulations, the federal appellate court reversed the federal district court finding the LCFS constitutional and remanding the case back to federal district court to determine whether the LCFS imposes a burden on interstate commerce that is excessive in light of the local benefits. On June 30, 2014, the U.S. Supreme Court declined to hear the appeal of the federal appellate court ruling and CARB recently re-adopted the LCFS with some slight modifications. The LCFS could have a negative impact on demand for corn-based ethanol and result in decreased ethanol prices affecting our ability to operate profitably.

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In February 2013, an anti-dumping tariff was imposed as a regulation by the Council of the European Union ethanol produced in the U.S. and exported to Europe. The Company does not export any ethanol to Europe at this time. However, continuation of this duty or imposition of tariffs by other countries or regions could reduce U.S. exports to Europe, and possibly other export markets. A reduction of exports to Europe could have an adverse effect on domestic ethanol prices, as the available supply of ethanol for the domestic market would increase.

Employees

We compete with ethanol producers in close proximity of our facility for the personnel required to operate our plant.  The existence and development of other ethanol plants will increase competition for qualified managers, engineers, operators and other personnel.  We also compete for personnel with businesses other than ethanol producers and with businesses located outside the community of Heron Lake, Minnesota.

As of the date of this report, we have 40 full time employees, of which 7 employees are involved primarily in management and administration and the remaining employees are involved primarily in plant operations.  We do not currently anticipate any significant change in the number of employees at our plant.

We  have entered into a management services agreement with Granite Falls Energy.  Pursuant to the management services agreement, GFE provides its chief executive officer, chief financial officer, and commodity risk manager to act in those positions as part-time officers and managers of the Company.  Each person providing management services to the Company under the management services agreement is subject to oversight by our board of governors.  However, the chief executive officer is solely responsible for hiring and firing persons providing management services under the management services agreement.

The initial term of the management services agreement automatically renews for successive one-year terms until either party gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

GFE is responsible for and agreed to directly pay salary, wages, and/or benefits to the persons providing management services under the management services agreement.  Under the terms of the management services agreement, the Company pays GFE 50% of the estimated total salary, bonuses and other expenses and costs (including all benefits and tax contributions) incurred by GFE for the three management positions on a monthly basis with a “true-up” following the close of GFE’s fiscal year.

Natural Gas Pipeline Segment

Through our wholly owned subsidiary, HLBE Pipeline Company, we indirectly own 73% of Agrinatural Gas, LLC, a Delaware limited liability company.  RES owns the remaining 27%  non-controlling interest in Agrinatural.  Swan Engineering, Inc. (“SEI”), an affiliate of RES, provides project management and management and operating services to Agrinatural as described below.

Agrinatural is governed by a 7 member board of managers.  Under Agrinatural’s operating agreement, we have the right to appoint 4 of the 7 managers and RES has the right to appoint 3 managers. Mychael Swan, the principal of SEI and largest owner of RES, serves as the Chairman of the Agrinatural board of managers.

Agrinatural is a natural gas distribution and sales company located in Heron Lake, Minnesota.  Agrinatural’s natural gas pipeline originates from an interconnection with the natural gas transmission pipeline of Northern Border Pipeline Company approximately seven miles southwest of Jeffers, Minnesota in Cottonwood County. Agrinatural currently owns and operates approximately 190 miles of pipeline, including 164 miles of distribution mains and 26 miles of service lines. The Agrinatural pipeline was initially installed in 2011 to serve the Company.  Since the initial installation of the pipeline, Agrinatural has added several other commercial, agricultural and residential customers in the communities and surrounding areas of Heron Lake, Jeffers, Delft, Dundee, Storden, and Okabena, Minnesota. 

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Agrinatural has a management and operating agreement with SEI, whereby SEI provides Agrinatural with day-to-day management and operation of Agrinatural’s pipeline distribution business.  In exchange for these services, Agrinatural pays SEI an aggregate management fee equal to the fixed monthly base fee plus the variable customer management fee based on the number of customers served on the pipeline less the agreed monthly fee reduction of $4,500.  The management and operating agreement with SEI expires July 1, 2019 unless earlier terminated for cause as defined in the agreement. For the fiscal year ended October 31, 2017, the Company paid SEI approximately $36,000 of monthly base fees and approximately $157,000 of variable customer management fees.

Agrinatural also has a project management agreement with SEI, whereby SEI supervises all of Agrinatural’s pipeline construction projects. These projects are constructed by unrelated third-party pipeline construction companies. Under the project management agreement, Agrinatural pays SEI a total of 10% of the actual capital expenditures for construction projects approved by Agrinatural’s  board of managers, excluding capitalized marketing costs. The project management with SEI expires June 30, 2019 unless earlier terminated for cause as defined in the agreement. For the fiscal year ended October 31, 2017, the Company paid SEI approximately $44,000 for project management and capital work fees.

Agrinatural has a professional services agreement with Wildwood Technology, LLC, pursuant to which, Wildwood Technology will act as the chief financial officer of Agrinatural through the services of its principal, Ann Tessier.  Pursuant to the Wildwood Technology agreement, Agrinatural pays Wildwood Technology $6,000 per month for the services provided by Ms. Tessier.  The Wildwood Technology agreement may be terminated at any time upon 30 days prior written notice by either party.    For the fiscal year ended October 31, 2017, the Company paid Wildwood Technology $72,000 in monthly fees.

Agrinatural also has a professional services agreement with Woodbury Consulting, LLC, an affiliate of RES. Pursuant to the Woodbury Consulting agreement, Woodbury Consulting will act as the chief executive officer of Agrinatural, through the services of its principal, John Sprangers.  Pursuant to the Woodbury Consulting agreement, Agrinatural pays Woodbury Consulting $150 per hour for the services provided by Mr. Sprangers plus travel expenses.  The Woodbury Consulting agreement may be terminated at any time upon 30 days prior written notice by either party. For the fiscal year ended October 31, 2017, the Company paid Woodbury Consulting approximately $22,000 for consulting services and approximately $1,000 for travel expense reimbursement.

The Company has entered into two intercompany credit facilities with Agrinatural, the July 2014 credit facility (the “Original Credit Facility”) and the March 2015 credit facility (the “Additional Credit Facility”). Under the Original Credit Facility, the Company made a five-year term loan in the principal amount of $3.05 million and pursuant to the Additional Credit Facility, made a four-year term loan in the principal amount of $3.5 million to Agrinatural.    

On May 19, 2016, the Company amended the Additional Credit Facility, entering into amendment to the loan agreement dated March 30, 2015 and an allonge to the negotiable promissory note dated March 30, 2015 issued by Agrinatural to the Company. Under the terms of the amendment and allonge, the Company agreed to increase the amount of the capital expenditures allowed by Agrinatural during the term of the facility and defer a portion of the principal payments required for 2016 and capitalize the deferred principal to the balloon payment due at maturity.

Details of the Agrinatural credit facilities are provided below in the section below entitled “PART II - ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Arrangements”.

Assets from our natural gas pipeline segment have represented 18.1%, 19.9%, and 19.5% of our consolidated total assets in the years ended October 31, 2017, 2016, and 2015, respectively.  Agrinatural’s assets consist of distribution main pipelines and service pipelines, together with the associated easement and land rights, a town border station, meters and regulators, office and other equipment and construction in process.

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Agrinatural’s revenues are generated through natural gas distribution fees and sales, including distribution fees paid by the Company pursuant to our firm natural gas transportation agreement with Agrinatural.  Before intercompany eliminations, revenues from our natural gas pipeline segment represented 2.7%, 2.5%, and 2.4% of our total consolidated revenues in the years ended October 31, 2017, 2016, and 2015, respectively.  After accounting for intercompany eliminations for fees from the Company for natural gas transportation services, Agrinatural’s revenues represented 1.1%, 0.9%, and 0.9% of our consolidated revenues for the fiscal years ended October 31, 2017, 2016, and 2015, respectively, and have little to no impact on the overall performance of the Company.

Financial Information about Geographic Areas

All of our operations are domiciled in the U.S., including those of Agrinatural, our majority owned subsidiary.  All of the products sold to our customers for the fiscal years ended October 31, 2017, 2016, and 2015 were produced in the U.S. and all of our long-lived assets are domiciled in the U.S.    

For the principal products of our ethanol production segment, we have engaged third-party professional marketers who decide where our products are marketed and we have no control over the marketing decisions made by our third-party professional marketers.  These third-party marketers may decide to sell our products in countries other than the U.S.  However, we anticipate that our products will primarily be sold in the U.S.

ITEM 1A.    RISK FACTORS

You should carefully read and consider the risks and uncertainties below and the other information contained in this report.  The risks and uncertainties described below are not the only ones we may face.  The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operation.  If any of the following risks actually occur, our results of operations, cash flows and the value of our units could be negatively impacted.

Risks Relating to Our Ethanol Production Operations

Because we are primarily dependent upon one product of our ethanol production segment, our business is not significantly diversified, and we may not be able to adapt to changing market conditions or endure any decline in the ethanol industry.

Our success depends on our ability to efficiently produce and sell ethanol, and, to a lesser extent, distillers’ grains and corn oil.  Although we operate a natural gas pipeline through our majority owned subsidiary, it does not produce significant revenue to rely upon if we are unable to produce and sell ethanol, distillers’ grains and corn oil, or if the market for those products decline. Our lack of diversification means that we may not be able to adapt to changing market conditions, changes in regulation, increased competition or any significant decline in the ethanol industry.

Our profitability depends upon purchasing corn at lower prices and selling ethanol at higher prices and because the difference between ethanol and corn prices can vary significantly, our financial results may also fluctuate significantly.

The results of our ethanol production business are highly impacted by commodity prices.  The substantial majority of our revenues are derived from the sale of ethanol. Our gross profit relating to the sale of ethanol is principally dependent on the difference between the price we receive for the ethanol we produce and the cost of corn and natural gas that we must purchase.  Changes in the prices and supplies of corn and natural gas are subject to and determined by market forces over which we have no control, such as weather, domestic and global demand, shortages, export prices, and various governmental policies in the U.S. and around the world. As a result of price volatility for these commodities, our operating results may fluctuate substantially. Increases in corn or natural gas prices or decreases in ethanol, distillers’ grains and corn oil prices may make it unprofitable to operate our plant. No assurance can be given that we will be able to purchase corn and natural gas at, or near, current prices and that we will be able to sell ethanol, distillers’ grains and corn oil at, or near, current prices. Consequently, our results of operations and financial position may be adversely affected by increases in the price of corn or natural gas or decreases in the price of ethanol, distillers’ grains and corn oil.

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We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions also involve risks to our business.  If we were to experience relatively higher corn and natural gas costs compared to the selling prices of our products for an extended period of time, the value of our units may be reduced.

Sustained negative operating margins may require some ethanol producers to temporarily limit or cease production.

Our ability and the ability of other ethanol producers to operate profitably is largely determined by the spread between the price paid for corn and the price received for ethanol.  If this spread is narrow or is negative for a sustained period, some ethanol producers may elect to temporarily limit or cease production until their possibility for profitability returns.  Although we currently have no plans to limit or cease ethanol production, we may be required to do so if we experience a period of sustained negative operating margins.  In such an event, we would still incur certain fixed costs, which would impact our financial performance.

Volatility in oil and gas prices may materially affect ethanol pricing and demand.

Ethanol has historically traded at a discount to gasoline.  When ethanol trades at a discount to gasoline it encourages discretionary blending, thereby increasing the demand for ethanol beyond required blending rates. Conversely, when ethanol trades at a premium to gasoline, there is a disincentive for discretionary blending and ethanol demand is negatively impacted.  Consequently,  ethanol pricing and demand may also be volatile, which makes it difficult to manage profit margins and which could result in a material adverse effect on our business, results of operations and financial condition.

If the supply of ethanol exceeds the demand for ethanol, the price we receive for our ethanol and distillers’ grains may decrease.

Domestic ethanol production capacity has increased substantially over the past decade.  However, demand for ethanol may not increase as quickly as expected or to a level that exceeds supply, or at all.

Excess ethanol production capacity may result from decreases in the demand for ethanol or increased domestic production or imported supply. There are many factors affecting demand for ethanol, including regulatory developments and reduced gasoline consumption as a result of increased prices for gasoline or crude oil. Higher gasoline prices could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage, or higher prices could spur technological advances, such as the commercialization of engines utilizing hydrogen fuel-cells, which could supplant gasoline-powered engines. There are a number of governmental initiatives designed to reduce gasoline consumption, including tax credits for hybrid vehicles and consumer education programs.

Because ethanol production produces distillers’ grains as a co-product, increased ethanol production will also lead to increased production of distillers’ grains. An increase in the supply of distillers’ grains, without corresponding increases in demand, could lead to lower prices or an inability to sell our distillers’ grains production. A decline in the price of distillers’ grains or the distillers’ grains market generally could have a material adverse effect on our business, results of operations and financial condition.

Management expects additional volatility for the price of ethanol in 2018.  Ethanol supply and demand both are expected to increase in 2018, which may lead to market imbalances.  Due to low ethanol and feedstock prices, exports grew in 2017 and are projected to continue to grow in 2018.  This is positive for the ethanol industry, but does introduce additional risk as international demand is more volatile than domestic demand.  U.S. gas demand was flat year over year in 2017, while ethanol as a percentage of the fuel supply increased slightly.  A decrease in demand for either gasoline or ethanol blends would adversely impact the price of ethanol, which could result in a material adverse effect on our business, results of operations and financial condition.

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The price of distillers’ grains is affected by the price of other commodity products, such as soybeans, and decreases in the price of these commodities could decrease the price of distillers’ grains.

Distillers’ grains compete with other protein-based animal feed products. The price of distillers’ grains may decrease when the price of competing feed products decrease. The prices of competing animal feed products are based in part on the prices of the commodities from which they are derived. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers’ grains. The price of distillers’ grains is not tied to production costs. However, decreases in the price of distillers’ grains would result in less revenue from the sale of distillers’ grains and could result in lower profit margins.

Historically, sales prices for distillers’ grains have been correlated with prices of corn. However, there have been occasions when the price increase for this co-product has lagged behind increases in corn prices. In addition, our distillers’ grains co-product competes with products made from other feedstocks, the cost of which may not have risen as corn prices have risen. Consequently, the price we may receive for distillers grains may not rise as corn prices rise, thereby lowering our cost recovery percentage relative to corn.

The prices of ethanol and distillers’ grains may decline as a result of trade barriers imposed by foreign countries with respect to ethanol and distillers’ grains originating in the U.S. and negatively affect our profitability.

An increasing amount of our industry’s products are being exported.  The U.S. ethanol industry was supported during our 2016 fiscal year with exports of ethanol which increased demand for our ethanol. Management believes these additional exports of ethanol were due to lower market ethanol prices in the U.S. and increased global demand for ethanol. However, these ethanol exports may not continue. If producers and exporters of ethanol and distillers’ grains are subjected to trade barriers when selling products to foreign customers, there may be a reduction in the price of these products in the U.S.  Declines in the price we receive for our products will lead to decreased revenues and may result in our inability to operate the ethanol plant profitably. 

If  U.S. producers can not satisfy import requirements imposed by countries importing distillers’ grains, export demand could be significantly reduced as a result. If export demand of distillers’ grains is significantly reduced as a result, the price of distillers’ grains in the U.S. would likely continue to decline which would have a negative effect on our revenue and could impact our ability to profitably operate which could in turn reduce the value of our units.

We face intense competition that may result in reductions in the price we receive for our ethanol, increases in the prices we pay for our corn, or lower gross profits.

Competition in the ethanol industry is intense. We face formidable competition in every aspect of our business from both larger and smaller producers of ethanol and distillers’ grains. Some larger producers of ethanol, such as POET Biorefining, Archer Daniels Midland Company, Cargill, Inc., Valero Energy Corporation, have substantially greater financial, operational, procurement, marketing, distribution and technical resources than we have. We may not be able to compete with these larger entities. These larger ethanol producers may be able to affect the ethanol market in ways that are not beneficial to us which could affect our financial performance.

Additionally, smaller competitors, such as farmer-owned cooperatives and independent companies owned by farmers and investors, have business advantages, such as the ability to more favorably procure corn by operating smaller plants that may not affect the local price of corn as much as a larger-scale plant like ours or requiring their farmer-owners to sell them corn as a requirement of ownership. Because Minnesota is one of the top producers of ethanol in the U.S., we face increased competition because of the location of our ethanol plants. Competing ethanol producers may introduce competitive pricing pressures that may adversely affect our sales levels and margins or our ability to procure corn at favorable prices. As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

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Until recently, oil companies, petrochemical refiners and gasoline retailers have not been engaged in ethanol production to a large extent. These companies, however, form the primary distribution networks for marketing ethanol through blended gasoline. During the past few years, several large oil companies have begun to penetrate the ethanol production market. If these companies increase their ethanol plant ownership or other oil companies seek to engage in direct ethanol production, such as Valero Renewable Fuels and Flint Hills Resources which are subsidiaries of larger oil companies, there may be a decrease in the demand for ethanol from smaller independent ethanol producers like us which could result in an adverse effect on our operations, cash flows and financial condition.

We also face increasing competition from international ethanol suppliers. Most international ethanol producers have cost structures that can be substantially lower than ours and therefore can sell their ethanol for substantially less than we can.

Competing ethanol producers may introduce competitive pricing pressures that may adversely affect our sales levels and margins or our ability to procure corn at favorable prices. As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

We engage in hedging transactions which involve risks that could harm our business.

We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn, natural gas and ethanol through the use of hedging instruments.  The effectiveness of our hedging strategies is dependent on the price of corn, natural gas and ethanol and our ability to sell sufficient products to use all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn and natural gas prices, as well as low ethanol prices.

Operational difficulties at our plant could negatively impact our sales volumes and could cause us to incur substantial losses.

We have experienced operational difficulties at our plant in the past that have resulted in scheduled and unscheduled downtime or reductions in the number of gallons of ethanol we produce. Some of the difficulties we have experienced relate to production problems, repairs required to our plant equipment and equipment maintenance, the installation of new equipment and related testing, and our efforts to improve and test our air emissions. Our revenues are driven in large part by the number of gallons of ethanol and the number of tons of distillers’ grains we produce. If our ethanol plant does not efficiently produce our products in high volumes, our business, results of operations, and financial condition may be materially adversely affected.

Our operations are also subject to operational hazards inherent in our industry and to manufacturing in general, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The occurrence of any of these operational hazards may materially adversely affect our business, results of operations and financial condition. Further, our insurance may not be adequate to fully cover the potential operational hazards described above or we may not be able to renew this insurance on commercially reasonable terms or at all.

Our operations and financial performance could be adversely affected by infrastructure disruptions and lack of adequate transportation and storage infrastructure in certain areas.

We ship our ethanol to our customers primarily by the railroad adjacent to our site. We also have the potential to receive inbound corn via the railroad. Our customers require appropriate transportation and storage capacity to take delivery of the products we produce. We also receive our natural gas through a pipeline that is approximately 16 miles in length. Without the appropriate flow of natural gas through the pipeline our plant may not be able to run at desired production levels or at all. Therefore, our business is dependent on the continuing availability of rail, highway and related infrastructure.

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Any disruptions in our infrastructure network, whether caused by labor difficulties, earthquakes, storms, other natural disasters, human error or malfeasance or other reasons, could have a material adverse effect on our business. We rely upon third-parties to maintain the rail lines from our plant to the national rail network, and any failure on their part to maintain the lines could impede our delivery of products, impose additional costs on us and could have a material adverse effect on our business, results of operations and financial condition.

In addition, lack of this infrastructure prevents the use of ethanol in certain areas where there might otherwise be demand and results in excess ethanol supply in areas with more established ethanol infrastructure, depressing ethanol prices in those areas. In order for the ethanol industry to grow and expand into additional markets and for our ethanol to be sold in these new markets, there must be substantial development of infrastructure including:

· additional rail capacity;

· additional storage facilities for ethanol;

· increases in truck fleets capable of transporting ethanol within localized markets;

· expansion of refining and blending facilities to handle ethanol; and

· growth in service stations equipped to handle ethanol fuels.

The substantial investments that will be required for these infrastructure changes and expansions may not be made on a timely basis, if at all, and decisions regarding these infrastructure improvements are outside of our control. Significant delay or failure to improve the infrastructure that facilitates the distribution could curtail more widespread ethanol demand or reduce prices for our products in certain areas, which would have a material adverse effect on our business, results of operations or financial condition.

Rail logistical problems may result in delays in shipments of our products which could negatively impact our financial performance.

There has been an increase in rail traffic congestion throughout the U.S. primarily due to the increase in cargo trains carrying shale oil. From time to time, periodic high demand and unusually adverse weather conditions may cause rail congestion resulting in rail delays and rail logistical problems. Although we have not been materially affected by prior rail congestion period, future periods of congestion may affect our ability to operate our plant at full capacity due to ethanol storage capacity constraints, which in turn could have a negative effect on our financial performance.

We depend on our management and key employees, and the loss of these relationships could negatively impact our ability to operate profitably.

Our success depends in part on our ability to attract and retain competent personnel. For our ethanol plant, we must hire qualified managers, operations personnel, accounting staff and others, which can be challenging in a rural community.   Further, our current employees may decide to end their employment with us.  Competition for employees in the ethanol industry is intense, and we may not be able to attract and retain qualified personnel. 

Part of our management team is provided by Granite Falls Energy pursuant to the management services agreement.  The management services agreement provides that it can be terminated on thirty days notice in certain circumstances. If the management services agreement is terminated or one or more of our employees terminate their employment, either with us or Granite Falls Energy, we may not be able to replace these individuals.  Any loss of these managers or key employees may prevent us from operating the ethanol plant efficiently and comply with our other obligations.

Technology in our industry evolves rapidly, potentially causing our plant to become obsolete, and we must continue to enhance the technology of our plant or our business may suffer.

We expect that technological advances in the processes and procedures for processing ethanol will continue to occur. It is possible that those advances could make the processes and procedures that we utilize at our ethanol plant less efficient or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than we are able. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than those of our competitors, which could cause our ethanol plant to become uncompetitive.

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Competition from the advancement of alternative fuels may lessen the demand forethanol.

Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells, plug-in hybrids or clean burning gaseous fuels. Like ethanol, these emerging technologies offer an option to address worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If these alternative technologies continue to expand and gain broad acceptance and become readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, resulting in lower ethanol prices that might adversely affect our results of operations and financial condition.

Our sales will decline, and our business will be materially harmed if our third party marketers do not effectively market or sell the ethanol, distillers’ grains and corn oil we produce or if there is a significant reduction or delay in orders from our marketers.

We have entered into agreements with third parties to market our supply of ethanol, distillers’ grains and corn oil. Our marketers are independent businesses that we do not control. We cannot be certain that our marketers will market or sell our ethanol, distillers’ grains and corn oil effectively. Our agreements with our marketers do not contain requirements that a certain percentage of sales are of our products, nor do the agreements restrict the marketer’s ability to choose alternative sources for ethanol, distillers’ grains or corn oil.

Our success in achieving revenue from the sale of ethanol, distillers’ grains and corn oil will depend upon the continued viability and financial stability of our marketers. Our marketers may choose to devote their efforts to other producers or reduce or fail to devote the necessary resources to provide effective sales and marketing support of our products. We believe that our financial success will continue to depend in large part upon the success of our marketers in operating their businesses.

If our marketers breach their contracts or do not have the ability, for financial or other reasons, to market all of the ethanol we produce or to market the co-products produced at our plant, we may not have any readily available alternative means to sell our products. Our lack of a sales force and reliance on these third parties to sell and market most of our products may place us at a competitive disadvantage. Our failure to sell all of our ethanol and co-products may result in lower revenues and reduced profitability.

We are exposed to credit risk resulting from non-payment by significant customers.

We have a concentration of credit risk because we sell our primary product, ethanol, and its primary co-product, distillers’ grains to two customers. Although we typically receive payments timely and within the terms of our marketing agreements with these customers, we continually monitor this credit risk exposure. These customers accounted for approximately 99.5%, 98.3%, and 98.5% of revenue for the years ended October 31, 2017, 2016, and 2015, respectively and approximately 98.1% and 93.0% of the outstanding accounts receivable balance at October 31, 2017 and 2016, respectively.  The inability of a third party to pay our accounts receivable may cause us to experience losses and may adversely affect our liquidity and our ability to make our payments when due.

Consumer resistance to the use of ethanol based on the belief that ethanol isexpensive, adds to air pollution, harms engines and/or takes more energy toproduce than it contributes may affect the demand for ethanol.

Certain individuals believe that the use of ethanol will have a negative impact on gasoline prices at the pump. Some also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy that is produced. These consumer beliefs could potentially be wide-spread and may be increasing as a result of recent efforts to increase the allowable percentage of ethanol that may be blended for use in conventional automobiles.  If consumers choose not to buy ethanol based on these beliefs, it would affect the demand for the ethanol we produce which could negatively affect our profitability and financial condition.

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Risks Related to Regulation and Government Action

Our failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground. Certain aspects of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities including the Minnesota Pollution Control Agency. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits. We could also incur substantial costs and experience increased operating expenses as a result of operational changes to comply with environmental laws, regulations and permits. We have previously incurred substantial costs relating to our air emissions permit and expect additional costs relating to this permit in the future.

Our air permit requires certain on-going performance testing to be completed periodically to ensure compliance with minor source emission limits. On May 12, 2017, we submitted a letter to the MPCA regarding the results of certain non-compliant tests. On October 17, 2017, we entered into a stipulation agreement with the MPCA relating to these non-compliant tests.  Under the stipulation agreement, we agreed to pay a civil penalty of $63,500, which was paid in October 2017.  

Environmental laws and regulations are subject to substantial change. We cannot predict what material impact, if any, these changes in laws or regulations might have on our business. The MPCA’s approval of our amendment, as well as future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could require additional capital expenditures, increase our operating costs or otherwise adversely affect our business. These changes may also relax requirements that could prove beneficial to our competitors and thus adversely affect our business. Further, regulations of the EPA and the MPCA depend heavily on administrative interpretations. We cannot assure you that future interpretations made by regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations. Failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

Because federal and state regulation heavily influence the supply of and demand for ethanol, changes in government regulation that adversely affect demand or supply will have a material adverse effect on our business.

Various federal and state laws, regulations and programs impact the supply of and demand for ethanol.  We believe the most important of these is the RFS, which sets minimum national volume standards for use of cellulosic, biomass-based diesel and total advanced renewable fuels.  The RFS helps support a market for ethanol that might disappear without this incentive. In the case of the RFS, while it creates a demand for ethanol, the existence of specific categories of renewable fuels also creates a demand for these types of renewable fuels and will likely provide an incentive for companies to further develop these products to capitalize on that demand. In these circumstances, the RFS may also reduce demand for ethanol in favor of the renewable fuels for which specific categories exist.

By statute, the RFS requires that 16.55 billion gallons be sold or dispensed in 2013, increasing to 36.0 billion gallons by 2022, but caps the amount of corn-based ethanol that can be used to meet the renewable fuels blending requirements at 15.0 billion gallons for 2015 and thereafter.  On November 30, 2017, the EPA announced final RVO requirements for the RFS for calendar year 2018. The corn-based biofuel requirement of 15.0 billion gallons equating to the statutory requirement level as originally set by Congress when the RFS was enacted. However, the overall RVOs were set at 19.29 billion gallons for 2018, more than 20% below the overall statutory level of 26 billion gallons, due to decreases in the RVOs for cellulosic ethanol and advanced biofuels. 

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According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total RVOs are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 RVOs are also more than 20% below statutory levels, the RVO reset will be triggered under RFS II and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022. Current ethanol production capacity exceeds the 2018 RVO standard which can be satisfied by corn-based ethanol. Reduction of blending requirements could reduce the demand for and price of ethanol. If demand for ethanol decreases, it could materially adversely affect our business, results of operations and financial condition.

Additionally, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. Successful reduction or repeal of the blending requirements of the RFS could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

The EPA imposed E10 “blend wall” if not overcome will have an adverse effect on demand for ethanol.

We believe that the E10 “blend wall” is one of the most critical governmental policies currently facing the ethanol industry. The “blend wall” issue arises because of several conflicting requirements. First, the renewable fuels standards dictate a continuing increase in the amount of ethanol blended into the national gasoline supply. Second, the EPA mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. The EPA policy of 10% and the RFS increasing blend rate are at odds, which is sometimes referred to as the “blend wall.” 

While the issue is being considered by the EPA, there have been no regulatory changes that would reconcile the conflicting requirements. In 2011, the EPA allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. As a result, the approval of E15 may not significantly increase demand for ethanol.

The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability.

California passed a Low Carbon Fuels Standard (“LCFS”) which requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which reductions are measured using a lifecycle analysis. Management believes that these regulations could preclude corn based ethanol produced in the Midwest from being used in California. California represents a significant ethanol demand market. If the ethanol industry is unable to supply corn based ethanol to California, it could significantly reduce demand for the ethanol we produce. This could result in a reduction of our revenues and negatively impact our ability to profitably operate the ethanol plant.

Meeting the requirements of evolving environmental, health and safety laws and regulations, and in particular those related to climate change, could adversely affect our financial performance.

When the EPA released its final regulations on RFS, these regulations grandfathered our plant at its current production capacity for the generation of RINs for compliance with RFS.  Any expansion of our plant beyond the grandfathered volumes must meet a threshold of a 20% reduction in GHG emissions from a 2005 baseline measurement for the ethanol to be eligible to generate RINS for compliance with the RFS II mandate.

In 2015, our plant was awarded “efficient producer” status under the pathway petition program for the non-grandfathered volumes of ethanol produced at our plant. Pursuant to the award approval, we are only authorized to generate RINs for our non-grandfathered volume if we can demonstrate that all ethanol produced at the plant during an averaging period (defined as the prior 365 days or the number of days since the date EPA efficient producer pathway approval) meets the 20% GHG reduction requirement.

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Although we believe our plant will be able to maintain continuous compliance with the 20% reduction in GHG emissions requirement as presently operated, there is no guarantee that we will not have to install carbon dioxide mitigation equipment or take other steps unknown to us at this time in order to comply with the efficient producer requirements or other future law or regulation.  Continued compliance with the efficient producer GHG reduction requirements or compliance with future law or regulation of carbon dioxide, could be costly and may prevent us from operating our plant as profitably, which may have an adverse impact on our operations, cash flows and financial position.

If we fail to comply with the 20% reduction in GHG emissions requirement, we will not be able to generate RINs for our non-grandfathered volumes of ethanol, which could adversely affect our operating margins.

We expect that nearly all of the anticipated demand for our ethanol production will be by customers obligated to comply with the RFS. The EPA’s approval of our efficient producer petitions requires that the plant demonstrates continuous compliance with the 20% reduction in GHG emissions for all volumes of ethanol produced, not just non-grandfathered volumes of ethanol. If we cannot show continuous compliance with the requirement for all volumes of ethanol, we will not be able issue RINs for the non-grandfathered volumes of ethanol produced. If our ethanol production does not meet the requirements for RIN generation as administered by the EPA, we may be required to sell those gallons of ethanol without RINs at lower prices in the domestic market to compensate for the lack of RINs or sell these gallons of ethanol in the export market where RINs are not required, which could adversely affect our results of operations, cash flows and financial condition.

Risks Related to Agrinatural and Natural Gas Pipeline Operations

The expansion of Agrinatural’s existing assets and construction of new assets is subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our results of operations and financial condition, and require additional capital contributions or loans from us.

One of the ways Agrinatural intends to grow its business is through the expansion of its existing assets and construction of new energy infrastructure assets. The construction of additions or modifications to Agrinatural’s existing pipelines, and the construction of other new energy infrastructure assets, involve numerous regulatory, environmental, political and legal uncertainties beyond Agrinatural’s control and may require the expenditure of significant capital.  Therefore, as the majority-owner of Agrinatural, we may be required to make additional capital contributions, loans and/or guaranty loans to Agrinatural in order to fund such expansion projects.  If Agrinatural undertakes these projects they may not be completed on schedule, at the budgeted cost or at all. Moreover, Agrinatural’s revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if it expands or adds a new pipeline, the construction may occur over an extended period of time, and we will not receive any material increases in revenues until the project is completed.

Agrinatural may also construct facilities to capture anticipated future growth in production or demand, which may not materialize or where contracts are later canceled. As a result, new pipelines may not be able to attract enough throughput volume to achieve our expected investment return, which could adversely affect our results of operations and financial condition. The construction of new pipelines may also require Agrinatural to obtain new rights-of-way, and it may become more expensive for Agrinatural to obtain these new rights-of-way or to renew existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases, Agrinatural’s cash flows could be adversely affected.

Transporting natural gas involves inherent risks that could cause Agrinatural, and therefore the Company as its majority owner, to incur significant financial losses.

There are inherent hazards and operation risks in gas distribution activities, such as leaks, accidental explosions and mechanical problems that could cause the loss of human life, significant damage to property, environmental pollution, impairment of operations and substantial losses to Agrinatural. The location of pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. These activities may subject us to litigation and administrative proceedings that could result in substantial monetary judgments, fines or penalties against us. To the extent that the occurrence of any of these events is not fully covered by insurance, they could adversely affect Agrinatural’s earnings and cash flow.

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Volatility in the price of natural gas could result in customers switching to alternative energy sources which could reduce Agrinatural’s revenues, earnings and cash flow.

The market price of alternative energy sources such as coal, electricity, propane, oil and steam is a competitive factor affecting the demand for Agrinatural’s gas distribution services. Its customers may have or may acquire the capacity to use one or more of the alternative energy sources if the price of natural gas and Agrinatural’s distribution services increase significantly. Natural gas has typically been less expensive than these alternative energy sources. However, if natural gas prices increase significantly, some of these alternative energy sources may become more economical or more attractive than natural gas, which could reduce our earnings and cash flow.

Agrinatural’s natural gas pipeline operations are subject to significant governmental and private sector regulations.

Agrinatural’s natural gas pipeline operations are subject to government regulation, including the Federal Energy Regulatory Commission and Minnesota Office of Pipeline Safety, compliance with which can impose significant costs on Agrinatural’s natural gas distribution business. Failure to comply with such regulations can result in additional costs, fines or criminal action.

Risks Related to the Units

Granite Falls Energy owns a large percentage of our units, which may allow it to control or heavily influence matters requiring member approval, and has additional board rights under our member control agreement.

As of January 29, 2018, Granite Falls Energy, LLC, through its wholly owned subsidiary, Project Viking, L.L.C., owns approximately 50.7% of our outstanding units.  As a result, Granite Falls Energy can significantly influence our management and affairs and all matters requiring member approval, including the approval of significant corporate transactions.

Our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. Therefore, Granite Falls Energy has the right to appoint five persons to our nine-person board pursuant to this provision. With the right to designate a majority of our board, Granite Falls Energy can significantly influence the outcome of any actions taken by our board of governors and our business. 

In addition, given the large ownership of Granite Falls Energy, they can significantly influence other actions, such as amendments to our operating agreement, mergers, going private transactions, and other extraordinary transactions, and any decisions concerning the terms of any of these transactions. The ownership and voting positions of Granite Falls Energy may have the effect of delaying, deterring, or preventing a change in control or a change in the composition of our board of directors.

Further, the interests of Granite Falls Energy may not coincide with our interests or the interests of our other members. For example, Granite Falls Energy owns and operates an ethanol production facility that could be considered our competitor. Granite Falls Energy may also use its rights under the member control agreement and their large ownership position to address their own interests, which may be different from those of our other members.

There is no public market for our units and no public market is expected to develop.

There is no established public trading market for our units, and we do not expect one to develop in the foreseeable future.  We have established a Unit Trading Bulletin Board through FNC Ag Stock, LLC, in order to facilitate trading among our members.  The Unit Trading Bulletin Board is a private online matching service that has been designed to comply with federal tax laws and IRS regulations establishing a “qualified matching service,” as well as state and federal securities laws.  The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached. 

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There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units. All transactions must comply with the Unit Trading Bulletin Board Rules, our member control agreement, and are subject to approval by our board of governors.  As a result, units held by our members may not be easily resold and members may be required to hold their units indefinitely. Even if members are able to resell our units, the price may be less than the members’ investment in the units or may otherwise be unattractive to the member.

There are significant restrictions on the transfer of our units.

To protect our status as a partnership for tax purposes and to assure that no public trading market in our units develops, our units are subject to significant restrictions on transfer and transfers are subject to approval by our board of governors. All transfers of units must comply with the transfer provisions of our member control agreement and the unit transfer policy adopted by our board of governors. Our board of governors will not approve transfers which could cause us to lose our tax status or violate federal or state securities laws. As a result of the provisions of our member control agreement, members may not be able to transfer their units and may be required to assume the risks of the investment for an indefinite period of time.

There is no assurance that we will be able to make distributions to our unit holders, which means that holders could receive little or no return on their investment.

Distributions of our net cash flow may be made at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and restrictions imposed by Compeer Financial, formerly known as AgStar Financial Services, FCLA (“Compeer”) under our credit facility. Our credit facility with Compeer currently limits our ability to make distributions to our members. If our financial performance and loan covenants permit, we expect to make cash distributions at times and in amounts that will permit our members to make income tax payments, along with distributions in excess of these amounts. However, our board may elect to retain cash for operating purposes, debt retirement, plant improvements or expansion. Although we have declared distributions that were paid to members in January 2015 and 2016, there is no guarantee that we will be in a financial position to pay distributions in the future, that the terms of our credit facility will allow us to make distributions to our members, or that distributions, if any, will be at times or in amounts to permit our members to make income tax payments. Consequently, members may receive little or no return on their investment in the units.

We may authorize and issue units of new classes which could be superior to or adversely affect holders of our outstanding units.

Our board of governors, upon the approval of a majority in interest of our members, has the power to authorize and issue units of classes which have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights, different from or superior to those of our present units. New units may be issued at a price and on terms determined by our board of governors. The terms of the units and the terms of issuance of the units could have an adverse impact on your voting rights and could dilute your financial interest in us.

Our use of a staggered board of governors and allocation of governor appointment rights may reduce the ability of members to affect the composition of the board.

We are managed by a board of governors, currently consisting of four (4) elected governors and five (5) appointed governors. The seats on the board that are not subject to a right of appointment will be elected by the members without appointment rights. An appointed governor serves indefinitely at the pleasure of the member appointing him or her (so long as such member and its affiliates continue to hold a sufficient number of units to maintain the applicable appointment right) until a successor is appointed, or until the earlier death, resignation or removal of the appointed governor.

Under our member control agreement, non-appointed governors are divided into three classes, with the term of one class expiring each year. As the term of each class expires, the successors to the governors in that class will be elected for a term of three years. As a result, members elect only approximately one-third of the non-appointed governors each year.

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The effect of these provisions may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of us and may discourage attempts to change our management, even if an acquisition or these changes would be beneficial to our members.

Our units represent both financial and governance rights, and loss of status as a member would result in the loss of the holder’s voting and other rights and would allow us to redeem such holder’s units.

Holders of units are entitled to certain financial rights, such as the right to any distributions, and to governance rights, such as the right to vote as a member. If a unit holder does not continue to qualify as a member or such holder’s member status is terminated, the holder would lose certain rights, such as voting rights, and we could redeem such holder’s units. The minimum number of units presently required for membership is 2,500 units. In addition, holders of units may be terminated as a member if the holder dies or ceases to exist, violates our member control agreement or takes actions contrary to our interests, and for other reasons. Although our member control agreement does not define what actions might be contrary to our interests, and our board of governors has not adopted a policy on the subject, such actions might include providing confidential information about us to a competitor, taking a board or management position with a competitor or taking action which results in significant financial harm to us in the marketplace. If a holder of units is terminated as a member, our board of governors will have no obligation to redeem such holder’s units.

Voting rights of members are not necessarily equal and are subject to certain limitations.

Members of our company are holders of units who have been admitted as members upon their investment in our units and who are admitted as members by our board of governors. The minimum number of units required to retain membership is 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members who are holders of our present units are entitled to one vote for each unit held. The provisions of our member control agreement relating to voting rights applicable to any class of units will apply equally to all units of that class.

However, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. For every 9% of our units held, the member has the right to appoint one person to our board. Granite Falls has the right to appoint five persons to our board pursuant to this provision and has currently appointed five persons. If units of any other class are issued in the future, holders of units of that other class will have the voting rights that are established for that class by our board of governors with the approval of our members. Consequently, the voting rights of members may not be necessarily proportional to the number of units held.

Further, cumulative voting for governors is not allowed, which makes it substantially less likely that a minority of members could elect a member to the board of governors. Members do not have dissenter’s rights. This means that they will not have the right to dissent and seek payment for their units in the event we merge, consolidate, exchange or otherwise dispose of all or substantially all of our property. Holders of units who are not members have no voting rights. These provisions may limit the ability of members to change the governance and policies of our company.

All members will be bound by actions taken by members holding a majority of our units, and because of the restrictions on transfer and lack of dissenters’ rights, members could be forced to hold a substantially changed investment.

We cannot engage in certain transactions, such as a merger, consolidation, dissolution or sale of all or substantially all of our assets, without the approval of our members. However, if holders of a majority of our units approve a transaction, then all members will also be bound to that transaction regardless of whether that member agrees with or voted in favor of the transaction. Under our member control agreement, members will not have any dissenters’ rights to seek appraisal or payment of the fair value of their units. Consequently, because there is no public market for the units, members may be forced to hold a substantially changed investment.

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Risks Related to Tax Issues in a Limited Liability Company

EACH UNIT HOLDER SHOULD CONSULT THE INVESTOR’S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES OF AN INVESTMENT IN HERON LAKE BIOENERGY, LLC AND ITS IMPACT ON THE INVESTOR’S TAX REPORTING OBLIGATIONS AND LIABILITY.

If we are not taxed as a partnership, we will pay taxes on all of our net income and you will be taxed on any earnings we distribute, and this will reduce the amount of cash available for distributions to holders of our units.

We consider Heron Lake BioEnergy, LLC to be a partnership for federal income tax purposes. This means that we will not pay any federal income tax, and our members will pay tax on their share of our net income. If we are unable to maintain our partnership tax treatment or qualify for partnership taxation for whatever reason, then we may be taxed as a corporation. We cannot assure you that we will be able to maintain our partnership tax classification. For example, there might be changes in the law or our company that would cause us to be reclassified as a corporation. As a corporation, we would be taxed on our taxable income at rates of up to 35% for federal income tax purposes (21% beginning after December 31, 2017). Further, distributions would be treated as ordinary dividend income to our unit holders to the extent of our earnings and profits. These distributions would not be deductible by us, thus resulting in double taxation of our earnings and profits. This would also reduce the amount of cash we may have available for distributions.

Your tax liability from your allocated share of our taxable income may exceed any cash distributions you receive, which means that you may have to satisfy this tax liability with your personal funds.

As a partnership for federal income tax purposes, all of our profits and losses “pass-through” to our unit holders. You must pay tax on your allocated share of our taxable income every year. You may incur tax liabilities from allocations of taxable income for a particular year or in the aggregate that exceed any cash distributions you receive in that year or in the aggregate. This may occur because of various factors, including but not limited to, accounting methodology, the specific tax rates you face, and payment obligations and other debt covenants that restrict our ability to pay cash distributions. If this occurs, you may have to pay income tax on your allocated share of our taxable income with your own personal funds.

You may not be able to fully deduct your share of our losses or your interest expense.

It is likely that your interest in us will be treated as a “passive activity” for federal income tax purposes. In the case of unit holders who are individuals or personal services corporations, this means that a unit holder’s share of any loss incurred by us will be deductible only against the holder’s income or gains from other passive activities, e.g., S corporations and partnerships that conduct a business in which the holder is not a material participant. Some closely held C corporations have more favorable passive loss limitations. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. Upon disposition of a taxpayer’s entire interest in a passive activity to an unrelated person in a taxable transaction, suspended losses with respect to that activity may then be deducted.

Interest paid on any borrowings incurred to purchase units may not be deductible in whole or in part because the interest must be aggregated with other items of income and loss that the unit holder has independently experienced from passive activities and subjected to limitations on passive activity losses.

Deductibility of capital losses that we incur and pass through to you or that you incur upon disposition of units may be limited. Capital losses are deductible only to the extent of capital gains plus, in the case of non-corporate taxpayers, the excess may be used to offset up to $3,000 of ordinary income. If a non-corporate taxpayer cannot fully utilize a capital loss because of this limitation, the unused loss may be carried forward and used in future years subject to the same limitations in the future years.

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You may be subject to federal alternative minimum tax.

Individual taxpayers are subject to an “alternative minimum tax” if that tax exceeds the individual’s regular income tax. For alternative minimum tax purposes, an individual’s adjusted gross income is increased by items of tax preference. We may generate such preference items. Accordingly, preference items from our operations together with other preference items you may have may cause or increase an alternative minimum tax to a unit holder. You are encouraged and expected to consult with your individual tax advisor to analyze and determine the effect on your individual tax situation of the alternative minimum taxable income you may be allocated, particularly in the early years of our operations.

Preparation of your tax returns may be complicated and expensive.

The tax treatment of limited liability companies and the rules regarding partnership allocations are complex. We will file a partnership income tax return and will furnish each unit holder with a Schedule K-1 that sets forth our determination of that unit holder’s allocable share of income, gains, losses and deductions. In addition to U.S. federal income taxes, unit holders will likely be subject to other taxes, such as state and local taxes, that are imposed by various jurisdictions. It is the responsibility of each unit holder to file all applicable federal, state and local tax returns and pay all applicable taxes. You may wish to engage a tax professional to assist you in preparing your tax returns and this could be costly to you.

Any audit of our tax returns resulting in adjustments could result in additional tax liability to you.

The IRS may audit our tax returns and may disagree with the positions that we take on our returns or any Schedule K-1. If any of the information on our partnership tax return or a Schedule K-1 is successfully challenged by the IRS, the character and amount of items of income, gains, losses, deductions or credits in a manner allocable to some or all our unit holders may change in a manner that adversely affects those unit holders. This could result in adjustments on unit holders’ tax returns and in additional tax liabilities, penalties and interest to you. An audit of our tax returns could lead to separate audits of your personal tax returns, especially if adjustments are required.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

We own approximately 216 acres of land located near Heron Lake, Minnesota on which we have constructed and operate our ethanol plant, which also includes corn, ethanol, distillers’ grains and corn oil storage and handling facilities.  Located on these 216 acres is an approximately 7,320 square foot building that serves as our headquarters.  Our address is 91246 390th Avenue, Heron Lake, Minnesota 56137-3175.

All of our real property is subject to mortgages in favor of Compeer as security for loan obligations.

Our majority owned subsidiary, Agrinatural, property consists of 190 miles of distribution main pipelines and service pipelines, together with the associated easement and land rights, a town border station, meters and regulators, office and other equipment and construction in process.  Agrinatural’s  assets have represented 18.1%, 19.9%, and 19.5% of our consolidated total assets in the years ended October 31, 2017, 2016, and 2015, respectively.  All of Agrinatural’s real property and assets are subject to mortgages in favor of HLBE as security for loan obligations.

Our and Agrinatural’s credit facilities are discussed in more detail under “ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Credit Arrangements”.

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ITEM 3.    LEGAL PROCEEDINGS

From time to time in the ordinary course of business, Heron Lake BioEnergy, LLC may be named as a defendant in legal proceedings related to various issues, including workers’ compensation claims, tort claims, or contractual disputes.  We are not currently involved in any material legal proceedings.

ITEM 4.    MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no public trading market for our Class A or Class B units.

However, we have established an online unit trading bulletin board (“QMS”) through FNC Ag Stock, LLC, in order to facilitate trading in our units. The QMS has been designed to comply with federal tax laws and IRS regulations establishing a “qualified matching service,” as well as state and federal securities laws. Our QMS consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes. The QMS does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached.

We do not become involved in any purchase or sale negotiations arising from our QMS and have no role in effecting the transactions beyond approval, as required under our member control agreement, and the issuance of new certificates. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the QMS. We do not receive any compensation for creating or maintaining the QMS. In advertising our QMS, we do not characterize Heron Lake BioEnergy, LLC as being a broker or dealer or an exchange. We do not use the QMS to offer to buy or sell securities other than in compliance with securities laws, including any applicable registration requirements.

There are detailed timelines that must be followed under the QMS rules and procedures with respect to offers and sales of membership units. All transactions must comply with the QMS rules and procedures, our member control agreement, and are subject to approval by our board of governors.

So long as we remain a publicly reporting company, information about the Company will be publicly available through the SEC’s filing system. However, if at any time we cease to be a publicly reporting company, we anticipate continuing to make information about the Company publicly available on our website in order to continue operating the QMS.

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The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe the following table most accurately represents the current trading value of the Company’s units. The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.

Quarter	Low Per Unit Price	High Per Unit Price	Total Units Traded
2016 1st	$ 1.15	$ 1.15	20,000
2016 2nd	$ 0.90	$ 1.00	48,500
2016 3rd	$ 0.85	$ 1.00	15,000
2016 4th	$ 0.90	$ 0.95	23,500
2017 1st	$ 0.85	$ 0.85	15,250
2017 2nd	$ 0.85	$ 1.00	87,875
2017 3rd	$ 0.85	$ 1.00	32,500
2017 4th	$ 0.85	$ 0.85	26,250

As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status.  Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof).  All transfers are subject to a determination that the transfer will not cause Heron Lake BioEnergy to be deemed a publicly traded partnership.

Issuer Repurchases of Equity Securities

We did not make any repurchases of our Class A or Class B units during fiscal 2017.

Holders of Record

As of January 29, 2018, there were 62,932,107 Class A units outstanding held of record by 1,196 unit holders, and 15,000,000 Class B units outstanding held of record by one unit holder. There are no other classes of units outstanding.  The determination of the number of members is based upon the number of record holders of the units as reflected in the Company’s internal unit records.

As of January 29, 2018, Granite Falls Energy, LLC owns an approximately 50.7% controlling interest in the Company through its wholly owned subsidiary, Project Viking, L.L.C. GFE is a related party by virtue of its ownership interest in us.  As a result of its majority ownership, GFE has the right to appoint five (5) of the nine (9) governors to our board of governors under our member control agreement.

As of October 31, 2017 and January 29, 2018, there were no outstanding options or warrants to purchase, or securities convertible for or into, our units.

Distributions

Distributions by the Company to our unit holders are in proportion to the number of units held by each unit holder. A unit holder’s distribution is determined by multiplying the number of units by distribution per unit declared. Our board of governors has complete discretion over the timing and amount of distributions to our unit holders.

Distributions are restricted by certain loan covenants in our comprehensive credit facility with Compeer. We may only make distributions to our members in an amount that does not exceed 65% of our net profit (determined according to GAAP) for such fiscal year; provided that the we are and will remain in compliance with all of the covenants, terms and conditions of the comprehensive credit facility. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments, along with distributions in excess of these amounts. Cash distributions are not assured, however, and we may never be in a position to make distributions. Under Minnesota law, we cannot make a distribution to a member if, after the distribution, we would not be able to pay our debts as they become due or our liabilities, excluding liabilities to our members on account of their capital contributions, would exceed our assets.

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On December 18, 2014, our board of governors declared a distribution of $0.12 per membership unit for a total of approximately $9.4 million to be paid to members of record as of December 18, 2014. The distribution was paid on or about January 19, 2015.

On December 17, 2015, our board of governors declared a distribution of $0.05 per membership unit for a total of approximately $3.9 million to be paid to members of record as of December 17, 2015. The distribution was paid on or about January 25, 2016. 

We did not make any distributions to our members during fiscal year 2017.

On December 21, 2017, our board of governors declared a distribution of $0.11 per membership unit for a total of approximately $8.6 million to be paid to members of record as of December 21, 2017. The distribution was paid on or about January 29, 2018. 

Our board of directors has complete discretion over the timing and amount of distributions to our members. Our expectations with respect to our ability to make future distributions are discussed in greater detail in “ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”

Unregistered Sales of Equity Securities

The Company had no unregistered sales of securities in fiscal year 2017.

Securities Authorized for Issuance Under Equity Compensation Plans

As of the date of this annual report, we had no “equity compensation plans” (including individual equity compensation arrangements) under which any of our equity securities are authorized for issuance.

Performance Graph

The following graph shows a comparison of cumulative total member return since October 31, 2012, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Index (the “NASDAQ”) and an index of other companies that have the same SIC code as the Company (the “SIC Code Index”). The graph assumes $100 was invested in each of the Company’s units, the NASDAQ, and the Industry Index on October 31, 2012. Data points on the graph are semi-annual. Note that historic stock price performance is not necessarily indicative of future unit price performance.

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Pursuant to the rules and regulations of the Securities and Exchange Commission, the performance graph and the information set forth therein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

ITEM 6.    SELECTED FINANCIAL DATA

The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected financial data for the consolidated balance sheets as of October 31, 2017 and 2016 and the consolidated statements of operations data for the years ended October 31, 2017, 2016, and 2015 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected financial data for the consolidated balance sheets as of October 31, 2015, 2014 and 2013 and the consolidated statements of operations data for the years ended October 31, 2014 and 2013 were derived from audited consolidated financial statements filed previously. This selected consolidated financial data should be read in conjunction with “ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data (amounts in thousands, except per unit data and unless context otherwise requires).

	For the Fiscal Years Ended October, 31,
Statement of Operations	2017		2016		2015		2014		2013
Revenues	$	109,918	$	109,606	$	115,660	$	149,418	$	163,764
Cost of Goods Sold		99,488		101,112		105,248		120,569		155,537
Gross Profit		10,430		8,494		10,412		28,849		8,227
Operating Expenses		(3,125)		(2,999)		(3,001)		(2,950)		(3,214)
Operating Income		7,305		5,495		7,411		25,899		5,013
Other Income (Expense)		211		(300)		(432)		(1,571)		(2,745)
Net Income		7,516		5,195		6,979		24,328		2,268
Less: Net Income Attributable to Non­controlling Interest		(248)		(245)		(228)		(359)		(327)
Net Income Attributable to Heron Lake BioEnergy, LLC	$	7,268	$	4,950	$	6,751	$	23,969	$	1,941
Weighted Average Units Outstanding—Basic (Class A and B)		77,932,107		77,932,107		77,932,107		69,233,367		44,868,463
Net Income (Loss) Per Unit Attributed to Heron Lake BioEnergy, LLC—Basic (Class A and B)	$	0.09	$	0.06	$	0.09	$	0.35	$	0.04
Weighted Average Units Outstanding - Diluted (Class A and B)		77,932,107		77,932,107		77,932,107		78,389,586		48,086,445
Net Income (Loss) Per Unit Attributed to Heron Lake BioEnergy, LLC—Diluted (Class A and B)	$	0.09	$	0.06	$	0.09	$	0.31	$	0.04
Distributions Per Unit (Class A and B)	$	—	$	0.05	$	0.12	$	—	$	—

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Balance Sheet Data at October 31,	2017		2016		2015		2014		2013
Current assets	$	21,562	$	12,614	$	12,892	$	10,897	$	7,849
Property and equipment, net		46,567		50,376		52,985		54,368		51,670
Other assets		744		781		819		858		1,274
Total assets	$	68,873	$	63,771	$	66,696	$	66,123	$	60,793
Current liabilities	$	5,646	$	7,632	$	6,456	$	8,109	$	5,062
Long-term debt, less current portion		966		1,394		6,712		2,112		28,182
Members' equity attributable to Heron Lake BioEnergy, LLC		60,768		53,500		52,447		55,047		27,142
Non-controlling interest		1,493		1,245		1,082		853		409
Total liabilities and members' equity	$	68,873	$	63,771	$	66,697	$	66,121	$	60,795

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the fiscal year ended October 31, 2017.  This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements thereto and the risk factors contained herein.

Overview

Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota.

Our revenues are derived from the sale and distribution of our ethanol throughout the continental U.S. and in the sale and distribution of our distillers’ grains (DGS) locally, and throughout the continental U.S.

Based on the criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes: (1) production of ethanol and related distillers’ grains, corn oil and syrup collectively referred to as ethanol production; and (2) natural gas pipeline distribution and services from the Company’s majority owned subsidiary, Agrinatural.

Before intercompany eliminations, revenues from our natural gas pipeline segment represented 2.7%, 2.5%, and 2.4% of our total consolidated revenues in the years ended October 31, 2017, 2016, and 2015, respectively.  After accounting for intercompany eliminations for fees paid by the Company for natural gas transportation services pursuant to our natural gas transportation agreement with Agrinatural, Agrinatural’s revenues represented 1.1%, 0.9%, and 0.9% of our consolidated revenues for the fiscal years ended October 31, 2017, 2016, and 2015, respectively, and have little to no impact on the overall performance of the Company.

Plan of Operations For the Next Twelve Months

Over the next twelve months we will continue our focus on operational improvements at our plant. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plant, continued emphasis on safety and environmental regulation, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

We expect to have sufficient cash generated by continuing operations and availability on our credit facility to fund our operations.  However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional funding.

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In addition, we expect to continue to conduct routine maintenance and repair activities at the ethanol plant to maintain current plant infrastructure, as well as small capital projects to improve operating efficiency. We anticipate using cash we generate from our operations and our revolving term loan to finance these plant upgrade projects.

Trends and Uncertainties Impacting Our Operations

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol.  Other factors that may affect our future results of operation include those risks and factors discussed in this report at “PART I - ITEM 1. BUSINESS” and “PART I - ITEM 1A. RISK FACTORS”.

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

We expect our ethanol plant to produce approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our ethanol plant may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our ethanol plant in order to minimize our variable costs and optimize cash flow.

For the fiscal year ended October 31, 2017 compared to fiscal year ended October 31, 2016, our average price per gallon of ethanol sold increased 1.8%. Although there has been an increased domestic supply of ethanol, the price of ethanol increased in part due to domestic demand as relatively low fuel prices resulted in increased consumers driving and increased export demand. The price of ethanol has also seen positive impact from the rising ethanol blend rates at the pump. In addition, because ethanol prices are typically directionally consistent with changes in corn and energy prices, lower corn prices were offset by rising crude oil and gasoline prices throughout the fiscal year which had a favorable effect on ethanol price. Management believes that, despite the uptick in ethanol price, the ethanol outlook moving into fiscal year 2018 will remain relatively flat and our margins will remain tight due to abundant corn supplies and relatively flat gasoline demand.  

Exports of ethanol have also been increasing, however export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. During 2017 Brazil and China adopted import quotas and/or tariffs on the importation of ethanol which are expected to continue to negatively impact U.S. exports. China, the number three importer of U.S. ethanol in 2016, has imported negligible volumes since imposing a 30% tariff on U.S. and Brazil fuel ethanol on January 1, 2017.  On September 1, 2017, Brazil’s Chamber of Foreign Trade imposed a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter. The ruling is valid for two years. According to the RFA, during September 2017, Brazil fell out of the top two customers of U.S. ethanol exports for the first time in 16 months. However, on June 27, 2017, the Energy Regulatory Commission of Mexico approved the use of 10% ethanol blends, effective immediately, up from 5.8%, in all but three of its largest cities: Mexico City, Guadalajara and Monterrey, which could lead to increased exports to Mexico. Any decrease in U.S. ethanol exports could adversely impact the market price of ethanol unless domestic demand increases or foreign markets are developed.

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Corn prices trended upward during the first half of fiscal year 2017, becoming more volatile and trending down during the latter part of fiscal year 2017 as harvest was completed.  The latest estimates of supply and demand provided by the U.S. Department of Agriculture (“USDA”) estimate the 2017-18 ending corn stocks at approximately 2.5 billion bushels, and project the 2017/18 corn supply at approximately 14.6 billion bushels with steady corn consumption for ethanol and co-products steady at approximately 5.5 billion bushels, suggesting lower corn prices into the first half of Fiscal 2018. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers grains out paces rising corn prices.

Our margins have also been, and could continue to be, negatively impacted due to the lower prices received for our distillers’ grainsdue to lower export demand and oversupply in the domestic market, along with increased corn and soybean availability.  Export demand from China and Vietnam, historically two of the largest importers of U.S. produced distillers grains, has significantly declined. In January year, China imposed significant anti-dumping and anti-subsidies on distillers’ grains imported from the U.S. which saw significant declines in exports of U.S. distillers’ grains to China.  

However, in November 2017, the China Ministry of Commerce announced that the anti-subsidy tariffs would be repealed.  While the anti-subsidy tariffs may be removed, the more substantial anti-dumping duties remain.  As a result, we cannot forecast how much demand from China will come back into the marketplace and distillers’ grains prices could remain low unless additional demand can be created from other foreign markets or domestically.

Additionally, exports of U.S. distillers’ grains to Vietnam have halted completely due to Vietnam’s imposition of stricter regulations on fumigation in December 2016. However, in a statement issued September 1, 2017, the U.S. Grains Council announced that Vietnam is lifting its suspension of U.S. distillers’ grains imports and easing fumigation requirements.  The lift of this suspension may result in increased exports to Vietnam; however, there is no guarantee that the Vietnamese export market will achieve significant growth.  Management anticipates distillers’ grains prices will remain lower during our 2018 fiscal year, unless additional domestic demand or other foreign markets develop. Domestic demand for distillers’ grains could also remain low if corn prices decline and end-users switch to lower priced alternatives.   

Corn oil prices have also been adversely impacted by oversupply of corn oil due to the substantial increase in corn oil production during the last few years. Additionally, corn oil prices have been impacted by the oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production. 

Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil and grain prices in future periods will be consistent compared to historical periods.

Results of Operations for the Fiscal Years Ended October 31, 2017 and 2016

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 audited consolidatedstatements of operations for the fiscal years ended October 31, 2017 and 2016 (amounts in thousands):

	Year Ended October 31, 2017				Year Ended October 31, 2016
Statement of Operations Data			%				%
Revenues	$	109,918	100.0	%	$	109,606	100.0	%
Cost of Goods Sold		99,488	90.5	%		101,112	92.3	%
Gross Profit		10,430	9.5	%		8,494	7.7	%
Operating Expenses		(3,125)	(2.8)	%		(2,999)	(2.7)	%
Operating Income		7,305	6.7	%		5,495	5.0	%
Other Income (Expense), net		211	0.2	%		(300)	(0.3)	%
Net Income		7,516	6.9	%		5,195	4.7	%
Less: Net Income Attributable to Non-controlling Interest		(248)	(0.2)	%		(245)	(0.2)	%
Net Income Attributable to Heron Lake BioEnergy, LLC	$	7,268	6.7	%	$	4,950	4.5	%

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Revenues

Our consolidated revenue is derived principally from revenues from our ethanol production segment, which consists of sales of our three primary products: ethanol, distillers’ grains and corn oil. Our remaining consolidated revenues are attributable to incidental sales of corn syrup and Agrinatural revenues, net of eliminations for distribution fees paid by the Company to Agrinatural for natural gas transportation services.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our audited consolidated statements of operations for the fiscal year ended October 31, 2017:

	Year Ended October 31, 2017
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	88,231	80.3	%
Distillers' grains sales		15,002	13.6	%
Corn oil sales		4,915	4.5	%
Corn syrup sales		562	0.5	%
Agrinatural revenues (net of intercompany eliminations)		1,208	1.1	%
Total Revenues	$	109,918	100.0	%

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our consolidated statements of operations for the fiscal year ended October 31, 2016:

	Year Ended October 31, 2016
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	86,175	78.6	%
Distillers' grains sales		17,004	15.5	%
Corn oil sales		4,780	4.4	%
Corn syrup sales		619	0.6	%
Agrinatural revenues (net of intercompany eliminations)		1,028	0.9	%
Total Revenues	$	109,606	100.0	%

Our total consolidated revenues increased by approximately 0.3% for the fiscal year ended October 31, 2017, as compared to the fiscal year 2016 primarily due to increases in the average price realized for our ethanol and corn oil which were partially mitigated by decreases in average price realized for our distillers’ grains.  The following table reflects quantities of our three primary products sold and the average net prices received for the fiscal years ended October 31, 2017 and 2016:

	Year Ended October 31, 2017			Year Ended October 31, 2016
	Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	64,030	$	1.38	63,664	$	1.35
Distillers' grains (tons)	156	$	96.44	147	$	115.56
Corn oil (pounds)	17,755	$	0.28	18,285	$	0.26

Ethanol

Total revenues from sales of ethanol increased by approximately 2.4% for fiscal year 2017 compared to the fiscal year 2016 due primarily to an approximately 1.8%  increase in the average price per gallon we received for our ethanol coupled with an approximate 0.6% increase in the volumes sold from period to period. We produced and sold more ethanol gallons during fiscal year 2017 as compared to fiscal year 2016 primarily due to the timing of ethanol shipments and a slight increase in ethanol production. Ethanol production was higher at our plant compared to the prior year due to capital improvements we are making at our plant designed to increase ethanol production and improve efficiency. We are currently operating above our nameplate capacity. Management anticipates relatively stable ethanol production and sales during our 2018 fiscal year. 

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The increase in the price of ethanol was due in part to domestic demand as relatively low fuel prices resulted in increased consumers driving and increased export demand. In addition, because ethanol prices are typically directionally consistent with changes in corn and energy prices, lower corn prices were offset by rising crude oil and gasoline prices throughout the fiscal year which had a favorable effect on ethanol prices.

We occasionally engage in hedging activities with respect to our ethanol sales. We recognize the gains or losses that result from the changes in the value of these derivative instruments in revenues as the changes occur. At October 31, 2017, we had fixed and basis contracts for forward ethanol sales for delivery periods through March 2018 valued at approximately $18.4 million.  Separately, ethanol derivative instruments resulted in a loss of approximately $219,000 for the fiscal year ended October 31, 2017 and a gain of approximately $118,000 for the fiscal year ended October 31, 2016.

Distillers’ Grains

Total revenues from sales of distillers’ grains for our 2017 fiscal year were approximately 11.8%  less compared to fiscal year 2016.  The decline in distillers’ grains revenues is primarily attributable to an approximately 16.5%  decrease in the average price per ton we received for our distillers’ grains from period to period, partially offset by an  approximately 5.7% increase in the tons of distillers’ grains sold during fiscal year 2017 compared to fiscal year 2016.   

The decline in the market price of distillers’ grains is due to lower domestic demand and lower export demand, particularly from China, as well as Vietnam. Reduced export demand from China and Vietnam, combined with lower corn and soybean prices, has led to an oversupply of distillers’ grains in the domestic market which has resulted in a decline in the price of distillers’ grains. Domestic demand for distillers’ grains may also remain low due to expansion of production capacity in the ethanol industry and end-users switching to lower priced alternatives. Management anticipates that distillers’ grains prices will remain lower during our 2018 fiscal year unless China reduces or eliminates its tariffs.

We sold more tons of distillers’ grains during fiscal year 2017 as compared to 2016 due primarily to an increase in distillers’ grains yield at the plant. Management anticipates relatively stable distillers’ grains production going forward. 

At October 31, 2017, we had forward distillers’ grains sales contracts valued at approximately $2.0 million for various delivery periods through March 2018.

Corn Oil

Separating the corn oil from our distillers’ grains decreases the total tons of distillers’ grains that we sell; however, our corn oil has a higher per ton value than our distillers’ grains.  Total revenues from sales of corn oil increased by approximately 2.8% for fiscal year 2017 compared to the fiscal year 2016.  This increase is attributable to an approximately 5.9% increase in the average price we received per pound of corn oil sold, offset by a 2.9% decrease in the number of pounds sold during fiscal year 2017 compared to fiscal year 2016.

Management attributes the increase in corn oil prices during fiscal year 2017, in part, to increased demand from the biodiesel industry and due to the expansion of the RFS advanced biofuel mandate increasing the demand for biodiesel. However, the RVO for advanced biofuels in EPA’s final rule for 2018 is significantly reduced in comparison to the statutory mandate.  As a result, the increased demand for corn oil from the biodiesel industry may not continue during fiscal year 2018, particularly if the biodiesel blenders' tax credit, which expired on December 31, 2016, is not extended. In December 2017, a bill, the Tax Extenders Act of 2017 (S. 2256), was introduced in the Senate which would renew the $1.00-per-gallon biodiesel and renewable diesel tax credits for biodiesel and blending biodiesel retroactively to January 1, 2017, and extending the tax credit through December 31, 2018. Due to the recent uncertainty in Congress, management cannot predict whether the tax credit extender bill will be passed by Congress as presently written or at all.

Although management believes that corn oil prices will remain relatively steady at the increased price levels, prices may decrease if there is an oversupply of corn oil production resulting from increased production rates at ethanol plants or if biodiesel producers begin to utilize lower-priced alternatives such as soybean oil or if biodiesel blenders’ tax credit is not renewed and biodiesel production declines.

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The decrease in volume sold for fiscal year 2017 compared to the 2016 is attributable to reduced oil yield.  Management expects our corn oil production will be relatively stable going forward.

At October 31, 2017, we had forward corn oil sales contracts valued at $763,000 for various delivery periods through December 2017.

Cost of Goods Sold

Our cost of goods sold decreased by approximately 1.6% for the fiscal year ended October 31, 2017, as compared to the fiscal year ended October 31, 2016.  Cost of goods sold, as a percentage of revenues, also decreased to approximately 90.5% for the fiscal year ended October 31, 2017, as compared to approximately 92.3% for the 2016 fiscal year due to a wider margin between the price of ethanol and the price of corn.  Approximately 90% of our total costs of goods sold is attributable to ethanol production. As a result, the cost of goods sold per gallon of ethanol produced for the fiscal year ended October 31, 2017 was approximately $1.38 per gallon of ethanol sold compared to approximately $1.42 per gallon of ethanol produced for the fiscal year ended October 31, 2016. 

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year ended October 31, 2017:

	Year Ended October 31, 2017
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	72,523	72.9	%
Natural gas costs		6,645	6.7	%
All other components of costs of goods sold		20,320	20.4	%
Total Cost of Goods Sold	$	99,488	100.0	%

The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year ended October 31, 2016:

	Year Ended October 31, 2016
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	75,194	74.3	%
Natural gas costs		5,631	5.6	%
All other components of costs of goods sold		20,287	20.1	%
Total Cost of Goods Sold	$	101,112	100.0	%

Corn Costs

Our cost of goods sold related to corn decreased approximately 2.6% for our 2017 fiscal year compared to our 2016 fiscal year, due primarily to decrease of 4.1% in the average price per bushel paid for corn from period to period,  offset by a 1.6% increase in the number of bushels of corn processed. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for our 2017 fiscal year was approximately $0.07 more than the corn-ethanol price spread we experienced for fiscal year 2016.

The decrease in our cost per bushel of corn was primarily related to lower market corn prices due to increased market corn supplies by the strong corn harvest in the fall of 2016, resulting in a sufficient local supply of corn to the market. Due to the strong 2017 harvest, management anticipates that corn prices will remain lower during our first half of 2018 fiscal year.

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For our fiscal years ended October 31, 2017 and 2016, we processed approximately 22.5 million and 22.1 million bushels of corn, respectively.  We were able to improve our corn conversion efficiency slightly during our 2017 fiscal year compared to 2016 which allowed us to produce more ethanol per bushel of corn. Management anticipates consistent corn consumption during our 2018 fiscal year provided that we can maintain positive operating margins that allow us to continue to operate the ethanol plant at capacity.

From time to time we enter into forward purchase contracts for our corn purchases. At October 31, 2017, we had forward corn purchase contracts for approximately 1.8 million bushels for various delivery periods through October 2018. Comparatively, at October 31, 2016, we had forward corn purchase contracts for approximately 4.3 million bushels for various delivery periods through August 2017.

Our corn derivative positions resulted in gains of approximately $962,000 and $916,000 for the fiscal years ended October 31, 2017 and 2016, respectively, which decreased cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur.  As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged. 

Natural Gas Costs

For our 2017 fiscal year, we experienced an increase of approximately 18.0% in our overall natural gas costs compared to our 2016 fiscal year.  This increase in cost of natural gas from period to period as was primarily the result of an increase in the average price per MMBTU of natural gas due to increased domestic and export demand and lower production which used up natural gas stocks that built up in 2015.  Management also anticipates higher natural gas prices during as we move through the winter months due to the typical seasonal natural gas cost increases experienced during the winter months.

From time to time we enter into forward purchase contracts for our natural gas purchases. Our natural gas derivative positions resulted in a loss of approximately $15,000 for the fiscal year ended October 31, 2017, which increased cost of goods sold. Comparatively, our natural gas derivative positions resulted in a gain of approximately $22,000 for the fiscal year ended October 31, 2016, which decreased cost of goods sold. We recognize the gains or losses that result from the changes in the value of our derivative instruments from natural gas in cost of goods sold as the changes occur.

Operating Expense

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees, property taxes and similar costs.  Operating expenses as a percentage of revenues rose slightly to 2.8% of revenues for our fiscal year ended October 31, 2017 compared to 2.7% of revenues for our fiscal year ended October 31, 2016.  This increase is due primarily to fixed production expenses that were higher compared to fiscal year 2016.   Our higher fixed production expenses are attributable to an increase in our property taxes, which was a result of the expiration of the State of Minnesota’s JOBZ program, which expired on December 31, 2015. Under the JOBZ program, our plant was exempt from property tax.

Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady into and throughout our 2018 fiscal year.

Operating Income

For our fiscal year ended October 31, 2017, we reported operating income of approximately $7.3 million compared to operating income of approximately $5.5 million for our fiscal year ended October 31, 2016.  This increase resulted largely from increased prices for our ethanol relative to the price of corn and improved operating margin.

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Other Income (Expense), Net

We had net other income of approximately $211,000 during fiscal year 2017 compared to net other expense of approximately $300,000 for fiscal year 2016.  We had more other income during fiscal year 2017 compared to fiscal year 2016 due to patronage income and decreased interest expense as a result of fewer borrowings under our credit facilities during the 2017 fiscal year. 

Results of Operations for the Fiscal Years Ended October 31, 2016 and 2015

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 audited consolidated statements of operations for the fiscal years ended October 31, 2016 and 2015 (amounts in thousands):

	Year Ended October 31, 2016				Year Ended October 31, 2015
Statement of Operations Data			%				%
Revenues	$	109,606	100.0	%	$	115,660	100.0	%
Cost of Goods Sold		101,112	92.3	%		105,248	91.0	%
Gross Profit		8,494	7.7	%		10,412	9.0	%
Operating Expenses		(2,999)	(2.7)	%		(3,001)	(2.6)	%
Operating Income		5,495	5.0	%		7,411	6.4	%
Other Expense, net		(300)	(0.3)	%		(432)	(0.4)	%
Net Income		5,195	4.7	%		6,979	6.0	%
Less: Net Income Attributable to Non-controlling Interest		(245)	(0.2)	%		(228)	(0.2)	%
Net Income Attributable to Heron Lake BioEnergy, LLC	$	4,950	4.5	%	$	6,751	5.8	%

Revenues

Our consolidated revenue is derived principally from revenues from our ethanol production segment, which consists of sales of our three primary products: ethanol, distillers’ grains and corn oil. Our remaining consolidated revenues are attributable to incidental sales of corn syrup and Agrinatural revenues, net of eliminations for distribution fees paid by the Company to Agrinatural for natural gas transportation services.

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our audited consolidated statements of operations for the fiscal year ended October 31, 2016:

	Year Ended October 31, 2016
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	86,175	78.6	%
Distillers' grains sales		17,004	15.5	%
Corn oil sales		4,780	4.4	%
Corn syrup sales		619	0.6	%
Agrinatural revenues (net of intercompany eliminations)		1,028	0.9	%
Total Revenues	$	109,606	100.0	%

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The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our consolidated statements of operations for the fiscal year ended October 31, 2015:

	Year Ended October 31, 2015
	Sales Revenue		% of Total Revenues
	(in thousands)
Ethanol sales	$	88,996	76.9	%
Distillers' grains sales		22,395	19.4	%
Corn oil sales		2,799	2.4	%
Corn syrup sales		479	0.4	%
Agrinatural revenues (net of intercompany eliminations)		991	0.9	%
Total Revenues	$	115,660	100.0	%

Our total consolidated revenues decreased by approximately 5.2% for the fiscal year ended October 31, 2016, as compared to the fiscal year 2015 primarily due to decreases in the average price realized for our ethanol and distillers’ grains which were partially mitigated by increases in total volumes sold of our ethanol and corn oil.  The following table reflects quantities of our three primary products sold and the average net prices received for the fiscal years ended October 31, 2016 and 2015:

	Year Ended October 31, 2016			Year Ended October 31, 2015
	Quantity Sold	Avg. Net Price		Quantity Sold	Avg. Net Price
Product	(in thousands)			(in thousands)
Ethanol (gallons)	63,664	$	1.35	61,382	$	1.45
Distillers' grains (tons)	147	$	115.56	158	$	141.68
Corn oil (pounds)	18,285	$	0.26	10,704	$	0.26

Ethanol

Total revenues from sales of ethanol decreased by approximately 3.2% for fiscal year 2016 compared to the fiscal year 2015 due primarily to an approximately 6.6% decline in the average price per gallon we received for our ethanol which was partially mitigated by approximately 3.7% increase in the volumes sold from period to period. We produced and sold more ethanol gallons during fiscal year 2016 as compared to fiscal year 2015 primarily due to the timing of ethanol shipments and a slight increase in ethanol production. Ethanol production was higher compared to prior year due to improvements we made at the ethanol plant designed to increase ethanol production and improve efficiencies. 

Ethanol derivative instruments resulted in a gain of approximately $118,000 during the fiscal year ended October 31, 2016, which increased our revenue.  In comparison, during the fiscal year ended October 31, 2015, we had no gains or losses on our ethanol derivative instruments.

Distillers’ Grains

Total revenues from sales of distillers’ grains for our 2016 fiscal year were approximately 24.1%  less compared to fiscal year 2015.  The decline in distillers’ grains revenues is primarily attributable to an approximately 18.4%  decrease in the average price per ton we received for our distillers’ grains from period to period. The effect of the decrease in average distillers’ grains price was compounded by an approximately 6.9% decrease in the tons of distillers’ grains sold during fiscal year 2016 compared to fiscal year 2015.   We sold less total tons of distillers’ grains during our 2016 fiscal year compared to the same period of 2015 due to increased efficiencies of converting corn into ethanol which leads to less co-products such as distillers’ grains. We also increased the amount of corn oil we were extracting from our distillers’ grains during our 2016 fiscal year which reduced the total tons of distillers’ grains we had available for sale.

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Corn Oil

Total revenues from sales of corn oil increased by approximately 70.8% for fiscal year 2016 compared to the fiscal year 2015.  This increase was attributable to an approximately 70.8% increase in pounds sold during fiscal year 2016 compared to fiscal year 2015 as the average price we received per pound of corn oil sold from period to period was relatively unchanged.    

Cost of Goods Sold

Our cost of goods sold decreased by approximately 3.9% for the fiscal year ended October 31, 2016, as compared to the fiscal year ended October 31, 2015. However, cost of goods sold, as a percentage of revenues, increased slightly to approximately 92.3% for the fiscal year ended October 31, 2016, as compared to approximately 91.0% for the 2015 fiscal year due to the narrowing of the margin between the price of ethanol and the price of corn.    Approximately 90% of our total costs of goods sold is attributable to ethanol production. As a result, the cost of goods sold per gallon of ethanol produced for the fiscal year ended October 31, 2016 was approximately $1.42 per gallon of ethanol sold compared to approximately $1.37 per gallon of ethanol produced for the fiscal year ended October 31, 2015. 

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year ended October 31, 2016:

	Year Ended October 31, 2016
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	75,194	74.3	%
Natural gas costs		5,631	5.6	%
All other components of costs of goods sold		20,287	20.1	%
Total Cost of Goods Sold	$	101,112	100.0	%

The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our audited consolidated statements of operations for the fiscal year ended October 31, 2015:

	Year Ended October 31, 2015
	Amount		% of
	(in thousands)		Cost of Goods Sold
Corn costs	$	77,846	74.0	%
Natural gas costs		7,288	6.9	%
All other components of costs of goods sold		20,114	19.1	%
Total Cost of Goods Sold	$	105,248	100.0	%

Corn Costs

Our cost of goods sold related to corn decreased approximately 3.4% for our 2016 fiscal year compared to our 2015 fiscal year.  This decrease was due primarily to decrease of 5.6% in the average price per bushel paid for corn from period to period,  partially offset by a 2.3% increase in the number of bushels of corn processed. The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for our 2016 fiscal year was approximately 4.9%  less than the corn-ethanol price spread we experienced for our 2015 fiscal year.    The decrease in our cost per bushel of corn was primarily related to lower market corn prices due to increased market corn supplies by the strong corn harvest in the fall of 2015, resulting in a sufficient local supply of corn to the market and relatively lower corn demand.

For our fiscal years ended October 31, 2016 and 2015, we processed approximately 22.1 million and 21.6 million bushels of corn, respectively.  We were able to improve our corn conversion efficiency slightly during our 2016 fiscal year compared to 2015 which allowed us to produce more ethanol per bushel of corn.

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At October 31, 2016, we had forward corn purchase contracts for approximately 4.3 million bushels for various delivery periods through August 2017. Comparatively, at October 31, 2015, we had forward corn purchase contracts for approximately 1.9 million bushels, comprised of long corn positions on 360,000 bushels, and short corn positions on 1.5 million bushels, for various delivery periods through December 2016.

Our corn derivative positions resulted in gains of approximately $916,000 and $831,000 for the fiscal years ended October 31, 2016 and 2015, respectively, which decreased cost of goods sold. 

Natural Gas Costs

For our 2016 fiscal year, we experienced a decrease of approximately 22.7% in our overall natural gas costs compared to our 2015 fiscal year.  The decrease in natural gas costs was primarily due lower natural gas prices due to ample supply. 

Our natural gas derivative positions resulted in a gain of approximately $22,000 for the fiscal year ended October 31, 2016, which decreased cost of goods sold. Comparatively, we had no gain or loss on natural gas derivative instruments during the fiscal year ended October 31, 2015.

Operating Expense

Operating expenses as a percentage of revenues rose slightly to 2.7% of revenues for our fiscal year ended October 31, 2016 compared to 2.6% of revenues for our fiscal year ended October 31, 2015.  This increase is due primarily to decreased revenues in fiscal year 2016 as actual operating expenses decreased by approximately $2,000 for fiscal year 2016.  

Operating Income

For our fiscal year ended October 31, 2016, we reported operating income of approximately $5.5 million and for our fiscal year ended October 31, 2015, we had operating income of approximately $7.4 million.  This decrease resulted largely from decreased prices for our ethanol and its co-products and the narrowing of our net operating margin.

Other Income (Expense), Net

We had total other expense, net for our fiscal year ended October 31, 2016 of approximately $300,000 compared to total other expense, net of approximately $432,000 for our fiscal year ended October 31, 2015.  This decrease in other expenses is due to a decrease in interest expense during our fiscal year ended October 31, 2016 compared to the same period of 2015 due to decreased borrowings on our credit facilities. We also had an increase of approximately $85,000 in miscellaneous income for fiscal year 2016 as compared to fiscal year 2015.

Changes in Financial Condition atOctober 31, 2017and2016

The following table highlights the changes in our financial condition from our audited consolidated balance sheet for the periods presented (amounts in thousands):

	October 31, 2017		October 31, 2016
Current Assets	$	21,562	$	12,614
Total Assets	$	68,873	$	63,771
Current Liabilities	$	5,646	$	7,632
Long-Term Debt, less current portion	$	966	$	1,394
Members' Equity attributable to Heron Lake BioEnergy, LLC	$	60,768	$	53,500
Non-Controlling Interest	$	1,493	$	1,245

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The $5.1 million increase in total assets is due to an increase in current assets, which is primarily attributable to increases in cash on hand of approximately $8.8 million and inventory of approximately $1.2 million at October 31, 2017 compared to October 31, 2016.  Offsetting the increases in cash on hand and inventory were decreases in accounts receivable of approximately $575,000 and the value of our commodity derivative instruments of approximately $520,000 at October 31, 2017 compared to October 31, 2016. The increase in our current assets was partially offset by an approximately $3.8 million decrease in property and equipment primarily due to current year depreciation expense.

Current liabilities at October 31, 2017 decreased by approximately $2.0 million compared to October 31, 2016. This decrease was primarily due to decreases of approximately $1.9 million in checks drawn in excess of bank balance. Our outstanding checks in excess of our bank balance represents any checks that we have issued that have not yet been cashed and exceed the cash we have in our bank account. Checks that we issue are paid from our revolving term loan and any cash that we generate is used to pay down our revolving term loan with our primary lender.

Our long-term debt decreased approximately $428,000 at October 31, 2017 compared to October 31, 2016. The decrease is due to payments on the note payable to the minority owner of Agrinatural, the note payable to the electric company and assessments paid under industrial water supply treatment agreement with the City of Heron Lake and Jackson County.

Members’ equity attributable to Heron Lake BioEnergy, LLC increased approximately $7.3 million at October 31, 2017 compared to October 31, 2016. The increase was a result of net income attributable to Heron Lake BioEnergy, LLC of approximately $7.3 million for the year ended October 31, 2017.    

Non-controlling interest totaled approximately $1.5 million at October 31, 2017 compared to approximately $1.2 million at October 31, 2016.  This is directly related to recognition of the 27.0% non-controlling interest in Agrinatural, LLC.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash provided by operations, cash on hand, and available borrowings under our credit facility with Compeer.  Our principal uses of cash are to pay operating expenses of the plant, to make debt service payments on our long-term debt, and to make distribution payments to our members.  We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations for the next twelve months.

We do not currently anticipate any significant purchases of property and equipment that would require us to secure additional capital in the next twelve months. For our 2018 fiscal year, we anticipate completion of several smaller capital projects and to maintain current plant infrastructure and improve operating efficiency. We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations and complete our capital expenditures during our 2018 fiscal year and beyond.

Management continues to evaluate conditions in the ethanol industry and explore opportunities to improve the efficiency and profitability of our operations which may require additional capital to supplement cash generated from operations and available for borrowing under our revolving term loan.

Year Ended October 31, 2017 Compared to Year Ended October 31, 2016 

The following table summarizes our sources and uses of cash from our audited consolidated statements of cash flows for the periods presented (amounts in thousands):

	Year Ended October 31,
	2017		2016
Net cash provided by operating activities	$	12,250	$	11,950
Net cash used in investing activities	$	(1,129)	$	(2,485)
Net cash used in financing activities	$	(2,353)	$	(9,294)
Net increase in cash	$	8,768	$	171

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Operating Cash Flows

During the fiscal year ended October 31, 2017, net cash provided by operating activities increased by approximately $300,000 compared to the fiscal year ended October 31, 2016.  The increase from resulted largely from an approximately $2.3 million increase in our net income in the current year,  offset by a decrease of approximately $2.0 million from period to period in various working capital items.  Net income increased for fiscal year due to increased average sales prices we received for our ethanol and corn oil.

Investing Cash Flows

During the fiscal year ended October 31, 2017, capital expenditures decreased compared to the fiscal year ended October 31, 2016 due to less property and equipment acquired for the ethanol plant, as well as proceeds from disposal of property and equipment.  Comparatively, during the fiscal year ended October 31, 2016, we used cash to primarily to complete our RTO replacement project, as well as other plant improvements.

Financing Cash Flows

We used approximately $6.9 million less for financing activities for the fiscal year ended October 31, 2017 compared to the fiscal year ended October 31, 2016.  During the fiscal year ended October 31, 2017, we used cash to make payments of approximately $486,000 on our long-term debt and decreased approximately $1.9 million on checks drawn in excess of bank balance.

For the same period of 2016, we used cash to make payments of approximately $3.9 million in distributions to our unit holders, and payments of approximately $15.2 million on our long-term debt, offset by proceeds of approximately $9.8 million from our long-term debt and approximately $30,000 from checks drawn in excess of bank balance. 

Year Ended October 31, 2016 Compared to Year Ended October 31, 2015 

The following table summarizes our sources and uses of cash from our audited consolidated statements of cash flows for the periods presented (amounts in thousands):

	Fiscal Year Ended October 31,
	2016		2015
Net cash provided by operating activities	$	11,950	$	9,890
Net cash used in investing activities	$	(2,485)	$	(6,182)
Net cash used in financing activities	$	(9,294)	$	(3,244)
Net increase in cash	$	171	$	464

Operating Cash Flows

During the fiscal year ended October 31, 2016, net cash provided by operating activities increased by approximately $2.0 million compared to the fiscal year ended October 31, 2015. This difference is primarily due to increased cash provided by accounts receivable and decrease in cash used for accounts payable, offset by decreases in our net income and cash used for inventory. 

For fiscal year 2016, cash provided by accounts receivable increased by approximately $2.6 million over the comparable prior period due a decrease in the balance of our accounts receivable resulting primarily from the timing of customer shipments and payments.  For fiscal year 2016, cash used for accounts payable was approximately $1.4 million less than the same period of 2015 primarily as a result of the timing of inventory receipts and vendor payments. Net income decreased for fiscal year 2016 by approximately 25.6% compared to fiscal year 2015, due to the lower average sales prices we received for our principal products.

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Investing Cash Flows

During the fiscal year ended October 31, 2016, capital expenditures decreased 65.0% compared to the fiscal year ended October 31, 2015 due to less property and equipment acquired for the ethanol plant.  During fiscal year 2015, investing activities used approximately $6.2 million in cash primarily to purchase a condenser and sieve beads to remediate the system pressure fluctuations we experienced during the first fiscal quarter of 2015 and make a down payment on the RTO replacement equipment.  During the fiscal year ended October 31, 2016, we used cash to primarily to complete our RTO replacement project.

Financing Cash Flows

We used approximately $6.0 million more for financing activities for the fiscal year ended October 31, 2016 compared to the fiscal year ended October 31, 2015.  During fiscal year 2016, we used cash to make payments of approximately $3.9 million in distributions to our unit holders, payments of approximately $15.2 million on our long-term debt, which were partially offset by approximately $9.8 million in proceeds from our long-term debt and approximately $30,000 from checks in excess of bank balance. During fiscal year 2015, we used cash to make payments of approximately $9.4 million in distributions to our unit holders and payments of approximately $9.2 million on our long-term debt, offset by proceeds of approximately $13.4 million from our long-term debt and proceeds of $1.8 million from checks in excess of bank balance.

Contractual Obligations

The following table provides information regarding the consolidated contractual obligations of the Company as of October 31, 2017 (amounts in thousands):  

			Less than		One to		Four to		Greater Than
	Total		One Year		Three Years		Five Years		Five Years
Long-term debt obligations(1)	$	1,575	$	431	$	771	$	373	$	—
Operating lease obligations(2)		16,213		1,896		3,534		3,534		7,249
Purchase obligations(3)		5,348		5,348		—		—		—
Total contractual obligations	$	23,136	$	7,675	$	4,305	$	3,907	$	7,249

(1) Long-term debt obligations include principal and estimated interest under our credit facilities based on the interest rates in effect as of October 31, 2017, assuming contractual maturities.

(2) The operating lease obligations in the table above include our rail car leases.

(3) Purchase obligations consist of forward contracted corn deliveries.  The amounts were determined assuming prices, including freight costs, at current market prices as of October 31, 2017 for basis contracts that had not yet been fixed.

Credit Arrangements

Credit Facility with Compeer

We have a comprehensive credit facility with Compeer Financial, formerly known as AgStar Financial Services, FCLA (“Compeer”), which consists of a revolving term loan with a maturity date of March 1, 2022.  As part of this credit facility, we entered into an administrative agency agreement with CoBank, ACP (“CoBank”), which was appointed the administrative agent for Compeer the purpose of servicing the credit facility.

Under the Compeer revolving term note, we can borrow, repay, and re-borrow up to the maximum aggregate principal commitment, which declines by $3.5 million annually beginning March 1, 2015 and continuing each anniversary thereafter until maturity on March 1, 2022. In the event any amount is outstanding on this loan in excess of maximum aggregate principal commitment following a scheduled reduction, we have agreed to repay principal on the loan until we reach the new reduced maximum aggregate principal commitment.   The maximum aggregate principal commitment under this facility at October 31, 2017 and 2016 was $17.5 million and $21.0 million, respectively. There was no outstanding balance on the revolving term loan at October 31, 2017 and 2016.  Therefore, the aggregate principal amount available to the Company for additional borrowing was $17.5 million and $21.0 million at October 31, 2017 and 2016, respectively.  

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Interest on this loan accrues at 3.25% above the One-Month London Interbank Offered Rate (LIBOR) Index rate.  The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreement.  The interest rate was 4.49% and 3.45% at October 31, 2017 and October 31, 2016, respectively.  

We agreed to pay an annual fee of 0.5% of the unused portion of this loan. The credit facility is secured by all of our real property, equipment and other assets. 

The credit facility with Compeer is subject to numerous financial and non-financial covenants that limit the Company’s distributions and debt and require minimum working capital, minimum local net worth, and debt service coverage ratio, including the following:

· the Company may not make loans or advances to Agrinatural, which exceed an aggregate principal amount of approximately $3.1 million without the consent of Compeer.  

· the Company must maintain working capital of at least $8.0 million. Working capital is calculated as unconsolidated current assets plus the amount available under revolving term loan, less unconsolidated current liabilities.

· the Company must maintain net worth of at least $32.0 million. Local net worth is defined as unconsolidated total assets, minus unconsolidated total liabilities plus the approximately $3.9 million of subordinated convertible debt that was converted into units on July 1, 2014.

· the Company must maintain a debt service coverage ratio of at least 1.5 to 1.0. The debt service coverage ratio is, calculated on an unconsolidated basis, net income (after taxes), plus depreciation and amortization, minus non-cash dividends/income received, minus extraordinary gains (plus losses), minus gain (plus loss) on asset sales and divided by $4.0 million.

· the Company may make member distributions of up to 65% of our net income without the consent of Compeer provided we remain in compliance with its loan covenants following the distribution.  Any member distributions in excess of 65% of the Company’s net income must be pre-approved by Compeer.

As of October 31, 2017 and 2016, the Company was in compliance with these loan covenants. However, if market conditions deteriorate in the future, circumstances may develop which could result in the Company violating the financial covenants or other terms of its Compeer credit facility. Should unfavorable market conditions result in our violation of the terms or covenants of the Compeer credit facility and we fail to obtain a waiver of any such term or covenant, Compeer could deem the Company in default, impose fees, charges and penalties, terminate any commitment to loan funds and require the Company to immediately repay a significant portion or possibly the entire outstanding balance of the revolving term loan. In the event of a default, Compeer could also elect to proceed with a foreclosure action on our plant.

Other Credit Arrangements

In addition to our primary credit arrangement with Compeer, we have other material credit arrangements and debt obligations.

In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors, an unrelated company. In consideration of this agreement, we and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities.

In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years’ debt service on approximately $3.6 million in water revenue bonds, which will be returned to us if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement.

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As of October 31, 2017 and 2016, there was a total of approximately $1.3 million and  $1.6 million in outstanding water revenue bonds, respectively. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 under a secured promissory note secured by the distribution system and substation for the plant. Under the note we were required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual maintenance fee of 1% beginning on October 10, 2009. We paid the balance of this loan in full in September 2017.

We also have a note payable to the minority owner of Agrinatural Gas, LLC in the amount of $100,000 and $200,000 at October 31, 2017 and 2016, respectively.  Interest on the note is One Month LIBOR rate plus 4.0%,  which was approximately 5.24% and 4.53% at October 31, 2017 and 2016, respectively.  Payment is due on demand at the discretion of the board of managers of Agrinatural. 

Loans to Agrinatural

Original Agrinatural Credit Facility

On July 29, 2014, we entered into an intercompany loan agreement and related loan documents with Agrinatural (the “Original Agrinatural Credit Facility”). Under the Original Agrinatural Credit Facility, we agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. The Original Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

On March 30, 2015, we entered into an allonge (the “Allonge”) to the July 29, 2014 note with Agrinatural. Under the terms of the Allonge, the Company and Agrinatural agreed to increase the principal amount of the Original Agrinatural Credit Facility to approximately $3.06 million, defer commencement of repayment of principal until May 1, 2015, decrease the monthly principal payment to $36,000 per month and shorten maturity of the Original Agrinatural Credit Facility to May 1, 2019.

Interest on the Original Agrinatural Credit Facility was not amended and accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  Accrued interest is due and payable on a monthly basis. Except as otherwise provided in the Allonge, all of the terms and conditions contained in the Original Agrinatural Credit Facility remain in full force and effect.

In exchange for the Loan Agreement, the Agrinatural executed a security agreement granting the Company a first lien security interest in all of Agrinatural’s equipment and assets and a collateral assignment assigning the Company all of Agrinatural’s interests in its contracts, leases, easements and other agreements. In addition, RES, the minority owner of Agrinatural, executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural’s obligations to the Company.

The balance of this loan was approximately $2.0 million and  $2.4 million at October 31, 2017 and 2016, respectively.

Additional Agrinatural Credit Facility

On March 30, 2015, we entered into a second intercompany loan agreement and related loan documents (the “Additional Agrinatural Credit Facility”) with Agrinatural.  Under the Additional Agrinatural Credit Facility, we agreed to make a four-year term loan in the principal amount of $3.5 million to Agrinatural for use by Agrinatural to repay its outstanding trade debt and provide working capital.  The Additional Agrinatural Credit Facility contains customary financial and non-financial affirmative covenants and negative covenants for loans of this type and size.

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Interest on the additional term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum.  Prior to May 1, 2015, Agrinatural was required to pay only monthly interest on the term loan.  Commencing May 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest of approximately $42,000 per month. The entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on May 1, 2019.

On May 19, 2016, the Company and Agrinatural amended the Additional Agrinatural Credit Facility, entering into amendment to the loan agreement dated March 30, 2015 (the “Amendment”).  Additionally, the Company and Agrinatural entered into an allonge to the negotiable promissory note dated March 30, 2015 issued by Agrinatural to the Company (the “Additional Allonge”) to increase the amount of the capital expenditures allowed by Agrinatural during the term of the facility and deferred a portion of the principal payments required for 2016. 

The Amendment provides that the portion of principal payments deferred in calendar year 2016 to continue to accrue interest at the rate set forth in the Note and become a part of the balloon payment due at maturity.  Additionally, for calendar years, 2017, 2018 and 2019, the Amendment provides that Agrinatural may, without consent of the Company, proceed with and pay for capital expenditures in an amount up to $100,000 plus the amount of contributions in aid of construction received by Agrinatural from customers for capital improvements (“CIAC”), less a reserve for distribution to the Agrinatural members to cover the income or other taxes imposed as a result of receipt of CIAC in an amount equal to 40% of CIAC. Prior to the Amendment, Agrinatural’s capital expenditures were restricted to $100,000 per year.

In exchange for the Additional Agrinatural Credit Facility, the Agrinatural executed a security agreement granting the Company a first lien security interest in all of Agrinatural’s equipment and assets and a collateral assignment assigning the Company all of Agrinatural’s interests in its contracts, leases, easements and other agreements. In addition, RES executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural’s obligations to the Company under the Additional Agrinatural Credit Facility.

The balance of this loan was approximately $2.5 million and $2.9 million at October 31, 2017 and 2016, respectively.

Off Balance-Sheet Arrangements

We have no off balance-sheet arrangements.

Critical Accounting Estimates

Note 1 to our consolidated financial statements contains a summary of our significant accounting policies, many of which require management to use estimates and assumptions. Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. We use our knowledge and experience about past events and certain future assumptions to make estimates and judgments involving matters that are inherently uncertain and that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies, the following are most noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations:

Revenue Recognition

The Company generally sells ethanol and related products pursuant to marketing agreements.  Revenues from the production of ethanol and its co-products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.  Title is generally assumed by the buyer at the Company’s shipping point. The Company believes there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue.

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of co‑products are included in cost of goods sold.

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Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

Derivative Instruments

From time to time, we enter into forward sales contracts for ethanol, distillers and corn oil, and purchase contracts for corn and natural gas to hedge our exposure to commodity price fluctuations.  These contracts provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Accordingly, we classify these sales and purchase contracts as normal sales and purchase contracts and as a result, these contracts are not marked to market in our consolidated financial statements.  

On occasion, in order to reduce the risks caused by market fluctuations, the Company hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company’s ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions.

Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

Inventory

We value our inventory at the lower of cost or net realizable value using the first in first out method or net realized value. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our use of derivative instruments. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or net realized value on inventory to be a critical accounting estimate.

Property and Equipment

Management’s estimate of the depreciable lives of property and equipment is based on the estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. The Company tests for impairment at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. 

Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of market fluctuations associated commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol, and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of FASB ASC 815, Derivatives and Hedging.

54

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facilities with Compeer. The specifics of these credit facilities are discussed in greater detail in “PART II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources; Indebtedness”.

Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period from October 31, 2017.

Outstanding Variable Rate Debt at	Interest Rate at	Interest Rate Following 10%	Approximate Adverse
October 31, 2017	October 31, 2017	Adverse Change	Change to Income
$100,000	5.24%	5.76%		$500

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers’ grains, through the use of hedging 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 and sales, management has chosen not to 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 as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. 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 October 31, 2017, we had price protection in place for approximately 7% and 14%  of our anticipated corn and natural gas needs, respectively, and 22%,  11% and 15% of our ethanol, distillers’ grains and corn oil sales, respectively, for the next 12 months.  Through these contracts we hope to minimize risk from future market price fluctuations and basis fluctuations. As input prices move in reaction to market trends and information, our income statement 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 us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn, and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average ethanol price and the fair value of our corn and natural gas prices as of October 31, 2017, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from October 31, 2017. The results of this analysis, which may differ from actual results, are as follows:

	Estimated Volume Requirements		Hypothetical Adverse	Approximate
	for the next 12 months	Unit of	Change in Price as of	Adverse
	(net of forward and futures contracts)	Measure	October 31, 2017	Change to Income
Ethanol	46,700,000	Gallons	10.0%	$	6,000,000
Corn	20,200,000	Bushels	10.0%	$	6,100,000
Natural Gas	1,100,000	MMBTU	10.0%	$	458,000

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee and Board of Governors

Heron Lake BioEnergy, LLC

Heron Lake, Minnesota

We have audited the accompanying consolidated balance sheets of Heron Lake BioEnergy, LLC and Subsidiaries (the “Company”) as of October 31, 2017 and 2016, and the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the years in the three-year period ended October 31, 2017. Heron Lake BioEnergy, LLC’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heron Lake BioEnergy, LLC and Subsidiaries as of October 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

/s/ Boulay PLLP

Minneapolis, Minnesota

January 29, 2018

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

	October 31, 2017		October 31, 2016
ASSETS
Current Assets
Cash	$	10,065,367	$	1,297,644
Accounts receivable		4,031,977		4,607,202
Inventory		7,064,344		5,864,545
Commodity derivative instruments		141,644		662,338
Prepaid expenses and other current assets		259,106		181,853
Total current assets		21,562,438		12,613,582
Property and Equipment, net		46,567,087		50,376,210
Other Assets
Other intangible assets, net		45,852		84,000
Other assets		697,254		697,254
Total other assets		743,106		781,254
Total Assets	$	68,872,631	$	63,771,046
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Current maturities of long-term debt	$	432,183	$	490,057
Checks drawn in excess of bank balance		—		1,866,683
Accounts payable		4,771,197		4,878,210
Commodity derivative instruments		27,630		—
Accrued expenses		415,106		397,407
Total current liabilities		5,646,116		7,632,357
Long-Term Debt, less current portion		965,502		1,393,669
Commitments and Contingencies
Members' Equity
Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units authorized,  issued and outstanding at both October 31, 2017 and 2016		60,767,951		53,499,596
Non-controlling interest		1,493,062		1,245,424
Total members' equity		62,261,013		54,745,020
Total Liabilities and Members' Equity	$	68,872,631	$	63,771,046

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

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Consolidated Statements of Operations

	Fiscal Year Ended October 31,
	2017		2016		2015
Revenues	$	109,917,652	$	109,605,544	$	115,660,469
Cost of Goods Sold		99,488,370		101,112,154		105,248,092
Gross Profit		10,429,282		8,493,390		10,412,377
Operating Expenses		(3,124,687)		(2,999,157)		(3,001,095)
Operating Income		7,304,595		5,494,233		7,411,282
Other Income (Expense):
Interest income		24,668		712		1,312
Interest expense		(212,491)		(397,837)		(444,625)
Other income, net		399,221		97,208		11,747
Total other income (expense), net		211,398		(299,917)		(431,566)
Net Income		7,515,993		5,194,316		6,979,716
Less: Net Income Attributable to Non-controlling Interest		(247,638)		(244,616)		(228,483)
Net Income Attributable to Heron Lake BioEnergy, LLC	$	7,268,355	$	4,949,700	$	6,751,233
Weighted Average Units Outstanding—Basic and Diluted (Class A and B)		77,932,107		77,932,107		77,932,107
Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC—Basic and Diluted (Class A and B)	$	0.09	$	0.06	$	0.09
Distributions Per Unit (Class A and B)	$	—	$	0.05	$	0.12

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

			Members'
			Equity
			attributable to
			Heron Lake		Non-		Total
			BioEnergy,		controlling		Members'
	Class A Units	Class B Units	LLC		Interest		Equity
Balance—October 31, 2014	62,932,107	15,000,000	$	55,047,120	$	853,323	$	55,900,443
Member Distributions	—	—		(9,351,853)		—		(9,351,853)
Net income attributable to non-controlling interest	—	—		—		228,483		228,483
Net income attributable to Heron Lake BioEnergy, LLC	—	—		6,751,233		—		6,751,233
Balance—October 31, 2015	62,932,107	15,000,000		52,446,500		1,081,806		53,528,306
Member Distributions	—	—		(3,896,604)		(80,998)		(3,977,602)
Net income attributable to non-controlling interest	—	—		—		244,616		244,616
Net income attributable to Heron Lake BioEnergy, LLC	—	—		4,949,700		—		4,949,700
Balance—October 31, 2016	62,932,107	15,000,000		53,499,596		1,245,424		54,745,020
Net income attributable to non-controlling interest	—	—		—		247,638		247,638
Net income attributable to Heron Lake BioEnergy, LLC	—	—		7,268,355		—		7,268,355
Balance—October 31, 2017	62,932,107	15,000,000	$	60,767,951	$	1,493,062	$	62,261,013

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

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Consolidated Statements of Cash Flows

	Fiscal Year Ended October 31,
	2017		2016		2015
Cash Flow From Operating Activities:
Net income	$	7,515,993	$	5,194,316	$	6,979,716
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		5,021,798		4,781,673		4,593,710
Gain on sale of asset		(45,000)		—		—
Change in fair value of commodity derivative instruments		(728,073)		(1,054,729)		(831,227)
Changes in operating assets and liabilities:
Restricted cash		—		—		264,086
Accounts receivable		575,225		1,063,979		(1,615,200)
Inventory		(1,199,799)		(605,199)		(72,079)
Commodity derivative instruments		1,276,397		1,069,540		591,578
Prepaid expenses and other current assets		(77,253)		(23,380)		131,267
Accounts payable		(107,013)		1,313,978		(124,087)
Accrued expenses		17,699		209,657		(27,866)
Net cash provided by operating activities		12,249,974		11,949,835		9,889,898
Cash Flows from Investing Activities:
Capital expenditures		(1,174,527)		(2,484,667)		(6,181,858)
Proceeds from disposal of asset		45,000		—		—
Net cash used in investing activities		(1,129,527)		(2,484,667)		(6,181,858)
Cash Flows from Financing Activities:
Proceeds from long-term debt		—		9,820,222		13,440,990
Checks drawn in excess of bank balance		(1,866,683)		30,001		1,836,682
Payments on long-term debt		(486,041)		(15,166,428)		(9,169,704)
Distributions to Heron Lake BioEnergy, LLC members		—		(3,896,604)		(9,351,853)
Distribution to non-controlling interest		—		(80,998)		—
Net cash used in financing activities		(2,352,724)		(9,293,807)		(3,243,885)
Net increase in cash		8,767,723		171,361		464,155
Cash—Beginning of period		1,297,644		1,126,283		662,128
Cash—End of period	$	10,065,367	$	1,297,644	$	1,126,283
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest expense	$	212,491	$	397,837	$	444,625
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Capital expenditures included in accounts payable	$	—	$	—	$	349,482

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Heron Lake BioEnergy, LLC owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis.  In addition, Heron Lake BioEnergy, LLC produces and sells distillers’ grains with solubles and corn oil as co-products of ethanol production. 

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), owns 73% of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC’s ethanol production facility and other customers.

Principles of Consolidation

The consolidated financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, “the Company”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% non-controlling interest identified separately in the accompanying consolidated balance sheets and statements of operations. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

The Company’s fiscal year end for reporting financial operations is October 31.

Accounting Estimates

Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with U.S. 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.  The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, valuation of commodity derivative instruments and inventory, evaluation of rail car damages contingency, the assumptions used in the impairment analysis of long-lived assets, and inventory purchase and sale commitments.  The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Non-controlling Interest

Amounts recorded as non-controlling interest relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Pursuant to the firm natural gas transportation agreement with Agrinatural, Agrinatural will provide natural gas to Heron Lake BioEnergy’s plant with a specified price per MMBTU with a term ending on October 31, 2021, with one automatic renewal option to extend the term for an additional five years period.

Revenue Recognition

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

Cost of Goods Sold

The primary components of cost of goods sold for the production of ethanol and related co-products are corn, energy, raw materials, overhead, depreciation, and direct labor.

Operating Expenses

The primary components of operating expenses are salaries and expenses for administrative employees, professional fees, board of governor expenses and property taxes.

Cash

The Company maintains its accounts at multiple financial institutions. At times throughout the year, the Company’s cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on its cash balances.

Restricted Cash

The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions as discussed in Note 6.

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. 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. 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 was not necessary at October 31, 2017 or 2016.  It is at least possible this estimate will change in the future.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out method (FIFO).  Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.  Inventory consists of raw materials, work in process, finished goods, and supplies.  Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers’ grains, and corn oil.

Derivative Instruments

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.

Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our consolidated financial statements.

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company’s ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 6.

Other Intangibles

Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years. The Company recorded amortization expense in the amount of approximately $38,000 for each of the fiscal years ended October 31, 2017, 2016, and 2015. 

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.

Depreciable useful lives are as follows:

Land improvements	15 Years
Plant building and equipment	7-40 Years
Vehicles and other equipment	5-7 Years
Office buildings and equipment	3-40 Years

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When determining impairment losses, a long lived asset should be grouped with other assets or liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or liabilities.  If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset.  If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.  Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.  No impairment expense was recorded during fiscal 2017, 2016, and 2015.

Fair Value of Financial Instruments

The Company follows guidance for accounting for fair value measurements of financial assets and liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

· Level 2 inputs include:

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

2. Quoted prices in markets that are observable for the asset or liability either directly or indirectly, for substantially the full term of the asset or liability.

3. Inputs that derived primarily from or corroborated by observable market date by correlation or other means.

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

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value.  No events occurred during the fiscal years ended October 31, 2017, 2016, and 2015 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The Company believes the carrying amount of its debt facilities approximates the fair value.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company’s tax year end is December 31.

The Company had no significant uncertain tax positions as of October 31, 2017 or 2016 that would require disclosure, primarily due to the partnership tax status. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company’s tax status as a partnership, the adoption of this guidance had no material impact on the Company’s financial condition or results of operations.

The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014.

Net Income per Unit

Basic net income per unit is computed by dividing net income by the weighted average number of members’ units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income by the weighted average number of members’ units and members’ unit equivalents outstanding during the period.

Environmental Liabilities

The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.   Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

· Ethanol Production.   Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

· Natural Gas Pipeline. The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

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Notes to Consolidated Financial Statements

Recently Issued Accounting Pronouncements

Contract Revenue Recognition (Evaluating)

In May 2014 and amended in August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 which amended the Revenue from Contracts with Customers (Topic 606) of the Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company beginning November 1, 2018. The Company is currently evaluating the guidance and its effect on its consolidated financial statements.

Leases (Evaluating)

In February 2016, the FASB adopted ASU No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The accounting guidance for lessors is largely unchanged. The guidance will be effective for the Company beginning November 1, 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

Restricted Cash (Evaluating)

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which amended Statement of Cash Flows (Topic 230) of the Accounting Standards Codification. The new guidance will require amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. The amendments will be effective for the Company beginning November 1, 2018. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements.

2. RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are primarily derived from the sale and distribution of ethanol, distillers’ grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75%-  85% of total revenues and corn costs average 70%-  90% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

The supply and demand for ethanol are impacted by federal and state legislation and regulation, most significantly the Renewable Fuels Standard (“RFS”), and any changes in legislation or regulation could cause the demand for ethanol to decline or its supply to increase, which could have a material adverse effect on our business, results of operations and financial condition, and the ability to operate at a profit.

On November 30, 2017, the EPA announced the final 2018 renewable volume requirements (“RVOs”)for conventional ethanol at 15.0 billion gallons, with the RVOs for advanced biofuels set at 4.29 billion gallons and cellulosic ethanol at 0.29 billon gallons, reducing overall RVOs to 19.29 billion gallons for 2018.  Although this final rule achieves the statutory RVO for conventional corn-based ethanol originally set by Congress when the RFS was enacted, it reduces the overall RVOs below the overall statutory level of 26 billion gallons.  

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Notes to Consolidated Financial Statements

According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed RVOs were more than 20% below statutory levels, in September 2017, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 RVOs are also more than 20% below statutory levels, the RVO reset will be triggered under RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022. If the statutory RVOs are reduced as a result of reset, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Additionally, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. Successful reduction or repeal of the blending requirements of the RFS could result in a significant decrease in ethanol demand.

Current ethanol production capacity is approximately 16.0 billion gallons according to the RFA and may increase during calendar year 2018 as several plants’ expansion projects come online. Although the release of the final 2018 RVOs maintaining the 15 billion gallon RVO for conventional corn-based ethanol together a letter issued by EPA Administrator Pruitt in October 2017 signals support from the EPA and the Trump administration for domestic ethanol production, the EPA and Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS.  It is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

3. FAIR VALUE MEASUREMENTS

The Company follows accounting guidance related to fair value disclosures.  For the Company, this guidance applies to certain derivative investments.  The authoritative guidance also clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair measurements.

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2017:

					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices		Significant Other		Significant
	Consolidated				in Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	141,644	$	141,644	$	141,644	$	—	$	—
Financial Liabilities:
Commodity Derivative instruments - Ethanol	$	12,249	$	12,249	$	18,000	$	(5,751)	$	—
Commodity Derivative instruments - Natural Gas	$	15,381	$	15,381	$	—	$	15,381	$	—

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2016:

					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices in		Significant Other		Significant
	Consolidated				Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	388,525	$	388,525	$	388,525	$	—	$	—
Commodity Derivative instruments - Ethanol	$	273,813	$	273,813	$	273,813	$	—	$	—

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Notes to Consolidated Financial Statements

We determine the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value of ethanol and natural gas Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

4. CONCENTRATIONS

The Company sold all of the ethanol, distillers’ grains, and corn oil produced at its plant to three customers under marketing agreements during the fiscal years ended October 31, 2017, 2016, and 2015. 

The percentage of total revenues attributable to each of the Company’s three major customers for the fiscal years ended October 31, 2017, 2016, and 2015 were as follows:

	October 31, 2017	October 31, 2016	October 31, 2015
Eco-Energy, Inc. - Ethanol	81.3%	78.5%	76.9%
Gavilon Ingredients, LLC - Distillers' Grains	13.7%	15.4%	19.2%
RPMG, Inc. - Corn Oil	4.5%	4.4%	2.4%

The percentage of total accounts receivable attributable to each of the Company’s three major customers at October 31, 2017 and 2016 were as follows:

	October 31, 2017	October 31, 2016
Eco-Energy, Inc. - Ethanol	86.8%	78.6%
Gavilon Ingredients, LLC - Distillers' Grains	7.0%	11.1%
RPMG, Inc. - Corn Oil	4.3%	3.3%

5. INVENTORY

Inventory consists of the following at October 31:

	2017		2016
Raw materials	$	1,442,844	$	1,434,854
Work in process		652,296		696,013
Finished goods		3,747,779		2,713,716
Supplies		1,221,425		1,019,962
Totals	$	7,064,344	$	5,864,545

The Company performs a lower cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol.  Based on the lower of cost or net realizable value analysis, the Company did not record a loss on ethanol inventories for the fiscal years ended October 31, 2017 or 2016.

6. DERIVATIVE INSTRUMENTS

The Company enters into corn, ethanol, and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices for periods up to 24 months. These derivatives are put in place to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn purchase commitments where the prices are set at a future date. Although these derivative instruments serve the Company’s purpose as an economic hedge, they are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change.

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Notes to Consolidated Financial Statements

As of October 31, 2017, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 1,120,000 bushels, comprised of long corn positions on 215,000 bushels that were entered into to hedge forecasted ethanol sales through December 2017, and short corn positions on 905,000 bushels that were entered into to hedge forecasted corn purchases through July 2018.  There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, 2017, the Company had outstanding natural gas derivative instruments totaling 120,000 MMBTU entered into to hedge forecasted natural gas purchases through February 2018.

As of October 31, 2017, the total notional amount of the Company’s outstanding ethanol derivative instruments was approximately 420,000 gallons that were entered into to hedge forecasted ethanol sales through November 2017.

As of October 31, 2017, the Company had no cash collateral (restricted cash) and approximately $12,000 due to broker related to derivatives held by a broker, recorded as a component of accounts payable.

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2017, none of which were designated as hedging instruments:

	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	141,644	$	—
Ethanol contracts	Commodity derivative instruments		—		12,249
Natural gas contracts	Commodity derivative instruments		—		15,381
Totals		$	141,644	$	27,630

As of October 31, 2016, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 4,285,000 bushels, comprised of long corn positions on 3,100,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 1,185,000 bushels that were entered into to hedge forecasted corn purchases through August 2017.  There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, 2016, the Company had no cash collateral (restricted cash) related to derivatives held by a broker.

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2016, none of which were designated as hedging instruments:

	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	388,525	$	—
Ethanol contracts	Commodity derivative instruments		273,813		—
Totals		$	662,338	$	—

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

	Consolidated Statement of	Fiscal Year Ended  October 31,
	Operations location	2017		2016		2015
Corn contracts	Cost of goods sold	$	962,256	$	915,555	$	831,227
Ethanol contracts	Revenues		(218,802)		117,624		—
Natural gas contracts	Cost of goods sold		(15,381)		21,550		—
Total gain		$	728,073	$	1,054,729	$	831,227

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Notes to Consolidated Financial Statements

7. PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

	October 31, 2017		October 31, 2016
Land and improvements	$	9,111,838	$	9,111,838
Plant buildings and equipment		85,809,325		84,594,751
Vehicles		682,719		620,323
Office buildings		641,860		641,860
Construction in progress		85,746		315,631
		96,331,488		95,284,403
Less: accumulated depreciation		(49,764,401)		(44,908,193)
Net property and equipment	$	46,567,087	$	50,376,210

Depreciation expense totaled approximately $4,984,000,  $4,744,000 and $4,556,000 during the fiscal years ended October 31, 2017, 2016, and 2015, respectively. 

8. DEBT FACILITIES

Long-term debt consists of the following:

	October 31, 2017		October 31, 2016
Revolving term note payable to lending institution, see terms below.	$	—	$	—
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.		1,241,171		1,517,046
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		56,514		97,930
Note payable to electrical company with monthly payments of $6,250 with interest at 0.00% and a 1.00% maintenance fee due each October. The note was paid in full in September 2017. The electrical company is a member of the Company.		—		68,750
Note payable to non-controlling interest member of Agrinatural. Interest is at One Month LIBOR plus 4.0%, which was approximately 5.24% and 4.53% at October 31, 2017 and 2016, respectively. The note is considered due on demand with payments due at Agrinatural Board of Managers discretion.		100,000		200,000
Totals		1,397,685		1,883,726
Less amounts due within one year		432,183		490,057
Net long-term debt	$	965,502	$	1,393,669

Revolving Term Note

The Company has a revolving term loan with a lender under which the Company could initially borrow, repay and re-borrow in an amount up to the aggregate principal commitment at any time prior to the March 1, 2022 maturity date.  This initial aggregate principal commitment was $28,000,000, which reduces by $3,500,000 annually, starting March 1, 2015 and continues each anniversary thereafter until maturity.  The aggregate principal commitment of this facility at October 31, 2017 was $17,500,000.  There was no outstanding balance on the revolving term loan at October 31, 2017 and 2016. Therefore, after accounting for amounts outstanding under this facility at October 31, 2017 and 2016, the aggregate principal amount available to the Company for borrowing was approximately $17,500,000 and $21,000,000, respectively.

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Notes to Consolidated Financial Statements

Interest on the revolving term loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which was 4.49% and 3.45% at October 31, 2017 and 2016, respectively.  The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. 

The Company also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum.  The loan is secured by substantially all of the Company assets including a subsidiary guarantee. 

The credit facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural,  and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties. 

As part of the credit facility closing, the Company entered into an administrative agency agreement with CoBank, ACP (“CoBank”).  CoBank purchased a participation interest in the revolving term loan and was appointed the administrative agent for the purpose of servicing the loan.  As a result, CoBank will act as the agent for the lender with respect to the credit facility.  The Company agreed to pay CoBank an annual fee of $2,500 as the agent.

Based on the most recent debt agreements, estimated maturities of long-term debt at October 31, 2017 are as follows:

2018	$	432,183
2019		318,883
2020		326,798
2021		319,821
Total debt	$	1,397,685

9. MEMBERS’ EQUITY

The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

On December 18, 2014, the Company’s board of governors declared a distribution of $0.12 per membership unit for a total of approximately $9,352,000 to be paid to members of record as of December 18, 2014. The distribution was paid in January 2015.  Based on the covenants contained in the Company’s AgStar credit facilities, the foregoing distribution was approved by its lender prior to distribution.

On December 17, 2015, the Company’s board of governors declared a distribution of $0.05 per membership unit for a total of approximately $3,897,000 to be paid to members of record as of December 18, 2015. The distribution was paid in January 2016.  Based on the covenants contained in the Company’s credit facilities, the foregoing distribution was approved by its lender prior to distribution.

Subsequent to year end, on December 21, 2017, the Company’s board of governors declared a distribution of $0.11 per membership unit for a total of approximately $8,573,000 to be paid to members of record as of December 21, 2017.  The distribution was paid in January 2018.  Based on the covenants contained in the Company’s  lender credit facilities, the foregoing distribution was approved by its lender prior to distribution.

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Notes to Consolidated Financial Statements

10. LEASES

The Company has lease agreements with leasing companies for 148 rail cars for the transportation of the Company’s ethanol with various maturity dates through January 2027. The rail car lease payments are due monthly in the aggregate amount of approximately $127,000.    

The Company has lease agreements with leasing companies for 110 hopper cars to assist in with the transport of the distillers’ grains by rail with various maturity dates through May 2027.  During the fiscal year ended October 31, 2017, the Company renewed a lease agreement for 50 hopper cars for an additional 10 years with monthly payments of approximately $25,000.  The rail car lease payments are due monthly in the amount of approximately $64,000.

Rent expense for the Company’s leases was approximately $2,170,000,  $2,571,000 and $1,969,000 for the fiscal years ended October 31, 2017, 2016, and 2015, respectively.

At October 31, 2017, the Company had the following minimum future lease payments, which at inception had non‑cancelable terms of more than one year:

November 1, 2017 to October 31, 2018	$	1,896,000
November 1, 2018 to October 31, 2019		1,767,000
November 1, 2019 to October 31, 2020		1,767,000
November 1, 2020 to October 31, 2021		1,767,000
November 1, 2021 to October 31, 2022		1,767,000
Thereafter		7,249,000
Total minimum lease commitments	$	16,213,000

11. INCOME TAXES

The differences between consolidated financial statement basis and tax basis of assets and liabilities are estimated as follows at October 31:

	2017		2016
Consolidated financial statement basis of assets	$	68,872,631	$	63,771,046
Plus: Organization and start-up costs capitalized		775,562		933,291
Less: Unrealized gains on commodity derivative instruments		(141,644)		(662,338)
Less: Accumulated tax depreciation and amortization greater than financial statement basis		(60,718,166)		(63,051,669)
Plus: Impairment charge		27,844,579		27,844,579
Income tax basis of assets	$	36,632,962	$	28,834,909

There were no significant differences between the consolidated financial statement basis of liabilities and the income tax basis of liabilities at October 31, 2017 and 2016.

12.  EMPLOYEE BENEFIT PLANS

The Company has a defined contribution plan available to all of its qualified employees. The Company contributes a match of 50% of the participant’s salary deferral up to a maximum of 4% of the employee’s salary.  The Company contributions totaled approximately $90,000,  $85,000, and $81,000 for the fiscal years ended October 31, 2017, 2016, and 2015, respectively.

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Notes to Consolidated Financial Statements

13. RELATED PARTY TRANSACTIONS

Granite Falls Energy, LLC

The Company has a management services agreement with Granite Falls Energy, LLC (“GFE”), a related party.  Under the terms of the agreement, GFE supplies its own personnel to act as part-time officers and managers of the Company for the positions of Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager and the Company pays GFE 50% of the total salary, bonuses and other expenses and costs for the three management positions.  The management services agreement automatically renews for successive on-year terms unless the Company or GFE gives the other party 90-day written notice of termination prior to expiration of the then-current term.  The management services agreement may also be terminated by either party for cause under certain circumstances.

Total expenses under this agreement were $406,000,  $375,000 and $414,000 for fiscal years ended October 31, 2017, 2016, and 2015, respectively.

Corn Purchase - Members

The Company purchased corn from board members of approximately $9,811,000 in fiscal year 2017,  $15,008,000 in fiscal year 2016, and $11,032,000 in fiscal year 2015.

Agrinatural

During 2013, the Company borrowed $300,000 from the non-controlling interest member of Agrinatural.  Total interest paid in relation to this note payable amounted to approximately $6,000, $20,000, and $16,000 for each of the fiscal years ended October 31, 2017, 2016, and 2015, respectively.

Swan Engineering

Agrinatural has a management and operating agreement with Swan Engineering, Inc. (“SEI”). SEI, together with an unrelated third party owns Rural Energy Solutions, LLC (“RES”), the 27% minority owner of Agrinatural. Under the management and operating agreement, SEI provides Agrinatural with day-to-day management and operation of Agrinatural’s pipeline distribution business. In exchange for these services, Agrinatural pays SEI an aggregate management fee equal to the fixed monthly base fee plus the variable customer management fee based on the number of customers served on the pipeline less the agreed monthly fee reduction of $4,500. For the year ended October 31, 2017, the Company paid approximately $36,000 and $157,000 for the monthly base fee and variable customer management fee, respectively.    For the year ended October 31, 2016, the Company paid approximately $32,000 and $149,000 for the monthly base fee and variable customer management fee, respectively. For the year ended October 31, 2015, the Company paid approximately $18,000 and $83,000 for the monthly base fee and variable customer management fee, respectively. The management and operating agreement with SEI expires July 1, 2019 unless earlier terminated for cause as defined in the agreement.

Agrinatural also has a project management agreement with SEI. Pursuant to the project management agreement, SEI supervises all of Agrinatural’s pipeline construction projects. These projects are constructed by unrelated third-party pipeline construction companies. Under the project management agreement, Agrinatural pays SEI a total of 10% of the actual capital expenditures for construction projects approved by Agrinatural’s Board of Directors, excluding capitalized marketing costs. For the year ended October 31, 2017, the Company incurred approximately $44,000 for project management and capital work fees. For the year ended October 31, 2016, the Company incurred approximately $28,000 for project management and capital work fees. For the year ended October 31, 2015, the Company paid approximately $19,000 for project management fees. The project management with SEI expires June 30, 2019 unless earlier terminated for cause as defined in the agreement.

Amounts due to SEI from Agrinatural included in accounts payable on the consolidated balance sheets totaled approximately $16,000 and $131,000 at October 31, 2017 and 2016, respectively.

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Notes to Consolidated Financial Statements

14. COMMITMENTS AND CONTINGENCIES

Water Agreements

In October 2003, the Company entered into an industrial water supply development and distribution agreement with the City of Heron Lake for 15 years.  The Company has the exclusive rights to the first 6,000 gallons per minute of capacity that is available from the well, and provides for the Company, combined with an unrelated company, to approve any other supply contracts that the City may enter into.  In consideration, the Company will pay one half of the City’s water well bond payments of $735,000, plus a 5% administrative fee, totaling approximately $594,000, and operating costs, relative to the Company’s water usage, plus a 10% profit.  These costs will be paid as water usage fees.  The Company recorded an assessment of approximately $367,000 with long-term debt as described in Note 8.  The Company pays operating and administrative expenses of approximately $12,000 per year.

In May 2006, the Company entered into a water treatment agreement with the City of Heron Lake and Jackson County for 30 years. The Company will pay for operating and maintenance costs of the plant in exchange for receiving treated water.  In addition, the Company agreed to an assessment for a portion of the capital costs of the water treatment plant. 

The Company recorded assessments with long-term debt of $500,000 and $3,550,000 in fiscal 2007 and 2006, respectively, as described in Note 8.  The Company paid operating and maintenance expenses of approximately $92,000,  $24,000, and $57,000 in fiscal 2017, 2016, and 2015, respectively.

Ethanol Marketing Agreement

The Company has a marketing agreement (“Eco Agreement”) with Eco-Energy, Inc., an unrelated party (“Eco-Energy”) for the sale of ethanol.  Under this ethanol agreement, Eco-Energy purchases, markets and resells 100% of the ethanol produced at the Company’s ethanol production facility and arranges for the transportation of ethanol.  The Company pays Eco-Energy a marketing fee per gallon of ethanol sold in consideration of Eco-Energy’s services, as well as a fixed lease fee for rail cars leased from Eco-Energy to the Company. The marketing fee was negotiated based on prevailing market-rate conditions for comparable ethanol marketing services.

The initial term of Eco Agreement continued through December 31, 2016, with automatic renewals for additional three terms of three year periods unless terminated by either party by providing written notice to the other party at least 3 months prior to the end of the then current term. During the third fiscal quarter of 2016, the Company amended the Eco Agreement. As amended, the term of the Eco Agreement continues through December 31, 2019. Additionally, the amended Eco Agreement provides for certain negotiated changes to the marketing fees payable to Eco-Energy and payment terms based on prevailing market-rate conditions for comparable ethanol marketed services.

Ethanol marketing fees and commissions totaled approximately $587,000,  $637,000, and $618,000 for the fiscal years ended October 31, 2017, 2016, and 2015.

Ethanol Forward Contracts

At October 31, 2017, the Company had fixed and basis contracts to sell approximately $18,414,000 of ethanol for various delivery periods through March 2018, which approximates 52% of its anticipated ethanol sales for that period.

Distillers’ Grains Marketing Agreement

Gavilon Ingredients, LLC, an unrelated party (“Gavilon”), serves as the distillers’ grains marketer for our plant pursuant to a distillers’ grains off-take agreement.  Pursuant to our agreement with Gavilon, Gavilon purchases all of the distillers’ grains produced at our ethanol plant.  We pay Gavilon a service fee for its services under this agreement. The contract commenced on November 1, 2013 with an initial term of six months, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 60 days to the other party.

Distillers’ grains commissions totaled approximately $268,000,  $283,000, and $308,000 for the fiscal years ended October 31, 2017, 2016, and 2015.

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Notes to Consolidated Financial Statements

Distillers’ Grains Forward Contracts

At October 31, 2017, the Company had forward contracts to sell approximately $2,006,000 of distillers’ grains for delivery through March 2018, which approximates 27% of its anticipated distillers’ grains sales during that period.

Corn Oil Marketing Agreement

RPMG, Inc., an unrelated party, markets the corn oil produced at our ethanol plant pursuant to a corn oil marketing agreement.  We pay RPMG a commission based on each pound of corn oil sold by RPMG under the agreement. The contract commenced on November 1, 2013 with an initial term of one year and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 90 days to the other party.

Corn oil commissions totaled approximately $89,000,  $96,000, and $56,000 for the fiscal years ended October 31, 2017, 2016, and 2015.

Corn Oil Forward Contracts

At October 31, 2017, the Company had forward contracts to sell approximately $763,000 of corn oil for delivery through December 2017, which approximates 90% of its anticipated corn oil sales for that period.

Contract for Natural Gas Pipeline to Plant

The Company has a facilities agreement with Northern Border Pipeline Company which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from the plant. Agrinatural was formed to own and operate the pipeline and transports gas to the Company pursuant to a transportation agreement.

The Company also has a base agreement for the sale and purchase of natural gas with Constellation NewEnergy-Gas Division, LLC (“Constellation”), pursuant to which it buys all of its natural gas from Constellation.  This agreement runs until March 31, 2019.

Corn Forward Contracts

At October 31, 2017, the Company had cash and basis contracts for forward corn purchase commitments for approximately 1,769,000 bushels for deliveries through October 2018.

Railcar Damages

In accordance with certain railcar lease agreements, at expiration, the Company is required to return the railcars in good condition, less normal wear and tear.  Primarily due to the ongoing maintenance and repair activities performed on its railcars, the Company has determined that no accrual for leased railcar damages is necessary and an estimate of the possible range of loss cannot be made.

15. BUSINESS SEGMENTS

The Company groups its operations into the following two business segments:

Ethanol Production:	Ethanol and co-product production and sales
Natural gas pipeline:	Ownership and operations of natural gas pipeline

Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses.   The accounting policies for each segment are the same as those described in the summary of significant accounting policies in Note 1. Segment income or loss does not include any allocation of shared-service costs.  Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.

75

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following tables summarize financial information by segment and provide a reconciliation of segment revenue, contribution to operating income and total assets for the fiscal years ended October 31:

Revenue:	2017		2016		2015
Ethanol production	$	108,709,255	$	108,577,171	$	114,669,831
Natural gas pipeline		2,946,438		2,770,310		2,761,042
Eliminations		(1,738,041)		(1,741,937)		(1,770,404)
Total Revenue	$	109,917,652	$	109,605,544	$	115,660,469

Operating Income:	2017		2016		2015
Ethanol production	$	6,821,779	$	5,057,258	$	8,106,105
Natural gas pipeline		1,177,251		1,177,158		1,075,581
Eliminations		(694,435)		(740,183)		(1,770,404)
Operating Income	$	7,304,595	$	5,494,233	$	7,411,282

Assets:	2017		2016		2015
Ethanol production	$	56,373,335	$	51,080,443	$	53,663,064
Natural gas pipeline		12,499,296		12,690,603		13,033,320
Total Assets	$	68,872,631	$	63,771,046	$	66,696,384

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary quarterly results are as follows:

	First		Second		Third		Fourth
Fiscal year ended October 31, 2017	Quarter		Quarter		Quarter		Quarter
Revenues	$	27,390,074	$	25,990,784	$	28,541,889	$	27,994,905
Gross profit		3,414,231		1,850,266		2,251,294		2,913,491
Operating income		2,567,534		1,080,594		1,518,888		2,137,579
Net income attributable to Heron Lake BioEnergy, LLC		2,832,413		1,019,120		1,414,752		2,002,070
Basic and diluted earnings per unit (Class A and B)	$	0.04	$	0.01	$	0.02	$	0.02

	First		Second		Third		Fourth
Fiscal year ended October 31, 2016	Quarter		Quarter		Quarter		Quarter
Revenues	$	26,588,565	$	25,241,981	$	30,365,123	$	27,409,875
Gross profit		857,581		920,070		3,730,408		2,985,331
Operating income		48,947		108,111		2,983,648		2,353,527
Net income (loss) attributable to Heron Lake BioEnergy, LLC		(25,555)		13,258		2,810,607		2,177,906
Basic and diluted earnings per unit (Class A and B)	$	—	$	—	$	0.03	$	0.03

	First		Second		Third		Fourth
Fiscal year ended October 31, 2015	Quarter		Quarter		Quarter		Quarter
Revenues	$	27,177,449	$	29,813,571	$	30,192,430	$	28,477,019
Gross profit		1,847,050		2,673,825		4,755,934		1,135,568
Operating income		966,668		1,891,732		4,014,168		538,714
Net income attributable to Heron Lake BioEnergy, LLC		879,256		1,733,837		3,808,820		329,320
Basic and diluted earnings per unit (Class A and B)	$	0.01	$	0.02	$	0.05	$	0.01

The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.

76

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and General Manager (the principal executive officer), Steve Christensen, along with our Chief Financial Officer (the principal financial officer), Stacie Schuler, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2017. Based upon this review and evaluation, these officers have concluded that our consolidated disclosure controls and procedures are effective as of October 31, 2017.  

(b) Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:

(i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and governors of the Company; and

(iii)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of October 31, 2017.

An attestation report from our accounting firm on our internal control over financial reporting is not included in this annual report because an attestation report is only required under the regulations of the Securities and Exchange Commission for accelerated filers and large accelerated filers.

77

(c) Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth fiscal quarter ended October 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

None.

PART III

Pursuant to General Instruction G(3), we omit Part III, Items 10, 11, 12, 13 and 14 and incorporate such items by reference to an amendment to this Annual Report on Form 10-K or to a definitive proxy statement (the “2018 Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year (October 31, 2017) covered by this Annual Report.

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Information required by this Item is incorporated by reference to the 2018 Proxy Statement.

ITEM 11.    EXECUTIVE COMPENSATION

The Information required by this Item is incorporated by reference to the 2018 Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The Information required by this Item is incorporated by reference to the 2018 Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The Information required by this Item is incorporated by reference to the 2018 Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The Information required by this Item is incorporated by reference to the 2018 Proxy Statement.

78

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES

The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:

(a)Financial Statements

The consolidated financial statements appear beginning at page 56 of this report.

(b)Financial Statement Schedules

All supplemental schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

(c)Exhibits

Exhibit Number	Exhibit Title	Incorporated by Reference To:
3.1	First Amended and Restated Articles of Organization of Heron Lake BioEnergy, LLC, as amended effective August 30, 2011	Exhibit 3.1 to Current Report on Form 8-K dated September 2, 2011.
3.2	Member Control Agreement of Heron Lake BioEnergy, LLC, as amended through August 30, 2011	Exhibit 3.2 to Current Report on Form 8-K dated September 2, 2011.
3.2.1	First Amendment to the Member Control Agreement	Exhibit 3.1 to Current Report on Form 8-K dated March 24, 2014.
3.2.2	Second Amendment to the Member Control Agreement	Exhibit 3.1 to Current Report on Form 8-K/A dated March 29, 2017.
4.1	Form of Class A Unit Certificate	Exhibit 4.1 of the Company’s Registration Statement on Form 10 (File No. 000-51825) filed on August 22, 2008 (the “2008 Registration Statement”).
4.2	Unit Transfer Policy adopted November 5, 2008	Exhibit 4.1 of the Company’s Current Report on Form 8-K dated November 5, 2008.
10.1	Industrial Water Supply Development and Distribution Agreement dated October 27, 2003 among Heron Lake BioEnergy, LLC (f/k/a Generation II Ethanol, LLC), City of Heron Lake, Jackson County, and Minnesota Soybean Processors	Exhibit 10.10 of the Company’s 2008 Registration Statement.
10.2	Industrial Water Supply Treatment Agreement dated May 23, 2006 among Heron Lake BioEnergy, LLC, City of Heron Lake and County of Jackson	Exhibit 10.11 of the Company’s 2008 Registration Statement.
10.3	Loan Agreement dated December 28, 2007 by and between Federated Rural Electric Association and Heron Lake BioEnergy, LLC	Exhibit 10.19 of the Company’s 2008 Registration Statement.
10.4	Secured Promissory Note issued December 28, 2007 by Heron Lake BioEnergy, LLC as borrower to Federated Rural Electric Association as lender in principal amount of $600,000	Exhibit 10.20 of the Company’s 2008 Registration Statement.
10.5	Security Agreement dated December 28, 2007 by Heron Lake BioEnergy, LLC in favor of Federated Rural Electric Association	Exhibit 10.21 of the Company’s 2008 Registration Statement.
10.6	Electric Service Agreement dated October 17, 2007 by and between Interstate Power and Light Company and Heron Lake BioEnergy, LLC	Exhibit 10.22 of the Company’s 2008 Registration Statement.

79

Exhibit Number	Exhibit Title	Incorporated by Reference To:
10.7	Shared Savings Contract dated November 16, 2007 by and between Interstate Power and Light Company and Heron Lake BioEnergy, LLC	Exhibit 10.23 of the Company’s 2008 Registration Statement.
10.8	Escrow Agreement dated November 16, 2007 by and between Heron Lake BioEnergy, LLC, Farmers State Bank of Hartland for the benefit of Interstate Power and Light Company	Exhibit 10.24 of the Company’s 2008 Registration Statement.
10.9	Management Services Agreement effective as of July 31, 2013 between Granite Falls Energy, LLC and Heron Lake BioEnergy, LLC*	Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2013.
10.10	Corn Oil Marketing Agreement dated September 4, 2013 by and among Heron Lake BioEnergy, LLC and RPMG, Inc. †	Exhibit 10.76 to Annual Report on Form 10-K/A for the year ended October 31, 2013.
10.11	Ethanol Marketing Agreement dated September 17, 2013 by and among Heron Lake BioEnergy, LLC and Eco-Energy, LLC †	Exhibit 10.77 to Annual Report on Form 10-K for the year ended October 31, 2013.
10.12	Distillers’ grains Off-Take Agreement dated September 24, 2013 by and among Heron Lake BioEnergy, LLC and Gavilon Ingredients, LLC †	Exhibit 10.78 to Annual Report on Form 10-K/A for the year ended October 31, 2013.
10.13	Loan Agreement dated July 29, 2014 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC	Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.14	Promissory Note dated July 29, 2014 between Heron Lake BioEnergy, LLC, as Holder, and Agrinatural Gas, LLC, as Borrower	Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.15	Security Agreement dated July 29, 2014 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC	Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.16	Collateral Assignment dated July 29, 2014 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC	Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.17	Guaranty dated July 29, 2014 by Rural Energy Solutions, LLC, guarantor, in favor of Heron Lake BioEnergy, LLC	Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.18	Master Loan Agreement dated July 29, 2014 by and between AgStar Financial Services, FLCA and Heron Lake BioEnergy, LLC	Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.19	$28,000,000 Revolving Term Loan Supplement dated July 29, 2014 by and between AgStar Financial Services, FLCA and Heron Lake BioEnergy, LLC	Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.20	Security Agreement dated July 29, 2014 between Heron Lake BioEnergy, LLC and AgStar Financial Services, FLCA and CoBank, ACB	Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.21	Real Estate Mortgage, Assignment of Rents and Profits and Fixture Financing Statement dated July 29, 2014 by and between AgStar Financial Services, FLCA, CoBank, ACB and Heron Lake BioEnergy, LLC	Exhibit 10.9 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.22	Guaranty dated July 29, 2014 by HLBE Pipeline Company, LLC in favor of AgStar Financial Services, FLCA	Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.23	Security Agreement dated July 29, 2014 between HLBE Pipeline Company, LLC and AgStar Financial Services, FLCA and CoBank, ACB	Exhibit 10.11 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2014.
10.24	Allonge Agreement dated March 30, 2015 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC	Exhibit 10.1 to Current Report on Form 8-K for the quarter ended March  31, 2015.

80

Exhibit Number	Exhibit Title	Incorporated by Reference To:
10.25	Loan Agreement dated March 30, 2015 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC		Exhibit 10.2 to Current Report on Form 8-K for the quarter ended March 31, 2015.
10.26	Promissory Note dated March 30, 2015 between Heron Lake BioEnergy, LLC, as Holder, and Agrinatural Gas, LLC, as Borrower		Exhibit 10.3 to Current Report on Form 8-K for the quarter ended March 31, 2015.
10.27	Security Agreement dated March 30, 2015 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC		Exhibit 10.4 to Current Report on Form 8-K for the quarter ended March 31, 2015.
10.28	Collateral Assignment dated March 30, 2015 by and between Agrinatural Gas, LLC, and Heron Lake BioEnergy, LLC		Exhibit 10.5 to Current Report on Form 8-K for the quarter ended March 31, 2015.
10.29	Guaranty dated March 30, 2015 by Rural Energy Solutions, LLC, guarantor, in favor of Heron Lake BioEnergy, LLC		Exhibit 10.6 to Current Report on Form 8-K for the quarter ended March 31, 2015.
10.30	Restructure Agreement dated March 30, 2015 by and between Agrinatural Gas, LLC and Swan Engineering, Inc.		Exhibit 10.7 to Current Report on Form 8-K for the quarter ended March 31, 2015.
10.31	Amendment No. 1 dated July  22, 2016 to the Ethanol Marketing Agreement dated September 17, 2013 by and among Heron Lake BioEnergy, LLC and Eco-Energy, LLC †		Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016.
21.10	Subsidiaries of the Registrant		Exhibit 21.1 to Annual Report on Form 10-K for the year ended October 31, 2011.
31.1	Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.		Attached hereto.
31.2	Certifications of Chief Financial Officer (principal financial officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.		Attached hereto.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350		Attached hereto.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350		Attached hereto.
101.1	The following materials from Heron Lake BioEnergy, LLC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of October 31, 2017 and October 31, 2016, (ii) the Consolidated Statements of Operations for the fiscal years ended October 31, 2017, 2016, and 2015, (iii) the Consolidated Statements of Changes in Members’ Equity, (iv) the Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2017, 2016, and 2015, and (v) the Notes to Consolidated Financial Statements.

*   Indicates compensatory agreement.

†   Certain portions of this exhibit have been redacted and filed on a confidential basis with the Commission pursuant to a request for confidential treatment under Rule 24b-2 of under the Exchange Act. Spaces corresponding to the deleted portions are represented by brackets with asterisks [* * *].

81

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		HERON LAKE BIOENERGY, LLC
Date:	January 29, 2018	/s/ Steve Christensen
		Steve Christensen
		Chief Executive Officer
Date:	January 29, 2018	/s/ Stacie Schuler
		Stacie Schuler
		Chief Financial Officer

82

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date:	January 29, 2018	/s/ Steve Christensen
		Steve Christensen, Chief Executive Officer and General Manager
		(Principal Executive Officer)
Date:	January 29, 2018	/s/ Stacie Schuler
		Stacie Schuler, Chief Financial Officer
		(Principal Financial and Accounting Officer)
Date:	January 29, 2018	/s/ Paul Enstad
		Paul Enstad, Governor and Chairman
Date:	January 29, 2018	/s/ Rodney R. Wilkison
		Rodney R. Wilkison, Governor and Vice Chairman
Date:	January 29, 2018	/s/ Michael Kunerth
		Michael Kunerth, Governor and Secretary
Date:	January 29, 2018	/s/ Dean Buesing
		Dean Buesing, Governor
Date:	January 29, 2018	/s/ Robert Ferguson
		Robert Ferguson, Governor
Date:	January 29, 2018	/s/ Marten Goulet
		Marten Goulet, Governor
Date:	January 29, 2018	/s/ Leslie Bergquist
		Leslie Bergquist, Governor
Date:	January 29, 2018	/s/ Doug Schmitz
		Doug Schmitz, Governor
Date:	January 29, 2018	/s/ David Westehoff
		David Woestehoff, Governor
Date:	January 29, 2018	/s/ Kenton Johnson
		Kenton Johnson, Alternate Governor
Date:	January 29, 2018	/s/ Milton Mckeown
		Milton McKeown, Alternate Governor

83

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Steve Christensen, certify that:

1.I have reviewed this annual report on Form 10-K of Heron Lake BioEnergy, 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 the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 the registrant, 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.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’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;

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 the registrant’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 the registrant’s internal control over financial reporting.

/s/
Date:	January 29, 2018	/s/ Steve A. Christensen
		Steve A. Christensen
		Chief Executive Officer
		(principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Stacie Schuler, certify that:

1.I have reviewed this annual report on Form 10-K of Heron Lake BioEnergy, 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 the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 the registrant, 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.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’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;

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 the registrant’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 the registrant’s internal control over financial reporting.

/s/
Date:	January 29, 2018	/s/ Stacie Schuler
		Stacie Schuler
		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 annual report on Form 10-K of Heron Lake BioEnergy, LLC (the “Company”) for the fiscal year ended October 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steve Christensen, Chief Executive Officer 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.

8
Date:	January 29, 2018	/s/ Steve A. Christensen
		Steve A. Christensen
		Chief Executive Officer
		(principal executive officer)

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 annual report on Form 10-K of Heron Lake BioEnergy, LLC (the “Company”) for the fiscal year ended October 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stacie Schuler, Chief Financial Officer 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.

Date:	January 29, 2018	/s/ Stacie Schuler
		Stacie Schuler
		Chief Financial Officer
		(principal financial officer)

XML

Document and Entity Information - USD ($)	12 Months Ended
	Oct. 31, 2017	Jan. 29, 2018	Apr. 30, 2017
Entity Registrant Name	Heron Lake BioEnergy, LLC
Entity Central Index Key	0001286964
Current Fiscal Year End Date	--10-31
Entity Filer Category	Non-accelerated Filer
Document Type	10-K
Document Period End Date	Oct. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus (Q1,Q2,Q3,FY)	FY
Amendment Flag	false
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 9,659,704
Class A units
Common stock, shares outstanding		62,932,107
Class B units
Common stock, shares outstanding		15,000,000

XML

Consolidated Balance Sheets - USD ($)	Oct. 31, 2017	Oct. 31, 2016
Current Assets
Cash	$ 10,065,367	$ 1,297,644
Accounts receivable	4,031,977	4,607,202
Inventory	7,064,344	5,864,545
Commodity derivative assets	141,644	662,338
Prepaid expenses and other current assets	259,106	181,853
Total current assets	21,562,438	12,613,582
Property and Equipment, net	46,567,087	50,376,210
Other Assets
Other intangible assets, net	45,852	84,000
Other assets	697,254	697,254
Total other assets	743,106	781,254
Total Assets	68,872,631	63,771,046
Current Liabilities
Current maturities of long-term debt	432,183	490,057
Checks drawn in excess of bank balance		1,866,683
Accounts payable	4,771,197	4,878,210
Commodity derivative instruments	27,630
Accrued expenses	415,106	397,407
Total current liabilities	5,646,116	7,632,357
Long-Term Debt, less current portion	965,502	1,393,669
Commitments and Contingencies
Members' Equity
Members' equity attributable to Heron Lake BioEnergy, LLC consists of 77,932,107 units authorized, issued and outstanding at both October 31, 2017 and 2016	60,767,951	53,499,596
Non-controlling interest	1,493,062	1,245,424
Total members' equity	62,261,013	54,745,020
Total Liabilities and Members' Equity	$ 68,872,631	$ 63,771,046

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Consolidated Balance Sheets (Parenthetical) - shares	Oct. 31, 2017	Oct. 31, 2016
Statement of Financial Position [Abstract]
Members' Equity, units authorized	77,932,107	77,932,107
Members' Equity, units issued	77,932,107	77,932,107
Members' Equity, units outstanding	77,932,107	77,932,107

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Consolidated Statements of Operations - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Income Statement [Abstract]
Revenues	$ 109,917,652	$ 109,605,544	$ 115,660,469
Cost of Goods Sold	99,488,370	101,112,154	105,248,092
Gross Profit	10,429,282	8,493,390	10,412,377
Operating Expenses	(3,124,687)	(2,999,157)	(3,001,095)
Operating Income	7,304,595	5,494,233	7,411,282
Other Income (Expense):
Interest income	24,668	712	1,312
Interest expense	(212,491)	(397,837)	(444,625)
Other income, net	399,221	97,208	11,747
Total other income (expense), net	211,398	(299,917)	(431,566)
Net Income	7,515,993	5,194,316	6,979,716
Less: Net Income Attributable to Non-controlling Interest	(247,638)	(244,616)	(228,483)
Net Income Attributable to Heron Lake BioEnergy, LLC	$ 7,268,355	$ 4,949,700	$ 6,751,233
Weighted Average Units Outstanding—Basic and Diluted (Class A and B) (in units)	77,932,107	77,932,107	77,932,107
Net Income Per Unit Attributable to Heron Lake BioEnergy, LLC—Basic and Diluted (Class A and B) (in dollars per unit)	$ 0.09	$ 0.06	$ 0.09
Distributions Per Unit (Class A and B) (in dollars per unit)		$ 0.05	$ 0.12

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Consolidated Statements of Changes in Members' Equity - USD ($)	Class A units	Class B units	Parent [Member]	Noncontrolling Interest	Total
Balance at Oct. 31, 2014			$ 55,047,120	$ 853,323	$ 55,900,443
Balance (in units) at Oct. 31, 2014	62,932,107	15,000,000
Increase (Decrease) in Stockholders' Equity
Member Distributions			(9,351,853)		(9,351,853)
Net income attributable to non-controlling interest				228,483	228,483
Net income attributable to Heron Lake BioEnergy, LLC			6,751,233		6,751,233
Balance at Oct. 31, 2015			52,446,500	1,081,806	53,528,306
Balance (in units) at Oct. 31, 2015	62,932,107	15,000,000
Increase (Decrease) in Stockholders' Equity
Member Distributions			(3,896,604)	(80,998)	(3,977,602)
Net income attributable to non-controlling interest				244,616	244,616
Net income attributable to Heron Lake BioEnergy, LLC			4,949,700		4,949,700
Balance at Oct. 31, 2016			53,499,596	1,245,424	$ 54,745,020
Balance (in units) at Oct. 31, 2016	62,932,107	15,000,000			77,932,107
Increase (Decrease) in Stockholders' Equity
Net income attributable to non-controlling interest				247,638	$ 247,638
Net income attributable to Heron Lake BioEnergy, LLC			7,268,355		7,268,355
Balance at Oct. 31, 2017			$ 60,767,951	$ 1,493,062	$ 62,261,013
Balance (in units) at Oct. 31, 2017	62,932,107	15,000,000			77,932,107

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Consolidated Statements of Cash Flows - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Cash Flow From Operating Activities
Net income	$ 7,515,993	$ 5,194,316	$ 6,979,716
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	5,021,798	4,781,673	4,593,710
Gain on sale of asset	(45,000)
Change in fair value of commodity derivative instruments	(728,073)	(1,054,729)	(831,227)
Changes in operating assets and liabilities:
Restricted cash			264,086
Accounts receivable	575,225	1,063,979	(1,615,200)
Inventory	(1,199,799)	(605,199)	(72,079)
Commodity derivative instruments	1,276,397	1,069,540	591,578
Prepaid expenses and other current assets	(77,253)	(23,380)	131,267
Accounts payable	(107,013)	1,313,978	(124,087)
Accrued expenses	17,699	209,657	(27,866)
Net cash provided by operating activities	12,249,974	11,949,835	9,889,898
Cash Flows from Investing Activities
Capital expenditures	(1,174,527)	(2,484,667)	(6,181,858)
Proceeds from disposal of asset	45,000
Net cash used in investing activities	(1,129,527)	(2,484,667)	(6,181,858)
Cash Flows from Financing Activities
Proceeds from long-term debt		9,820,222	13,440,990
Checks drawn in excess of bank balance	(1,866,683)	30,001	1,836,682
Payments on long-term debt	(486,041)	(15,166,428)	(9,169,704)
Distributions to Heron Lake BioEnergy, LLC members		(3,896,604)	(9,351,853)
Distribution to non-controlling interest		(80,998)
Net cash used in financing activities	(2,352,724)	(9,293,807)	(3,243,885)
Net increase in cash	8,767,723	171,361	464,155
Cash - Beginning of period	1,297,644	1,126,283	662,128
Cash - End of period	10,065,367	1,297,644	1,126,283
Supplemental Disclosure of Cash Flow Information
Interest expense	$ 212,491	$ 397,837	444,625
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Capital expenditures included in accounts payable			$ 349,482

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Oct. 31, 2017

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Heron Lake BioEnergy, LLC owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis.  In addition, Heron Lake BioEnergy, LLC produces and sells distillers’ grains with solubles and corn oil as co-products of ethanol production. 

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), owns 73% of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC’s ethanol production facility and other customers.

Principles of Consolidation

The consolidated financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, “the Company”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% non-controlling interest identified separately in the accompanying consolidated balance sheets and statements of operations. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

The Company’s fiscal year end for reporting financial operations is October 31.

Accounting Estimates

Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with U.S. 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.  The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, valuation of commodity derivative instruments and inventory, evaluation of rail car damages contingency, the assumptions used in the impairment analysis of long-lived assets, and inventory purchase and sale commitments.  The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Non-controlling Interest

Amounts recorded as non-controlling interest relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Pursuant to the firm natural gas transportation agreement with Agrinatural, Agrinatural will provide natural gas to Heron Lake BioEnergy’s plant with a specified price per MMBTU with a term ending on October 31, 2021, with one automatic renewal option to extend the term for an additional five years period.

Revenue Recognition

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

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

Cost of Goods Sold

The primary components of cost of goods sold for the production of ethanol and related co-products are corn, energy, raw materials, overhead, depreciation, and direct labor.

Operating Expenses

The primary components of operating expenses are salaries and expenses for administrative employees, professional fees, board of governor expenses and property taxes.

Cash

The Company maintains its accounts at multiple financial institutions. At times throughout the year, the Company’s cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on its cash balances.

Restricted Cash

The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions as discussed in Note 6.

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. 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. 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 was not necessary at October 31, 2017 or 2016.  It is at least possible this estimate will change in the future.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out method (FIFO).  Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.  Inventory consists of raw materials, work in process, finished goods, and supplies.  Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers’ grains, and corn oil.

Derivative Instruments

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

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

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.

Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our consolidated financial statements.

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company’s ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 6.

Other Intangibles

Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years. The Company recorded amortization expense in the amount of approximately $38,000 for each of the fiscal years ended October 31, 2017, 2016, and 2015. 

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.

Depreciable useful lives are as follows:

Land improvements	15 Years
Plant building and equipment	7-40 Years
Vehicles and other equipment	5-7 Years
Office buildings and equipment	3-40 Years

Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When determining impairment losses, a long lived asset should be grouped with other assets or liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or liabilities.  If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset.  If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.  Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.  No impairment expense was recorded during fiscal 2017, 2016, and 2015.

Fair Value of Financial Instruments

The Company follows guidance for accounting for fair value measurements of financial assets and liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

· Level 2 inputs include:

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

2. Quoted prices in markets that are observable for the asset or liability either directly or indirectly, for substantially the full term of the asset or liability.

3. Inputs that derived primarily from or corroborated by observable market date by correlation or other means.

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

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value.  No events occurred during the fiscal years ended October 31, 2017, 2016, and 2015 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The Company believes the carrying amount of its debt facilities approximates the fair value.

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. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company’s tax year end is December 31.

The Company had no significant uncertain tax positions as of October 31, 2017 or 2016 that would require disclosure, primarily due to the partnership tax status. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company’s tax status as a partnership, the adoption of this guidance had no material impact on the Company’s financial condition or results of operations.

The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014.

Net Income per Unit

Basic net income per unit is computed by dividing net income by the weighted average number of members’ units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income by the weighted average number of members’ units and members’ unit equivalents outstanding during the period.

Environmental Liabilities

The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.   Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

· Ethanol Production.   Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

· Natural Gas Pipeline. The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

Recently Issued Accounting Pronouncements

Contract Revenue Recognition (Evaluating)

In May 2014 and amended in August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 which amended the Revenue from Contracts with Customers (Topic 606) of the Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company beginning November 1, 2018. The Company is currently evaluating the guidance and its effect on its consolidated financial statements.

Leases (Evaluating)

In February 2016, the FASB adopted ASU No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The accounting guidance for lessors is largely unchanged. The guidance will be effective for the Company beginning November 1, 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

Restricted Cash (Evaluating)

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which amended Statement of Cash Flows (Topic 230) of the Accounting Standards Codification. The new guidance will require amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. The amendments will be effective for the Company beginning November 1, 2018. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements.

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RISKS AND UNCERTAINTIES

12 Months Ended

Oct. 31, 2017

Risks and Uncertainties [Abstract]

RISKS AND UNCERTAINTIES

2. RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are primarily derived from the sale and distribution of ethanol, distillers’ grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75%-  85% of total revenues and corn costs average 70%-  90% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

The supply and demand for ethanol are impacted by federal and state legislation and regulation, most significantly the Renewable Fuels Standard (“RFS”), and any changes in legislation or regulation could cause the demand for ethanol to decline or its supply to increase, which could have a material adverse effect on our business, results of operations and financial condition, and the ability to operate at a profit.

On November 30, 2017, the EPA announced the final 2018 renewable volume requirements (“RVOs”)for conventional ethanol at 15.0 billion gallons, with the RVOs for advanced biofuels set at 4.29 billion gallons and cellulosic ethanol at 0.29 billon gallons, reducing overall RVOs to 19.29 billion gallons for 2018.  Although this final rule achieves the statutory RVO for conventional corn-based ethanol originally set by Congress when the RFS was enacted, it reduces the overall RVOs below the overall statutory level of 26 billion gallons.  

According to the RFS, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed RVOs were more than 20% below statutory levels, in September 2017, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 RVOs are also more than 20% below statutory levels, the RVO reset will be triggered under RFS and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022. If the statutory RVOs are reduced as a result of reset, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

Additionally, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. Successful reduction or repeal of the blending requirements of the RFS could result in a significant decrease in ethanol demand.

Current ethanol production capacity is approximately 16.0 billion gallons according to the RFA and may increase during calendar year 2018 as several plants’ expansion projects come online. Although the release of the final 2018 RVOs maintaining the 15 billion gallon RVO for conventional corn-based ethanol together a letter issued by EPA Administrator Pruitt in October 2017 signals support from the EPA and the Trump administration for domestic ethanol production, the EPA and Trump administration could still elect to materially modify, repeal or otherwise invalidate the RFS.  It is unclear what regulatory framework and renewable volume requirements, if any, will emerge as a result of such reforms; however, any such reform could adversely affect the demand and price for ethanol and the Company's profitability.

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FAIR VALUE MEASUREMENTS

12 Months Ended

Oct. 31, 2017

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

3. FAIR VALUE MEASUREMENTS

The Company follows accounting guidance related to fair value disclosures.  For the Company, this guidance applies to certain derivative investments.  The authoritative guidance also clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair measurements.

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2017:

					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices		Significant Other		Significant
	Consolidated				in Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	141,644	$	141,644	$	141,644	$	—	$	—
Financial Liabilities:
Commodity Derivative instruments - Ethanol	$	12,249	$	12,249	$	18,000	$	(5,751)	$	—
Commodity Derivative instruments - Natural Gas	$	15,381	$	15,381	$	—	$	15,381	$	—

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2016:

					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices in		Significant Other		Significant
	Consolidated				Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	388,525	$	388,525	$	388,525	$	—	$	—
Commodity Derivative instruments - Ethanol	$	273,813	$	273,813	$	273,813	$	—	$	—

We determine the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value of ethanol and natural gas Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

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CONCENTRATIONS

12 Months Ended

Oct. 31, 2017

CONCENTRATIONS

CONCENTRATIONS

4. CONCENTRATIONS

The Company sold all of the ethanol, distillers’ grains, and corn oil produced at its plant to three customers under marketing agreements during the fiscal years ended October 31, 2017, 2016, and 2015. 

The percentage of total revenues attributable to each of the Company’s three major customers for the fiscal years ended October 31, 2017, 2016, and 2015 were as follows:

	October 31, 2017	October 31, 2016	October 31, 2015
Eco-Energy, Inc. - Ethanol	81.3%	78.5%	76.9%
Gavilon Ingredients, LLC - Distillers' Grains	13.7%	15.4%	19.2%
RPMG, Inc. - Corn Oil	4.5%	4.4%	2.4%

The percentage of total accounts receivable attributable to each of the Company’s three major customers at October 31, 2017 and 2016 were as follows:

	October 31, 2017	October 31, 2016
Eco-Energy, Inc. - Ethanol	86.8%	78.6%
Gavilon Ingredients, LLC - Distillers' Grains	7.0%	11.1%
RPMG, Inc. - Corn Oil	4.3%	3.3%

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INVENTORY

12 Months Ended

Oct. 31, 2017

Inventory Disclosure [Abstract]

INVENTORY

5. INVENTORY

Inventory consists of the following at October 31:

	2017		2016
Raw materials	$	1,442,844	$	1,434,854
Work in process		652,296		696,013
Finished goods		3,747,779		2,713,716
Supplies		1,221,425		1,019,962
Totals	$	7,064,344	$	5,864,545

The Company performs a lower cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol.  Based on the lower of cost or net realizable value analysis, the Company did not record a loss on ethanol inventories for the fiscal years ended October 31, 2017 or 2016.

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DERIVATIVE INSTRUMENTS

12 Months Ended

Oct. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

6. DERIVATIVE INSTRUMENTS

The Company enters into corn, ethanol, and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices for periods up to 24 months. These derivatives are put in place to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn purchase commitments where the prices are set at a future date. Although these derivative instruments serve the Company’s purpose as an economic hedge, they are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change.

As of October 31, 2017, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 1,120,000 bushels, comprised of long corn positions on 215,000 bushels that were entered into to hedge forecasted ethanol sales through December 2017, and short corn positions on 905,000 bushels that were entered into to hedge forecasted corn purchases through July 2018.  There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, 2017, the Company had outstanding natural gas derivative instruments totaling 120,000 MMBTU entered into to hedge forecasted natural gas purchases through February 2018.

As of October 31, 2017, the total notional amount of the Company’s outstanding ethanol derivative instruments was approximately 420,000 gallons that were entered into to hedge forecasted ethanol sales through November 2017.

As of October 31, 2017, the Company had no cash collateral (restricted cash) and approximately $12,000 due to broker related to derivatives held by a broker, recorded as a component of accounts payable.

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2017, none of which were designated as hedging instruments:

	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	141,644	$	—
Ethanol contracts	Commodity derivative instruments		—		12,249
Natural gas contracts	Commodity derivative instruments		—		15,381
Totals		$	141,644	$	27,630

As of October 31, 2016, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 4,285,000 bushels, comprised of long corn positions on 3,100,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 1,185,000 bushels that were entered into to hedge forecasted corn purchases through August 2017.  There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, 2016, the Company had no cash collateral (restricted cash) related to derivatives held by a broker.

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2016, none of which were designated as hedging instruments:

	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	388,525	$	—
Ethanol contracts	Commodity derivative instruments		273,813		—
Totals		$	662,338	$	—

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

	Consolidated Statement of	Fiscal Year Ended  October 31,
	Operations location	2017		2016		2015
Corn contracts	Cost of goods sold	$	962,256	$	915,555	$	831,227
Ethanol contracts	Revenues		(218,802)		117,624		—
Natural gas contracts	Cost of goods sold		(15,381)		21,550		—
Total gain		$	728,073	$	1,054,729	$	831,227

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PROPERTY AND EQUIPMENT

12 Months Ended

Oct. 31, 2017

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT

7. PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

	October 31, 2017		October 31, 2016
Land and improvements	$	9,111,838	$	9,111,838
Plant buildings and equipment		85,809,325		84,594,751
Vehicles		682,719		620,323
Office buildings		641,860		641,860
Construction in progress		85,746		315,631
		96,331,488		95,284,403
Less: accumulated depreciation		(49,764,401)		(44,908,193)
Net property and equipment	$	46,567,087	$	50,376,210

Depreciation expense totaled approximately $4,984,000,  $4,744,000 and $4,556,000 during the fiscal years ended October 31, 2017, 2016, and 2015, respectively. 

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DEBT FACILITIES

12 Months Ended

Oct. 31, 2017

Debt Facilities

Debt Facilities

8. DEBT FACILITIES

Long-term debt consists of the following:

	October 31, 2017		October 31, 2016
Revolving term note payable to lending institution, see terms below.	$	—	$	—
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.		1,241,171		1,517,046
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		56,514		97,930
Note payable to electrical company with monthly payments of $6,250 with interest at 0.00% and a 1.00% maintenance fee due each October. The note was paid in full in September 2017. The electrical company is a member of the Company.		—		68,750
Note payable to non-controlling interest member of Agrinatural. Interest is at One Month LIBOR plus 4.0%, which was approximately 5.24% and 4.53% at October 31, 2017 and 2016, respectively. The note is considered due on demand with payments due at Agrinatural Board of Managers discretion.		100,000		200,000
Totals		1,397,685		1,883,726
Less amounts due within one year		432,183		490,057
Net long-term debt	$	965,502	$	1,393,669

Revolving Term Note

The Company has a revolving term loan with a lender under which the Company could initially borrow, repay and re-borrow in an amount up to the aggregate principal commitment at any time prior to the March 1, 2022 maturity date.  This initial aggregate principal commitment was $28,000,000, which reduces by $3,500,000 annually, starting March 1, 2015 and continues each anniversary thereafter until maturity.  The aggregate principal commitment of this facility at October 31, 2017 was $17,500,000.  There was no outstanding balance on the revolving term loan at October 31, 2017 and 2016. Therefore, after accounting for amounts outstanding under this facility at October 31, 2017 and 2016, the aggregate principal amount available to the Company for borrowing was approximately $17,500,000 and $21,000,000, respectively.

Interest on the revolving term loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which was 4.49% and 3.45% at October 31, 2017 and 2016, respectively.  The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. 

The Company also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum.  The loan is secured by substantially all of the Company assets including a subsidiary guarantee. 

The credit facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural,  and maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties. 

As part of the credit facility closing, the Company entered into an administrative agency agreement with CoBank, ACP (“CoBank”).  CoBank purchased a participation interest in the revolving term loan and was appointed the administrative agent for the purpose of servicing the loan.  As a result, CoBank will act as the agent for the lender with respect to the credit facility.  The Company agreed to pay CoBank an annual fee of $2,500 as the agent.

Based on the most recent debt agreements, estimated maturities of long-term debt at October 31, 2017 are as follows:

2018	$	432,183
2019		318,883
2020		326,798
2021		319,821
Total debt	$	1,397,685

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MEMBERS' EQUITY

12 Months Ended

Oct. 31, 2017

Members' Equity [Abstract]

MEMBERS' EQUITY

9. MEMBERS’ EQUITY

The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

On December 18, 2014, the Company’s board of governors declared a distribution of $0.12 per membership unit for a total of approximately $9,352,000 to be paid to members of record as of December 18, 2014. The distribution was paid in January 2015.  Based on the covenants contained in the Company’s AgStar credit facilities, the foregoing distribution was approved by its lender prior to distribution.

On December 17, 2015, the Company’s board of governors declared a distribution of $0.05 per membership unit for a total of approximately $3,897,000 to be paid to members of record as of December 18, 2015. The distribution was paid in January 2016.  Based on the covenants contained in the Company’s credit facilities, the foregoing distribution was approved by its lender prior to distribution.

Subsequent to year end, on December 21, 2017, the Company’s board of governors declared a distribution of $0.11 per membership unit for a total of approximately $8,573,000 to be paid to members of record as of December 21, 2017.  The distribution was paid in January 2018.  Based on the covenants contained in the Company’s  lender credit facilities, the foregoing distribution was approved by its lender prior to distribution.

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LEASES

12 Months Ended

Oct. 31, 2017

Leases [Abstract]

LEASES

10. LEASES

The Company has lease agreements with leasing companies for 148 rail cars for the transportation of the Company’s ethanol with various maturity dates through January 2027. The rail car lease payments are due monthly in the aggregate amount of approximately $127,000.    

The Company has lease agreements with leasing companies for 110 hopper cars to assist in with the transport of the distillers’ grains by rail with various maturity dates through May 2027.  During the fiscal year ended October 31, 2017, the Company renewed a lease agreement for 50 hopper cars for an additional 10 years with monthly payments of approximately $25,000.  The rail car lease payments are due monthly in the amount of approximately $64,000.

Rent expense for the Company’s leases was approximately $2,170,000,  $2,571,000 and $1,969,000 for the fiscal years ended October 31, 2017, 2016, and 2015, respectively.

At October 31, 2017, the Company had the following minimum future lease payments, which at inception had non‑cancelable terms of more than one year:

November 1, 2017 to October 31, 2018	$	1,896,000
November 1, 2018 to October 31, 2019		1,767,000
November 1, 2019 to October 31, 2020		1,767,000
November 1, 2020 to October 31, 2021		1,767,000
November 1, 2021 to October 31, 2022		1,767,000
Thereafter		7,249,000
Total minimum lease commitments	$	16,213,000

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INCOME TAXES

12 Months Ended

Oct. 31, 2017

Income Tax Disclosure [Abstract]

INCOME TAXES

11. INCOME TAXES

The differences between consolidated financial statement basis and tax basis of assets and liabilities are estimated as follows at October 31:

	2017		2016
Consolidated financial statement basis of assets	$	68,872,631	$	63,771,046
Plus: Organization and start-up costs capitalized		775,562		933,291
Less: Unrealized gains on commodity derivative instruments		(141,644)		(662,338)
Less: Accumulated tax depreciation and amortization greater than financial statement basis		(60,718,166)		(63,051,669)
Plus: Impairment charge		27,844,579		27,844,579
Income tax basis of assets	$	36,632,962	$	28,834,909

There were no significant differences between the consolidated financial statement basis of liabilities and the income tax basis of liabilities at October 31, 2017 and 2016.

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EMPLOYEE BENEFIT PLANS

12 Months Ended

Oct. 31, 2017

Retirement Benefits [Abstract]

EMPLOYEE BENEFIT PLANS

12.  EMPLOYEE BENEFIT PLANS

The Company has a defined contribution plan available to all of its qualified employees. The Company contributes a match of 50% of the participant’s salary deferral up to a maximum of 4% of the employee’s salary.  The Company contributions totaled approximately $90,000,  $85,000, and $81,000 for the fiscal years ended October 31, 2017, 2016, and 2015, respectively.

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RELATED PARTY TRANSACTIONS

12 Months Ended

Oct. 31, 2017

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

13. RELATED PARTY TRANSACTIONS

Granite Falls Energy, LLC

The Company has a management services agreement with Granite Falls Energy, LLC (“GFE”), a related party.  Under the terms of the agreement, GFE supplies its own personnel to act as part-time officers and managers of the Company for the positions of Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager and the Company pays GFE 50% of the total salary, bonuses and other expenses and costs for the three management positions.  The management services agreement automatically renews for successive on-year terms unless the Company or GFE gives the other party 90-day written notice of termination prior to expiration of the then-current term.  The management services agreement may also be terminated by either party for cause under certain circumstances.

Total expenses under this agreement were $406,000,  $375,000 and $414,000 for fiscal years ended October 31, 2017, 2016, and 2015, respectively.

Corn Purchase - Members

The Company purchased corn from board members of approximately $9,811,000 in fiscal year 2017,  $15,008,000 in fiscal year 2016, and $11,032,000 in fiscal year 2015.

Agrinatural

During 2013, the Company borrowed $300,000 from the non-controlling interest member of Agrinatural.  Total interest paid in relation to this note payable amounted to approximately $6,000, $20,000, and $16,000 for each of the fiscal years ended October 31, 2017, 2016, and 2015, respectively.

Swan Engineering

Agrinatural has a management and operating agreement with Swan Engineering, Inc. (“SEI”). SEI, together with an unrelated third party owns Rural Energy Solutions, LLC (“RES”), the 27% minority owner of Agrinatural. Under the management and operating agreement, SEI provides Agrinatural with day-to-day management and operation of Agrinatural’s pipeline distribution business. In exchange for these services, Agrinatural pays SEI an aggregate management fee equal to the fixed monthly base fee plus the variable customer management fee based on the number of customers served on the pipeline less the agreed monthly fee reduction of $4,500. For the year ended October 31, 2017, the Company paid approximately $36,000 and $157,000 for the monthly base fee and variable customer management fee, respectively.    For the year ended October 31, 2016, the Company paid approximately $32,000 and $149,000 for the monthly base fee and variable customer management fee, respectively. For the year ended October 31, 2015, the Company paid approximately $18,000 and $83,000 for the monthly base fee and variable customer management fee, respectively. The management and operating agreement with SEI expires July 1, 2019 unless earlier terminated for cause as defined in the agreement.

Agrinatural also has a project management agreement with SEI. Pursuant to the project management agreement, SEI supervises all of Agrinatural’s pipeline construction projects. These projects are constructed by unrelated third-party pipeline construction companies. Under the project management agreement, Agrinatural pays SEI a total of 10% of the actual capital expenditures for construction projects approved by Agrinatural’s Board of Directors, excluding capitalized marketing costs. For the year ended October 31, 2017, the Company incurred approximately $44,000 for project management and capital work fees. For the year ended October 31, 2016, the Company incurred approximately $28,000 for project management and capital work fees. For the year ended October 31, 2015, the Company paid approximately $19,000 for project management fees. The project management with SEI expires June 30, 2019 unless earlier terminated for cause as defined in the agreement.

Amounts due to SEI from Agrinatural included in accounts payable on the consolidated balance sheets totaled approximately $16,000 and $131,000 at October 31, 2017 and 2016, respectively.

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Oct. 31, 2017

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

14. COMMITMENTS AND CONTINGENCIES

Water Agreements

In October 2003, the Company entered into an industrial water supply development and distribution agreement with the City of Heron Lake for 15 years.  The Company has the exclusive rights to the first 6,000 gallons per minute of capacity that is available from the well, and provides for the Company, combined with an unrelated company, to approve any other supply contracts that the City may enter into.  In consideration, the Company will pay one half of the City’s water well bond payments of $735,000, plus a 5% administrative fee, totaling approximately $594,000, and operating costs, relative to the Company’s water usage, plus a 10% profit.  These costs will be paid as water usage fees.  The Company recorded an assessment of approximately $367,000 with long-term debt as described in Note 8.  The Company pays operating and administrative expenses of approximately $12,000 per year.

In May 2006, the Company entered into a water treatment agreement with the City of Heron Lake and Jackson County for 30 years. The Company will pay for operating and maintenance costs of the plant in exchange for receiving treated water.  In addition, the Company agreed to an assessment for a portion of the capital costs of the water treatment plant. 

The Company recorded assessments with long-term debt of $500,000 and $3,550,000 in fiscal 2007 and 2006, respectively, as described in Note 8.  The Company paid operating and maintenance expenses of approximately $92,000,  $24,000, and $57,000 in fiscal 2017, 2016, and 2015, respectively.

Ethanol Marketing Agreement

The Company has a marketing agreement (“Eco Agreement”) with Eco-Energy, Inc., an unrelated party (“Eco-Energy”) for the sale of ethanol.  Under this ethanol agreement, Eco-Energy purchases, markets and resells 100% of the ethanol produced at the Company’s ethanol production facility and arranges for the transportation of ethanol.  The Company pays Eco-Energy a marketing fee per gallon of ethanol sold in consideration of Eco-Energy’s services, as well as a fixed lease fee for rail cars leased from Eco-Energy to the Company. The marketing fee was negotiated based on prevailing market-rate conditions for comparable ethanol marketing services.

The initial term of Eco Agreement continued through December 31, 2016, with automatic renewals for additional three terms of three year periods unless terminated by either party by providing written notice to the other party at least 3 months prior to the end of the then current term. During the third fiscal quarter of 2016, the Company amended the Eco Agreement. As amended, the term of the Eco Agreement continues through December 31, 2019. Additionally, the amended Eco Agreement provides for certain negotiated changes to the marketing fees payable to Eco-Energy and payment terms based on prevailing market-rate conditions for comparable ethanol marketed services.

Ethanol marketing fees and commissions totaled approximately $587,000,  $637,000, and $618,000 for the fiscal years ended October 31, 2017, 2016, and 2015.

Ethanol Forward Contracts

At October 31, 2017, the Company had fixed and basis contracts to sell approximately $18,414,000 of ethanol for various delivery periods through March 2018, which approximates 52% of its anticipated ethanol sales for that period.

Distillers’ Grains Marketing Agreement

Gavilon Ingredients, LLC, an unrelated party (“Gavilon”), serves as the distillers’ grains marketer for our plant pursuant to a distillers’ grains off-take agreement.  Pursuant to our agreement with Gavilon, Gavilon purchases all of the distillers’ grains produced at our ethanol plant.  We pay Gavilon a service fee for its services under this agreement. The contract commenced on November 1, 2013 with an initial term of six months, and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 60 days to the other party.

Distillers’ grains commissions totaled approximately $268,000,  $283,000, and $308,000 for the fiscal years ended October 31, 2017, 2016, and 2015.

Distillers’ Grains Forward Contracts

At October 31, 2017, the Company had forward contracts to sell approximately $2,006,000 of distillers’ grains for delivery through March 2018, which approximates 27% of its anticipated distillers’ grains sales during that period.

Corn Oil Marketing Agreement

RPMG, Inc., an unrelated party, markets the corn oil produced at our ethanol plant pursuant to a corn oil marketing agreement.  We pay RPMG a commission based on each pound of corn oil sold by RPMG under the agreement. The contract commenced on November 1, 2013 with an initial term of one year and will continue to remain in effect until terminated by either party at its unqualified option, by providing written notice of not less than 90 days to the other party.

Corn oil commissions totaled approximately $89,000,  $96,000, and $56,000 for the fiscal years ended October 31, 2017, 2016, and 2015.

Corn Oil Forward Contracts

At October 31, 2017, the Company had forward contracts to sell approximately $763,000 of corn oil for delivery through December 2017, which approximates 90% of its anticipated corn oil sales for that period.

Contract for Natural Gas Pipeline to Plant

The Company has a facilities agreement with Northern Border Pipeline Company which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from the plant. Agrinatural was formed to own and operate the pipeline and transports gas to the Company pursuant to a transportation agreement.

The Company also has a base agreement for the sale and purchase of natural gas with Constellation NewEnergy-Gas Division, LLC (“Constellation”), pursuant to which it buys all of its natural gas from Constellation.  This agreement runs until March 31, 2019.

Corn Forward Contracts

At October 31, 2017, the Company had cash and basis contracts for forward corn purchase commitments for approximately 1,769,000 bushels for deliveries through October 2018.

Railcar Damages

In accordance with certain railcar lease agreements, at expiration, the Company is required to return the railcars in good condition, less normal wear and tear.  Primarily due to the ongoing maintenance and repair activities performed on its railcars, the Company has determined that no accrual for leased railcar damages is necessary and an estimate of the possible range of loss cannot be made.

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BUSINESS SEGMENTS

12 Months Ended

Oct. 31, 2017

Segment Reporting [Abstract]

BUSINESS SEGMENTS

15. BUSINESS SEGMENTS

The Company groups its operations into the following two business segments:

Ethanol Production:	Ethanol and co-product production and sales
Natural gas pipeline:	Ownership and operations of natural gas pipeline

Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses.   The accounting policies for each segment are the same as those described in the summary of significant accounting policies in Note 1. Segment income or loss does not include any allocation of shared-service costs.  Segment assets are those that are directly used in or identified with segment operations. Inter-segment balances and transactions have been eliminated.

The following tables summarize financial information by segment and provide a reconciliation of segment revenue, contribution to operating income and total assets for the fiscal years ended October 31:

Revenue:	2017		2016		2015
Ethanol production	$	108,709,255	$	108,577,171	$	114,669,831
Natural gas pipeline		2,946,438		2,770,310		2,761,042
Eliminations		(1,738,041)		(1,741,937)		(1,770,404)
Total Revenue	$	109,917,652	$	109,605,544	$	115,660,469

Operating Income:	2017		2016		2015
Ethanol production	$	6,821,779	$	5,057,258	$	8,106,105
Natural gas pipeline		1,177,251		1,177,158		1,075,581
Eliminations		(694,435)		(740,183)		(1,770,404)
Operating Income	$	7,304,595	$	5,494,233	$	7,411,282

Assets:	2017		2016		2015
Ethanol production	$	56,373,335	$	51,080,443	$	53,663,064
Natural gas pipeline		12,499,296		12,690,603		13,033,320
Total Assets	$	68,872,631	$	63,771,046	$	66,696,384

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QUARTERLY FINANCIAL DATA (UNAUDITED)

12 Months Ended

Oct. 31, 2017

QUARTERLY FINANCIAL DATA (UNAUDITED)

QUARTERLY FINANCIAL DATA (UNAUDITED)

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary quarterly results are as follows:

	First		Second		Third		Fourth
Fiscal year ended October 31, 2017	Quarter		Quarter		Quarter		Quarter
Revenues	$	27,390,074	$	25,990,784	$	28,541,889	$	27,994,905
Gross profit		3,414,231		1,850,266		2,251,294		2,913,491
Operating income		2,567,534		1,080,594		1,518,888		2,137,579
Net income attributable to Heron Lake BioEnergy, LLC		2,832,413		1,019,120		1,414,752		2,002,070
Basic and diluted earnings per unit (Class A and B)	$	0.04	$	0.01	$	0.02	$	0.02

	First		Second		Third		Fourth
Fiscal year ended October 31, 2016	Quarter		Quarter		Quarter		Quarter
Revenues	$	26,588,565	$	25,241,981	$	30,365,123	$	27,409,875
Gross profit		857,581		920,070		3,730,408		2,985,331
Operating income		48,947		108,111		2,983,648		2,353,527
Net income (loss) attributable to Heron Lake BioEnergy, LLC		(25,555)		13,258		2,810,607		2,177,906
Basic and diluted earnings per unit (Class A and B)	$	—	$	—	$	0.03	$	0.03

	First		Second		Third		Fourth
Fiscal year ended October 31, 2015	Quarter		Quarter		Quarter		Quarter
Revenues	$	27,177,449	$	29,813,571	$	30,192,430	$	28,477,019
Gross profit		1,847,050		2,673,825		4,755,934		1,135,568
Operating income		966,668		1,891,732		4,014,168		538,714
Net income attributable to Heron Lake BioEnergy, LLC		879,256		1,733,837		3,808,820		329,320
Basic and diluted earnings per unit (Class A and B)	$	0.01	$	0.02	$	0.05	$	0.01

The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Oct. 31, 2017

Accounting Policies [Abstract]

Nature of Business

Nature of Business

Heron Lake BioEnergy, LLC owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 72.3 million gallons per year of undenatured ethanol on a twelve-month rolling sum basis.  In addition, Heron Lake BioEnergy, LLC produces and sells distillers’ grains with solubles and corn oil as co-products of ethanol production. 

Heron Lake BioEnergy, LLC’s wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), owns 73% of Agrinatural Gas, LLC (“Agrinatural”).  Agrinatural operates a natural gas pipeline that provides natural gas to Heron Lake BioEnergy, LLC’s ethanol production facility and other customers.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company (collectively, “the Company”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% non-controlling interest identified separately in the accompanying consolidated balance sheets and statements of operations. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

Fiscal Reporting Period

The Company’s fiscal year end for reporting financial operations is October 31.

Accounting Estimates

Accounting Estimates

Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with U.S. 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.  The Company uses estimates and assumptions in accounting for significant matters including, among others, the economic lives of property and equipment, valuation of commodity derivative instruments and inventory, evaluation of rail car damages contingency, the assumptions used in the impairment analysis of long-lived assets, and inventory purchase and sale commitments.  The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Noncontrolling Interest

Non-controlling Interest

Amounts recorded as non-controlling interest relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Pursuant to the firm natural gas transportation agreement with Agrinatural, Agrinatural will provide natural gas to Heron Lake BioEnergy’s plant with a specified price per MMBTU with a term ending on October 31, 2021, with one automatic renewal option to extend the term for an additional five years period.

Revenue Recognition

Revenue Recognition

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

In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

Cost of Goods Sold

Cost of Goods Sold

The primary components of cost of goods sold for the production of ethanol and related co-products are corn, energy, raw materials, overhead, depreciation, and direct labor.

Operating Expenses

Operating Expenses

The primary components of operating expenses are salaries and expenses for administrative employees, professional fees, board of governor expenses and property taxes.

Cash

Cash

The Company maintains its accounts at multiple financial institutions. At times throughout the year, the Company’s cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to any significant credit risk on its cash balances.

Restricted Cash

Restricted Cash

The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions as discussed in Note 6.

Accounts Receivable

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. 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. 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 was not necessary at October 31, 2017 or 2016.  It is at least possible this estimate will change in the future.

Inventory

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost for all inventories is determined using the first in first out method (FIFO).  Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.  Inventory consists of raw materials, work in process, finished goods, and supplies.  Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers’ grains, and corn oil.

Derivative Instruments

Derivative Instruments

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

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

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.

Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our consolidated financial statements.

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company’s ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 6.

Other Intangibles

Other Intangibles

Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years. The Company recorded amortization expense in the amount of approximately $38,000 for each of the fiscal years ended October 31, 2017, 2016, and 2015. 

Property and Equipment

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress expenditures will be depreciated using the straight-line method over their estimated useful lives once the assets are placed into service.

Depreciable useful lives are as follows:

Land improvements	15 Years
Plant building and equipment	7-40 Years
Vehicles and other equipment	5-7 Years
Office buildings and equipment	3-40 Years

Long-Lived Assets

Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When determining impairment losses, a long lived asset should be grouped with other assets or liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or liabilities.  If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset.  If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.  Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.  No impairment expense was recorded during fiscal 2017, 2016, and 2015.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company follows guidance for accounting for fair value measurements of financial assets and liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring and nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

· Level 2 inputs include:

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

2. Quoted prices in markets that are observable for the asset or liability either directly or indirectly, for substantially the full term of the asset or liability.

3. Inputs that derived primarily from or corroborated by observable market date by correlation or other means.

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

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value.  No events occurred during the fiscal years ended October 31, 2017, 2016, and 2015 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The Company believes the carrying amount of its debt facilities approximates the fair value.

Income Taxes

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. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company’s tax year end is December 31.

The Company had no significant uncertain tax positions as of October 31, 2017 or 2016 that would require disclosure, primarily due to the partnership tax status. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company’s tax status as a partnership, the adoption of this guidance had no material impact on the Company’s financial condition or results of operations.

The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014.

Net Income per Unit

Net Income per Unit

Basic net income per unit is computed by dividing net income by the weighted average number of members’ units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income by the weighted average number of members’ units and members’ unit equivalents outstanding during the period.

Environmental Liabilities

Environmental Liabilities

The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company has adopted policies, practices, and procedures in the areas of pollution control, occupational health, and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. Environmental liabilities are recorded when the liability is probable and the costs can be reasonably estimated.

Reportable Operating Segments

Reportable Operating Segments

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.   Based on the related business nature and expected financial results criteria set forth in ASC 280, the Company has two reportable operating segments for financial reporting purposes.

· Ethanol Production.   Based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant, including the production and sale of ethanol and its co-products, are aggregated into one financial reporting segment.

· Natural Gas Pipeline. The Company has majority ownership in Agrinatural, through its wholly owned subsidiary, HLBE Pipeline, LLC, and operations of Agrinatural’s natural gas pipeline are aggregated into another financial reporting segment.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

Contract Revenue Recognition (Evaluating)

In May 2014 and amended in August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 which amended the Revenue from Contracts with Customers (Topic 606) of the Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company beginning November 1, 2018. The Company is currently evaluating the guidance and its effect on its consolidated financial statements.

Leases (Evaluating)

In February 2016, the FASB adopted ASU No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The accounting guidance for lessors is largely unchanged. The guidance will be effective for the Company beginning November 1, 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

Restricted Cash (Evaluating)

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which amended Statement of Cash Flows (Topic 230) of the Accounting Standards Codification. The new guidance will require amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statement of cash flows. The amendments will be effective for the Company beginning November 1, 2018. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial statements.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Oct. 31, 2017

Accounting Policies [Abstract]

Schedule of depreciable useful lives of property and equipment

Land improvements	15 Years
Plant building and equipment	7-40 Years
Vehicles and other equipment	5-7 Years
Office buildings and equipment	3-40 Years

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FAIR VALUE MEASUREMENTS (Tables)

12 Months Ended

Oct. 31, 2017

Fair Value Disclosures [Abstract]

Schedule of fair value of assets measured on a recurring basis

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2017:

					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices		Significant Other		Significant
	Consolidated				in Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	141,644	$	141,644	$	141,644	$	—	$	—
Financial Liabilities:
Commodity Derivative instruments - Ethanol	$	12,249	$	12,249	$	18,000	$	(5,751)	$	—
Commodity Derivative instruments - Natural Gas	$	15,381	$	15,381	$	—	$	15,381	$	—

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2016:

					Fair Value Measurement Using
	Carrying Amount in				Quoted Prices in		Significant Other		Significant
	Consolidated				Active Markets		Observable Inputs		Unobservable Inputs
Financial Assets:	Balance Sheet		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commodity Derivative instruments - Corn	$	388,525	$	388,525	$	388,525	$	—	$	—
Commodity Derivative instruments - Ethanol	$	273,813	$	273,813	$	273,813	$	—	$	—

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CONCENTRATIONS (Tables)

12 Months Ended

Oct. 31, 2017

Customer | Total revenues

CONCENTRATIONS

Schedule of concentration risk

	October 31, 2017	October 31, 2016	October 31, 2015
Eco-Energy, Inc. - Ethanol	81.3%	78.5%	76.9%
Gavilon Ingredients, LLC - Distillers' Grains	13.7%	15.4%	19.2%
RPMG, Inc. - Corn Oil	4.5%	4.4%	2.4%

Credit | Accounts receivable

CONCENTRATIONS

Schedule of concentration risk

	October 31, 2017	October 31, 2016
Eco-Energy, Inc. - Ethanol	86.8%	78.6%
Gavilon Ingredients, LLC - Distillers' Grains	7.0%	11.1%
RPMG, Inc. - Corn Oil	4.3%	3.3%

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INVENTORY (Tables)

12 Months Ended

Oct. 31, 2017

Inventory Disclosure [Abstract]

Schedule of inventory

	2017		2016
Raw materials	$	1,442,844	$	1,434,854
Work in process		652,296		696,013
Finished goods		3,747,779		2,713,716
Supplies		1,221,425		1,019,962
Totals	$	7,064,344	$	5,864,545

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DERIVATIVE INSTRUMENTS (Tables)

12 Months Ended

Oct. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of derivative financial instruments

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2017, none of which were designated as hedging instruments:

	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	141,644	$	—
Ethanol contracts	Commodity derivative instruments		—		12,249
Natural gas contracts	Commodity derivative instruments		—		15,381
Totals		$	141,644	$	27,630

As of October 31, 2016, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 4,285,000 bushels, comprised of long corn positions on 3,100,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 1,185,000 bushels that were entered into to hedge forecasted corn purchases through August 2017.  There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

As of October 31, 2016, the Company had no cash collateral (restricted cash) related to derivatives held by a broker.

The following table provides detail regarding the Company’s derivative financial instruments at October 31, 2016, none of which were designated as hedging instruments:

	Consolidated Balance Sheet Location	Assets		Liabilities
Corn contracts	Commodity derivative instruments	$	388,525	$	—
Ethanol contracts	Commodity derivative instruments		273,813		—
Totals		$	662,338	$	—

Schedule of gains (losses) from derivative instruments

	Consolidated Statement of	Fiscal Year Ended  October 31,
	Operations location	2017		2016		2015
Corn contracts	Cost of goods sold	$	962,256	$	915,555	$	831,227
Ethanol contracts	Revenues		(218,802)		117,624		—
Natural gas contracts	Cost of goods sold		(15,381)		21,550		—
Total gain		$	728,073	$	1,054,729	$	831,227

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PROPERTY AND EQUIPMENT (Tables)

12 Months Ended

Oct. 31, 2017

Property, Plant and Equipment [Abstract]

Schedule of property and equipment

	October 31, 2017		October 31, 2016
Land and improvements	$	9,111,838	$	9,111,838
Plant buildings and equipment		85,809,325		84,594,751
Vehicles		682,719		620,323
Office buildings		641,860		641,860
Construction in progress		85,746		315,631
		96,331,488		95,284,403
Less: accumulated depreciation		(49,764,401)		(44,908,193)
Net property and equipment	$	46,567,087	$	50,376,210

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DEBT FACILITIES (Tables)

12 Months Ended

Oct. 31, 2017

Debt Facilities

Schedule of long-term debt

	October 31, 2017		October 31, 2016
Revolving term note payable to lending institution, see terms below.	$	—	$	—
Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.		1,241,171		1,517,046
Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.		56,514		97,930
Note payable to electrical company with monthly payments of $6,250 with interest at 0.00% and a 1.00% maintenance fee due each October. The note was paid in full in September 2017. The electrical company is a member of the Company.		—		68,750
Note payable to non-controlling interest member of Agrinatural. Interest is at One Month LIBOR plus 4.0%, which was approximately 5.24% and 4.53% at October 31, 2017 and 2016, respectively. The note is considered due on demand with payments due at Agrinatural Board of Managers discretion.		100,000		200,000
Totals		1,397,685		1,883,726
Less amounts due within one year		432,183		490,057
Net long-term debt	$	965,502	$	1,393,669

Schedule of estimated maturities of long-term debt

2018	$	432,183
2019		318,883
2020		326,798
2021		319,821
Total debt	$	1,397,685

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LEASES (Tables)

12 Months Ended

Oct. 31, 2017

Leases [Abstract]

Schedule of minimum future lease payments

November 1, 2017 to October 31, 2018	$	1,896,000
November 1, 2018 to October 31, 2019		1,767,000
November 1, 2019 to October 31, 2020		1,767,000
November 1, 2020 to October 31, 2021		1,767,000
November 1, 2021 to October 31, 2022		1,767,000
Thereafter		7,249,000
Total minimum lease commitments	$	16,213,000

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INCOME TAXES (Tables)

12 Months Ended

Oct. 31, 2017

Income Tax Disclosure [Abstract]

Schedule of differences between financial statement basis and tax basis of assets

	2017		2016
Consolidated financial statement basis of assets	$	68,872,631	$	63,771,046
Plus: Organization and start-up costs capitalized		775,562		933,291
Less: Unrealized gains on commodity derivative instruments		(141,644)		(662,338)
Less: Accumulated tax depreciation and amortization greater than financial statement basis		(60,718,166)		(63,051,669)
Plus: Impairment charge		27,844,579		27,844,579
Income tax basis of assets	$	36,632,962	$	28,834,909

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BUSINESS SEGMENTS (Tables)

12 Months Ended

Oct. 31, 2017

Segment Reporting [Abstract]

Schedule of primary business segments

Ethanol Production:	Ethanol and co-product production and sales
Natural gas pipeline:	Ownership and operations of natural gas pipeline

Financial information by segment

Revenue:	2017		2016		2015
Ethanol production	$	108,709,255	$	108,577,171	$	114,669,831
Natural gas pipeline		2,946,438		2,770,310		2,761,042
Eliminations		(1,738,041)		(1,741,937)		(1,770,404)
Total Revenue	$	109,917,652	$	109,605,544	$	115,660,469

Operating Income:	2017		2016		2015
Ethanol production	$	6,821,779	$	5,057,258	$	8,106,105
Natural gas pipeline		1,177,251		1,177,158		1,075,581
Eliminations		(694,435)		(740,183)		(1,770,404)
Operating Income	$	7,304,595	$	5,494,233	$	7,411,282

Assets:	2017		2016		2015
Ethanol production	$	56,373,335	$	51,080,443	$	53,663,064
Natural gas pipeline		12,499,296		12,690,603		13,033,320
Total Assets	$	68,872,631	$	63,771,046	$	66,696,384

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QUARTERLY FINANCIAL DATA (UNAUDITED) (Tables)

12 Months Ended

Oct. 31, 2017

QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary of quarterly results

	First		Second		Third		Fourth
Fiscal year ended October 31, 2017	Quarter		Quarter		Quarter		Quarter
Revenues	$	27,390,074	$	25,990,784	$	28,541,889	$	27,994,905
Gross profit		3,414,231		1,850,266		2,251,294		2,913,491
Operating income		2,567,534		1,080,594		1,518,888		2,137,579
Net income attributable to Heron Lake BioEnergy, LLC		2,832,413		1,019,120		1,414,752		2,002,070
Basic and diluted earnings per unit (Class A and B)	$	0.04	$	0.01	$	0.02	$	0.02

	First		Second		Third		Fourth
Fiscal year ended October 31, 2016	Quarter		Quarter		Quarter		Quarter
Revenues	$	26,588,565	$	25,241,981	$	30,365,123	$	27,409,875
Gross profit		857,581		920,070		3,730,408		2,985,331
Operating income		48,947		108,111		2,983,648		2,353,527
Net income (loss) attributable to Heron Lake BioEnergy, LLC		(25,555)		13,258		2,810,607		2,177,906
Basic and diluted earnings per unit (Class A and B)	$	—	$	—	$	0.03	$	0.03

	First		Second		Third		Fourth
Fiscal year ended October 31, 2015	Quarter		Quarter		Quarter		Quarter
Revenues	$	27,177,449	$	29,813,571	$	30,192,430	$	28,477,019
Gross profit		1,847,050		2,673,825		4,755,934		1,135,568
Operating income		966,668		1,891,732		4,014,168		538,714
Net income attributable to Heron Lake BioEnergy, LLC		879,256		1,733,837		3,808,820		329,320
Basic and diluted earnings per unit (Class A and B)	$	0.01	$	0.02	$	0.05	$	0.01

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Nature of Business (Details) gal in Millions	12 Months Ended
	Oct. 31, 2017 item gal
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operating capacity of Ethanol plant owned and operated | gal	72.3
Agrinatural, LLC
Noncontrolling interest
Number of renewal options | item	1
Term of renewed contract	5 years
Agrinatural, LLC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Noncontrolling interest, ownership percentage by noncontrolling owners	27.00%
HLBE Pipeline Company, LLC | Agrinatural, LLC
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership percentage	73.00%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Other intangibles (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Other Intangibles
Economic useful life of other intangibles	15 years
Amortization of intangible assets	$ 38,000	$ 38,000	$ 38,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and Equipment (Details)	12 Months Ended
	Oct. 31, 2017
Land improvements
Property and Equipment
Depreciable useful life	15 years
Plant building and equipment | Minimum
Property and Equipment
Depreciable useful life	7 years
Plant building and equipment | Maximum
Property and Equipment
Depreciable useful life	40 years
Vehicles and other equipment | Minimum
Property and Equipment
Depreciable useful life	5 years
Vehicles and other equipment | Maximum
Property and Equipment
Depreciable useful life	7 years
Office buildings and equipment | Minimum
Property and Equipment
Depreciable useful life	3 years
Office buildings and equipment | Maximum
Property and Equipment
Depreciable useful life	40 years

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Long-Lived Assets (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Long-Lived Assets
Impairment charge	$ 0	$ 0	$ 0

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Segment (Details)	12 Months Ended
	Oct. 31, 2017 segment
Segment Reporting Information
Number of reportable segments	2
Ethanol production
Segment Reporting Information
Number of reportable segments	1

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RISKS AND UNCERTAINTIES (Details) gal in Millions	12 Months Ended
	Oct. 31, 2019	Oct. 31, 2018	Oct. 31, 2017 Y gal	Nov. 30, 2017 gal
Ethanol production
RISKS AND UNCERTAINTIES
Ethanol production capacity			16,000
Conventional ethanol
RISKS AND UNCERTAINTIES
Renewable volume obligation				15,000
Advanced biofuels
RISKS AND UNCERTAINTIES
Renewable volume obligation				4,290
Cellulosic ethanol
RISKS AND UNCERTAINTIES
Renewable volume obligation				290
Renewable fuels
RISKS AND UNCERTAINTIES
Renewable volume obligation				26,000
Percentage mandatory renewable fuel volumes are reduced			20.00%
Number of consecutive years | Y			2
Period to modify volumes after trigger event	1 year
Renewable fuels | Proposed plan
RISKS AND UNCERTAINTIES
Renewable volume obligation				19,290
Renewable fuels | Minimum
RISKS AND UNCERTAINTIES
Percentage below statutory levels	20.00%	20.00%
Total revenues | Customer | Ethanol production | Minimum
RISKS AND UNCERTAINTIES
Concentration percentage			75.00%
Total revenues | Customer | Ethanol production | Maximum
RISKS AND UNCERTAINTIES
Concentration percentage			85.00%
Cost of goods sold | Product | Corn | Minimum
RISKS AND UNCERTAINTIES
Concentration percentage			70.00%
Cost of goods sold | Product | Corn | Maximum
RISKS AND UNCERTAINTIES
Concentration percentage			90.00%

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FAIR VALUE MEASUREMENTS (Details) - Recurring basis - USD ($)	Oct. 31, 2017	Oct. 31, 2016
Corn contracts | Carrying Amount
Fair value measurements
Derivative Assets	$ 141,644	$ 388,525
Corn contracts | Fair Value
Fair value measurements
Derivative Assets	141,644	388,525
Corn contracts | Level 1 | Fair Value
Fair value measurements
Derivative Assets	141,644	388,525
Ethanol contracts | Carrying Amount
Fair value measurements
Derivative Assets		273,813
Derivative Liability	12,249
Ethanol contracts | Fair Value
Fair value measurements
Derivative Assets		273,813
Derivative Liability	12,249
Ethanol contracts | Level 1 | Fair Value
Fair value measurements
Derivative Assets		$ 273,813
Derivative Liability	18,000
Ethanol contracts | Level 2 | Fair Value
Fair value measurements
Derivative Liability	(5,751)
Natural gas contracts | Carrying Amount
Fair value measurements
Derivative Liability	15,381
Natural gas contracts | Fair Value
Fair value measurements
Derivative Liability	15,381
Natural gas contracts | Level 2 | Fair Value
Fair value measurements
Derivative Liability	$ 15,381

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CONCENTRATIONS (Details) - customer	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
CONCENTRATIONS
Number of major customers	3	3	3
Total revenues | Customer | Eco-Energy, Inc. | Ethanol production
CONCENTRATIONS
Concentration percentage	81.30%	78.50%	76.90%
Total revenues | Customer | Gavilon Ingredients, LLC | Distiller's Grains
CONCENTRATIONS
Concentration percentage	13.70%	15.40%	19.20%
Total revenues | Customer | RPMG, Inc. | Corn Oil
CONCENTRATIONS
Concentration percentage	4.50%	4.40%	2.40%
Accounts receivable | Credit | Eco-Energy, Inc. | Ethanol production
CONCENTRATIONS
Concentration percentage	86.80%	78.60%
Accounts receivable | Credit | Gavilon Ingredients, LLC | Distiller's Grains
CONCENTRATIONS
Concentration percentage	7.00%	11.10%
Accounts receivable | Credit | RPMG, Inc. | Corn Oil
CONCENTRATIONS
Concentration percentage	4.30%	3.30%

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INVENTORY (Details) - USD ($)	Oct. 31, 2017	Oct. 31, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 1,442,844	$ 1,434,854
Work in process	652,296	696,013
Finished goods	3,747,779	2,713,716
Supplies	1,221,425	1,019,962
Totals	$ 7,064,344	$ 5,864,545

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DERIVATIVE INSTRUMENTS (Details)	12 Months Ended
	Oct. 31, 2017 USD ($) MMBTU bu gal	Oct. 31, 2016 USD ($) bu
Derivative instruments
Assets	$ 141,644	$ 662,338
Liabilities	$ 27,630
Corn contracts
Derivative instruments
Notional volume | bu	1,120,000	4,285,000
Restricted cash		$ 0
Corn contracts | Long/Purchase
Derivative instruments
Notional volume | bu	215,000	3,100,000
Corn contracts | Short/Sale
Derivative instruments
Notional volume | bu	905,000	1,185,000
Ethanol contracts
Derivative instruments
Notional volume | gal	420,000
Natural gas contracts
Derivative instruments
National Energy | MMBTU	120,000
Derivatives held by a broker
Derivative instruments
Restricted cash	$ 0
Derivatives held by a broker | Accounts Payable
Derivative instruments
Liabilities	12,000
Derivatives not designated as hedging instruments
Derivative instruments
Assets	141,644	$ 662,338
Liabilities	$ 27,630
Derivatives not designated as hedging instruments | Commodity Contract | Maximum
Derivative instruments
Derivative term	24 months
Derivatives not designated as hedging instruments | Corn contracts
Derivative instruments
Assets	$ 141,644	388,525
Derivatives not designated as hedging instruments | Ethanol contracts
Derivative instruments
Assets		$ 273,813
Liabilities	12,249
Derivatives not designated as hedging instruments | Natural gas contracts
Derivative instruments
Liabilities	$ 15,381

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DERIVATIVE INSTRUMENTS, Gains (losses) (Details) - Derivatives not designated as hedging instruments - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Derivative Instruments
Gains and (losses) from derivative instruments	$ 728,073	$ 1,054,729	$ 831,227
Corn contracts | Cost of goods sold.
Derivative Instruments
Gains and (losses) from derivative instruments	962,256	915,555	$ 831,227
Ethanol contracts | Revenues.
Derivative Instruments
Gains and (losses) from derivative instruments	(218,802)	117,624
Natural gas contracts | Cost of goods sold.
Derivative Instruments
Gains and (losses) from derivative instruments	$ (15,381)	$ 21,550

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PROPERTY AND EQUIPMENT (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Property and Equipment
Property and equipment, gross	$ 96,331,488	$ 95,284,403
Less accumulated depreciation	(49,764,401)	(44,908,193)
Net, property and equipment	46,567,087	50,376,210
Depreciation	4,984,000	4,744,000	$ 4,556,000
Land and improvements
Property and Equipment
Property and equipment, gross	9,111,838	9,111,838
Plant building and equipment
Property and Equipment
Property and equipment, gross	85,809,325	84,594,751
Vehicles
Property and Equipment
Property and equipment, gross	682,719	620,323
Office buildings
Property and Equipment
Property and equipment, gross	641,860	641,860
Construction in progress
Property and Equipment
Property and equipment, gross	$ 85,746	$ 315,631

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DEBT FACILITIES (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016
DEBT FACILITIES
Long-term debt	$ 1,397,685	$ 1,883,726
Less amounts due on demand or within one year	432,183	490,057
Net long term debt	$ 965,502	$ 1,393,669
Revolving term note payable to lending institution
DEBT FACILITIES
Interest rate at end of period (as a percent)	4.49%	3.45%
Revolving term note payable to lending institution | One-Month LIBOR
DEBT FACILITIES
Spread above variable interest rate (as a percent)	3.25%
Assessments payable as part of water treatment agreement, with interest at 6.55%, due in 2021
DEBT FACILITIES
Long-term debt	$ 1,241,171	$ 1,517,046
Payment	$ 189,393	$ 189,393
Frequency of payment	semi-annual	semi-annual
Interest rate (as a percent)	6.55%	6.55%
Period of worth of debt	1 year	1 year
Deposit on debt service payments	$ 364,000	$ 364,000
Assessments payable as part of water supply agreement, with interest at 8.73%, due in 2019
DEBT FACILITIES
Long-term debt	56,514	97,930
Payment	$ 3,942	$ 3,942
Frequency of payment	monthly	monthly
Interest rate (as a percent)	8.73%	8.73%
Note payable to electrical company, due September 2017
DEBT FACILITIES
Long-term debt		$ 68,750
Payment		$ 6,250
Frequency of payment		monthly
Interest rate (as a percent)		0.00%
Maintenance fee (as a percent)		1.00%
Note payable to noncontrolling interest member of Agrinatural, Interest One Month LIBOR plus 4.0 %
DEBT FACILITIES
Long-term debt	$ 100,000	$ 200,000
Interest rate at end of period (as a percent)	5.24%	4.53%
Note payable to noncontrolling interest member of Agrinatural, Interest One Month LIBOR plus 4.0 % | One-Month LIBOR
DEBT FACILITIES
Spread above variable interest rate (as a percent)	4.00%	4.00%

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DEBT FACILITIES - Additional information (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Feb. 28, 2015
Revolving term note payable to lending institution
Debt financing
Maximum borrowing capacity			$ 28,000,000
Line of credit future reduction amounts	$ 3,500,000
Current borrowing capacity	17,500,000
Outstanding balance on credit facility	0	$ 0
Aggregate principal amount available for borrowing	$ 17,500,000	$ 21,000,000
Interest rate at end of period (as a percent)	4.49%	3.45%
Unused commitment fee per annum on the unused portion of debt (as a percent)	0.50%
Revolving term note payable to lending institution | One-Month LIBOR
Debt financing
Spread above variable interest rate (as a percent)	3.25%
CoBank
Debt financing
Annual fee	$ 2,500

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DEBT FACILITIES - Estimated annual maturities (Details) - USD ($)	Oct. 31, 2017	Oct. 31, 2016
Estimated maturities of long-term debt
2018	$ 432,183
2019	318,883
2020	326,798
2021	319,821
Long-term debt	$ 1,397,685	$ 1,883,726

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MEMBERS' EQUITY (Details)	Dec. 21, 2017 USD ($) $ / shares	Dec. 17, 2015 USD ($) $ / shares	Dec. 18, 2014 USD ($) $ / shares	Oct. 31, 2017 Vote / shares shares	Oct. 31, 2016 shares
Members' Equity
Common Unit, Authorized				77,932,107	77,932,107
Minimum number of units held to be member				2,500
Number of votes per unit | Vote / shares				1
Distribution declared, per membership unit (in dollars per unit) | $ / shares	$ 0.11	$ 0.05	$ 0.12
Amount of distribution declared | $	$ 8,573,000	$ 3,897,000	$ 9,352,000
Class A units
Members' Equity
Common Unit, Authorized				65,000,000
Class B units
Members' Equity
Common Unit, Authorized				15,000,000

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LEASES (Details)	12 Months Ended
	Oct. 31, 2017 USD ($) item	Oct. 31, 2016 USD ($)	Oct. 31, 2015 USD ($)
Leases
Rent expense	$ 2,170,000	$ 2,571,000	$ 1,969,000
Minimum
Leases
Lease term	1 year
Rail Cars
Leases
Equipment lease, quantity | item	148
Monthly lease payment	$ 127,000
Hopper Cars
Leases
Equipment lease, quantity | item	110
Monthly lease payment	$ 64,000
Hopper Cars Renewed
Leases
Equipment lease, quantity | item	50
Monthly lease payment	$ 25,000
Lease term	10 years

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LEASES, Future minimum lease payments (Details)	Oct. 31, 2017 USD ($)
Minimum future lease payments
November 1, 2017 to October 31, 2018	$ 1,896,000
November 1, 2018 to October 31, 2019	1,767,000
November 1, 2019 to October 31, 2020	1,767,000
November 1, 2020 to October 31, 2021	1,767,000
November 1, 2021 to October 31, 2022	1,767,000
Thereafter	7,249,000
Total minimum lease commitments	$ 16,213,000

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INCOME TAXES (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Income Tax Disclosure [Abstract]
Consolidated financial statement basis of assets	$ 68,872,631	$ 63,771,046	$ 66,696,384
Plus: Organization and start-up costs capitalized	775,562	933,291
Less: Unrealized gains on commodity derivative instruments	(141,644)	(662,338)
Less: Accumulated tax depreciation and amortization greater than financial statement basis	(60,718,166)	(63,051,669)
Plus: Impairment charge	27,844,579	27,844,579
Income tax basis of assets	$ 36,632,962	$ 28,834,909

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EMPLOYEE BENEFIT PLANS (Details) - USD ($)	12 Months Ended
	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
Defined Contribution Plan
Employer match as a percentage of employee deferral	50.00%
Company contributions to the plan	$ 90,000	$ 85,000	$ 81,000
Maximum
Defined Contribution Plan
Maximum contribution as a percentage of employee salary	4.00%

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RELATED PARTY TRANSACTIONS - (Details)	12 Months Ended
	Oct. 31, 2017 USD ($) item shares	Oct. 31, 2016 USD ($) shares	Oct. 31, 2015 USD ($)	Dec. 31, 2013 USD ($)
RELATED PARTY TRANSACTIONS
Number of units sold (in shares) | shares	77,932,107	77,932,107
Agrinatural, LLC
RELATED PARTY TRANSACTIONS
Noncontrolling interest, ownership percentage by noncontrolling owners	27.00%
Board Members | Corn
RELATED PARTY TRANSACTIONS
Amount purchased from related party	$ 9,811,000	$ 15,008,000	$ 11,032,000
Granite Falls Energy, LLC
RELATED PARTY TRANSACTIONS
Percentage of costs for three management positions incurred by GFE paid by the Company	50.00%
Number of management positions of GFE partially paid for by the Company | item	3
Period of written notice for termination prior to renewal of agreement	90 days
Amount of related party transaction	$ 406,000	375,000	414,000
Agrinatural, LLC
RELATED PARTY TRANSACTIONS
Proceeds from noncontrolling interest				$ 300,000
Interest paid	6,000	20,000	16,000
Swan Engineering Inc (SEI)
RELATED PARTY TRANSACTIONS
Accounts payable, related parties	16,000	131,000
Swan Engineering Inc. Management And Operating Agreement
RELATED PARTY TRANSACTIONS
Monthly base fee paid	36,000	32,000	18,000
Monthly variable fee paid	157,000	149,000	83,000
Swan Engineering Inc. Project Management Agreement
RELATED PARTY TRANSACTIONS
Project management and capital work fees	44,000	$ 28,000
Project management fees			$ 19,000
Agrinatural, LLC | Swan Engineering Inc. Management And Operating Agreement
RELATED PARTY TRANSACTIONS
Management fee reduction	$ 4,500
Agrinatural, LLC | Swan Engineering Inc. Project Management Agreement
RELATED PARTY TRANSACTIONS
Percentage of capital expenditures reimbursed to related parties	10.00%
Swan Engineering Inc. And Unrelated Third Party | Agrinatural, LLC
RELATED PARTY TRANSACTIONS
Noncontrolling interest, ownership percentage by noncontrolling owners	27.00%

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COMMITMENTS AND CONTINGENCIES (Details)		1 Months Ended		12 Months Ended
	Nov. 01, 2013	May 31, 2006	Oct. 31, 2003 USD ($) gal	Oct. 31, 2017 USD ($) mi bu	Dec. 31, 2016 item	Oct. 31, 2016 USD ($)	Oct. 31, 2015 USD ($)	Oct. 31, 2007 USD ($)	Oct. 31, 2006 USD ($)
Water Supply Development and Distribution Agreement
COMMITMENTS AND CONTINGENCIES
Term of agreement			15 years
Initial volume per minute of capacity that is available from the well for which the entity has exclusive rights (in gallons) | gal			6,000
Percentage of water well bond payments entity to pay			50.00%
City's water well bond payments			$ 735,000
Administrative fee to be paid as water usage fees (as a percent)			5.00%
Administrative fee to be paid as water usage fees			$ 594,000
Percentage of profit to be paid as water usage fees			10.00%
Assessment			$ 367,000
Operating and administrative/maintenance expenses paid			$ 12,000
Water Treatment Agreement
COMMITMENTS AND CONTINGENCIES
Term of agreement		30 years
Assessment								$ 500,000	$ 3,550,000
Operating and administrative/maintenance expenses paid				$ 92,000		$ 24,000	$ 57,000
Ethanol Marketing Agreement
COMMITMENTS AND CONTINGENCIES
Percentage of ethanol and distillers grains products produced by the entity to be purchased, marketed and resold by Gavilon				100.00%
Number of terms agreement automatically renews | item					3
Term of renewal periods					3 years
Fees and commissions				$ 587,000		637,000	618,000
Distillers Grains Marketing Agreement
COMMITMENTS AND CONTINGENCIES
Term of agreement	6 months
Fees and commissions				268,000		283,000	308,000
Corn Oil Marketing Agreement
COMMITMENTS AND CONTINGENCIES
Term of agreement	1 year
Fees and commissions				$ 89,000		$ 96,000	$ 56,000
Contract For Natural Gas Pipeline To Plant
COMMITMENTS AND CONTINGENCIES
Distance of the natural gas pipeline from the ethanol plant | mi				16
Short/Sale | Ethanol Forward Contracts
COMMITMENTS AND CONTINGENCIES
Notional value				$ 18,414,000
Anticipated sales (as a percent)				52.00%
Short/Sale | Distillers Grains Forward Contracts
COMMITMENTS AND CONTINGENCIES
Notional value				$ 2,006,000
Anticipated sales (as a percent)				27.00%
Short/Sale | Corn Oil Forward Contract
COMMITMENTS AND CONTINGENCIES
Notional value				$ 763,000
Anticipated sales (as a percent)				90.00%
Long/Purchase | Corn Forward Contracts
COMMITMENTS AND CONTINGENCIES
Notional volume | bu				1,769,000
Minimum | Ethanol Marketing Agreement
COMMITMENTS AND CONTINGENCIES
Written notice for termination of agreement					3 months
Minimum | Distillers Grains Marketing Agreement
COMMITMENTS AND CONTINGENCIES
Written notice for termination of agreement	60 days
Minimum | Corn Oil Marketing Agreement
COMMITMENTS AND CONTINGENCIES
Written notice for termination of agreement	90 days

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BUSINESS SEGMENTS (Details)	3 Months Ended												12 Months Ended
	Oct. 31, 2017 USD ($)	Jul. 31, 2017 USD ($)	Apr. 30, 2017 USD ($)	Jan. 31, 2017 USD ($)	Oct. 31, 2016 USD ($)	Jul. 31, 2016 USD ($)	Apr. 30, 2016 USD ($)	Jan. 31, 2016 USD ($)	Oct. 31, 2015 USD ($)	Jul. 31, 2015 USD ($)	Apr. 30, 2015 USD ($)	Jan. 31, 2015 USD ($)	Oct. 31, 2017 USD ($) segment	Oct. 31, 2016 USD ($)	Oct. 31, 2015 USD ($)
Segment Reporting Information
Number of operating segments | segment													2
Revenue	$ 27,994,905	$ 28,541,889	$ 25,990,784	$ 27,390,074	$ 27,409,875	$ 30,365,123	$ 25,241,981	$ 26,588,565	$ 28,477,019	$ 30,192,430	$ 29,813,571	$ 27,177,449	$ 109,917,652	$ 109,605,544	$ 115,660,469
Operating income	2,137,579	$ 1,518,888	$ 1,080,594	$ 2,567,534	2,353,527	$ 2,983,648	$ 108,111	$ 48,947	538,714	$ 4,014,168	$ 1,891,732	$ 966,668	7,304,595	5,494,233	7,411,282
Assets	68,872,631				63,771,046				66,696,384				68,872,631	63,771,046	66,696,384
Operating Segments | Ethanol production
Segment Reporting Information
Revenue													108,709,255	108,577,171	114,669,831
Operating income													6,821,779	5,057,258	8,106,105
Assets	56,373,335				51,080,443				53,663,064				56,373,335	51,080,443	53,663,064
Operating Segments | Natural gas pipeline
Segment Reporting Information
Revenue													2,946,438	2,770,310	2,761,042
Operating income													1,177,251	1,177,158	1,075,581
Assets	$ 12,499,296				$ 12,690,603				$ 13,033,320				12,499,296	12,690,603	13,033,320
Intersegment Eliminations
Segment Reporting Information
Revenue													(1,738,041)	(1,741,937)	(1,770,404)
Operating income													$ (694,435)	$ (740,183)	$ (1,770,404)

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QUARTERLY FINANCIAL DATA (UNAUDITED) (Details) - USD ($)	3 Months Ended												12 Months Ended
	Oct. 31, 2017	Jul. 31, 2017	Apr. 30, 2017	Jan. 31, 2017	Oct. 31, 2016	Jul. 31, 2016	Apr. 30, 2016	Jan. 31, 2016	Oct. 31, 2015	Jul. 31, 2015	Apr. 30, 2015	Jan. 31, 2015	Oct. 31, 2017	Oct. 31, 2016	Oct. 31, 2015
QUARTERLY FINANCIAL DATA (UNAUDITED)
Revenues	$ 27,994,905	$ 28,541,889	$ 25,990,784	$ 27,390,074	$ 27,409,875	$ 30,365,123	$ 25,241,981	$ 26,588,565	$ 28,477,019	$ 30,192,430	$ 29,813,571	$ 27,177,449	$ 109,917,652	$ 109,605,544	$ 115,660,469
Gross Profit	2,913,491	2,251,294	1,850,266	3,414,231	2,985,331	3,730,408	920,070	857,581	1,135,568	4,755,934	2,673,825	1,847,050	10,429,282	8,493,390	10,412,377
Operating income	2,137,579	1,518,888	1,080,594	2,567,534	2,353,527	2,983,648	108,111	48,947	538,714	4,014,168	1,891,732	966,668	7,304,595	5,494,233	7,411,282
Net income (loss) attributable to Heron Lake BioEnergy, LLC	$ 2,002,070	$ 1,414,752	$ 1,019,120	$ 2,832,413	$ 2,177,906	$ 2,810,607	$ 13,258	$ (25,555)	$ 329,320	$ 3,808,820	$ 1,733,837	$ 879,256	$ 7,268,355	$ 4,949,700	$ 6,751,233
Basic and diluted earnings per unit (Class A and B)	$ 0.02	$ 0.02	$ 0.01	$ 0.04	$ 0.03	$ 0.03			$ 0.01	$ 0.05	$ 0.02	$ 0.01	$ 0.09	$ 0.06	$ 0.09