More Information: Green Plains Renewable Energy, Inc.

Ethanol

Ethanol is produced by processing corn and/or other biomass. Ethanol is utilized primarily as an "oxygenate," or an additive to gasoline to increase the oxygen level in fuel so the gasoline burns more cleanly. Ethanol is used to enhance octane in gasoline, and is also considered a primary fuel that can be purchased at many gasoline stations throughout the U.S. as E-85, which is 85% ethanol and 15% unleaded gasoline.

The increased use of ethanol is attributable in part to the Federal Clean Air Act Amendments of 1990, which established the federal oxygenated gasoline programs to reduce smog in certain urban areas by requiring the use of oxygenated fuels during the winter months. In addition, under the Clean Air Amendments, several major U.S. metropolitan areas are required to use oxygenated fuel year-round. With the passage of the Renewable Fuels Bill of 2005 in the United States Congress, ethanol usage is expected to increase significantly in the coming years.

Currently, the mandates of the Federal Clean Air Act Amendments of 1990 are being satisfied primarily with ethanol or methyl tertiary butyl ether or "MTBE," which is cheaper than ethanol. However, unlike MTBE, which is petroleum-based, ethanol is biodegradable. MTBE is being phased out or is currently banned in certain states, including, among others, California, Connecticut, Missouri, New Jersey, and New York, due to concerns over groundwater contamination. It is also anticipated that many other States will do the same in the future.

Due in part to federal and state policies promoting cleaner air and federal and state tax and production incentives, the ethanol industry has grown substantially in recent years. According to Renewable Fuels Association, there are currently over 100 producing ethanol plants in the US capable of producing approximately 4.8 billion gallons of ethanol per year. There are 39 new plants currently under construction and 7 in expansions.

The Federal Energy Bill passed in 2005, mandated that 7.5 billion gallons of ethanol will be used in the U.S by 2012. That bill also removed the legal protection that blenders of MTBE had enjoyed prior to its passage. Upon its passage, most oil companies stopped blending MTBE in the U.S. which has driven the demand for and use of ethanol significantly.

Distillers Grains

The principal by-product of the ethanol production process is Distillers Grains, a high protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry.

Distiller’s grains contain by-pass protein that is comparable to other protein supplements such as cottonseed meal and soybean meal. By-pass proteins are more digestible to the animal. Certain studies have found that feeding distillers grains in appropriate quantities causes greater lactation in milk cows and greater weight gain in beef cattle.

Dry mill ethanol processing creates three forms of distiller’s grains: Distillers Wet Grains with Solubles (“DWGS”), Distiller’s Modified Wet Grains with Solubles (“DMWG”) and Distiller’s Dried Grains with Solubles (“DDGS”). DWGS is processed corn mash that contains approximately 70% moisture. DWGS has a shelf life of approximately three days and can be sold only to farms within the immediate vicinity of an ethanol plant.

DMWG is DWGS that has been dried to approximately 50% moisture. DMWG have a slightly longer shelf life of approximately three weeks and are often sold to nearby markets.

DDGS is DWGS that has been dried to 10% moisture. DDGS has an almost indefinite shelf life and may be sold and shipped to any market regardless of its vicinity to an ethanol plant. GPRE intends to market DDGS and is exploring the local demand for DWGS and DMWG, hoping to market at least a portion of their distillers grains in these higher moisture forms.