Green Plains Inc (GPRE) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Green Plains Renewable Energy first-quarter 2011 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

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

Thanks, Mimi. Welcome to our first-quarter 2011 earnings call. On the call today is Todd Becker, President and Chief Executive Officer; and Jerry Peters, our Chief Financial Officer; Jeff Briggs, Chief Operating Officer; and Steve Bleyl, Executive Vice President of Ethanol Marketing.

We are here to discuss our first quarter 2011 financial results and recent developments for Green Plains Renewable Energy. There is a slide presentation for you to follow along with as we go through our comments today. You can find the presentation on our website, www.GPREinc.com on the investor page under the events and presentations link.

Our comments today will contain forward-looking statements or any statements made that are not historical facts. These forward-looking statements are based on the current expectations of Green Plains' management team and there can be no assurance that such expectations will prove to be correct.

Because forward-looking statements involve risks and uncertainties, Green Plains actual results could differ materially from management's expectations. Please refer to page two of the website presentation and our 10-K and other periodic SEC filings for information about factors that could cause different outcomes.

The information presented today is time sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Green Plains will not be reviewing or updating this material.

Now I would like to turn the call of a Todd Becker.

Thanks Jim. Good morning and thanks for joining us today. We produced solid financial results for the first quarter of 2011 considering the market dynamics the industry faced at the start of the year.

For the first quarter, we generated $812 million of revenues, $7.7 million of net income and $0.20 in diluted earnings per share. That extends our string of profitable quarters now to eight, all at the same time we more than doubled our ethanol production and increased or grain storage capacity by over 70%.

All of our segments were profitable in the quarter and we reported $24.6 million of operating income before corporate expenses. Total EBITDA for the quarter was approximately $32 million. We sold and produced 172 million gallons of ethanol and with the successful close of the Otter Tail ethanol plant acquisition at the end of March; we are now producing at slightly over a 2 million gallon per day rate or 740 million gallons on an annual basis. That is equivalent to more than 1400 gallons of motor fuel per minute or enough to fuel three drivers average driving for a year every single minute of the day.

We saw a $1.4 million positive swing in operating income for our agribusiness segment in the first quarter compared to last year [while] the $500,000 operating loss in the first quarter of last year was turned around to a $900,000 operating income for the first quarter of this year.

We are making progress reducing costs and improving profitability in this segment. We are still on track to hit operating income for this segment of between $8 million and $10 million for 2011 as indicated previously.

As we indicated in our earnings release, we are investing capital to expand our grain storage capacity by 3.6 million bushels this year. These construction projects should be completed by the fall harvest and will allow us to originate more harvest bushels directly from our farmer customers. Once completed we will own a total of over 43 million bushels of grain storage with 33 million bushels at our agribusiness operations and the remainder at our nine ethanol plants.

We continue to explore additional internal expansion projects as well as actively looking for acquisition opportunities.

I want to give you a few numbers that outline our presence as an agricultural processor and handler. If you combine the [grind] at our production facilities with the handle at our elevators over the next 12 months, we will process over 300 million bushels the corn or approximately 2% of the US corn crop.

We also produce and distribute more than two million tons of animal feed. We believe that the combination of grain handling, processing and animal feed production and marketing firmly places us as one of the leaders in the US agricultural value chain.

Marketing and distribution operating income was up 250% quarter-over-quarter for the first quarter of 2011. This segment's significant growth in operating income is primarily the result of producing and selling 10 million pounds of corn oil in the first quarter of this year. We now have six plants producing corn oil and expect two more plants on line by the end of the second quarter and the extraction technology will be installed at Otter Tail in the third quarter of this year.

As a reminder, corn oil typically trades at a discount to soy oil and we do not expect that relationship to change, yet we are still achieving better than expected returns on this investment.

Operating income related to corn oil should double again in the second quarter as we ramp up production. When fully implemented, we expect to produce at least 25 million pounds per quarter.

We have continued to focus on our operating costs and efficiencies, remaining a low-cost operator is important for a commodity processing business, particularly in light of the current dynamic margin environment.

The ethanol margin curve is compressed currently in the middle of the year with little visibility of acceptable margins. This pattern is similar to last year at this time and we have needed to be patient, particularly with the third quarter. Our best opportunities for locking margins have been within the second and the fourth quarters of 2011.

Let me give you some data that demonstrates the result of our margin management strategy for Q1 production. We often go back and compare the daily average spot crush for our platform with the actual realized crush during the quarter. During the first quarter, the daily average platform crush was in the high single digits, yet we achieved $0.18 per gallon as represented in our financial performance for the quarter. The main reason for this outperformance was our ability to lock margins away long before we got to the start of the quarter.

We had good visibility for Q1 margins during the third and fourth quarters of last year and we moved quickly to lock these margins away. Our strong balance sheet allows us to use all the instruments available in the physical markets as well is using financial markets as well.

As we focus on finishing up the second quarter we have seen the daily average platform crush continue to trend lower. When we go back and look at last year, on July 1 of 2010, average platform crush was less than $0.05 per gallon for the third quarter of last year, yet we finished that quarter at $0.19 per gallon -- of EBITDA per gallon. Today's margins have similar visibility to last year, yet we feel there are even better underlying demand fundamentals this year and I will discuss that later in the call.

We believe the opportunity to execute our risk management strategy will happen for the third quarter, but it will take a little more time and patience before it materializes.

As I said earlier, the best opportunity to lock margins away for 2011 has been in the fourth quarter. We have approximately half that quarter locked away at margins in the low $0.20 per gallon range and we will keep going after that as we move through this quarter.

So we have, as we call it, the summer of discontent, yet feel optimistic we will have opportunities to capitalize on margins as they expand. We believe keeping operating and overhead costs down combined with the diversified income streams we are developing. We believe we are on track to generate at least $50 million of total operating income annually from non-ethanol related products and services which will smooth out the rough edges of the ethanol margin environment as we move through the summer.

Not I would like to turn the call over to Jerry to review our financials in more detail and then I will cover industry topics and our current outlook for the Company.

Thanks, Todd. I'd like to first take a few minutes and run down our consolidated income statement for the first quarter of 2011 compared to 2010, as shown on slide six. The biggest drivers in the $386 million increase in revenues year-over-year were increased ethanol production volumes, grain volumes and higher commodity prices in each of our segments.

Ethanol production volumes increased 39% in the first quarter when compared to a year ago. The addition of the Lakota and Riga plants which were acquired in the fourth quarter of last year, accounted for the majority of the increase in production gallons, along with a small amount from Otter Tail as this acquisition was completed with about one week left in the first quarter.

As I said, the revenue increase was also driven by higher revenues from our agribusiness segment, which increased $72 million as a result of a 125% increase in volumes of grain sold in the first quarter of 2011 compared to 2010.

The Tennessee grain operations which were added in the second quarter of 2010 account for most of the increase between these periods but grain handled in Iowa also increased year-over-year. The Tennessee operations have performed very well and are largely responsible for the increase in operating income in the agribusiness segment.

While our revenues increased substantially, gross profit remained flat between the periods, mainly because we experienced very favorable crush margins in the first quarter of 2010. As shown on slide four, per gallon operating income before depreciation in the first quarter of 2010 was $0.30 compared to $0.18 per gallon realized in 2011.

Consolidated selling and general and administrative expenses increased $4.6 million quarter-over-quarter as a result of the increased size and scope of our business with eight more operating locations in the first quarter of 2011 than in 2010. These factors along with the increased interest expense due to our acquisitions and the convertible net issuance late last year reduced our earnings before income tax by $8 million in the first quarter of 2011 compared to the same period last year.

As we have discussed previously, our effective tax rate has increased to about 37% compared to 22% last year. At this point, we expect the rate to remain pretty close to the 37% level for the rest of 2011.

EBITDA for the first quarter of 2011 was $32 million which was off slightly from a year ago and on a trailing 12-month basis, totaled approximately $128 million.

Our cash position remains strong as this is an important component supporting our risk management strategy. You may recall we ended 2010 with $261 million of cash on the balance sheet. At the end of March, we had about $162 million of cash on hand plus $54 million undrawn under our revolvers. The reduction in cash was not unexpected since we had about $60 million going out during the first week of January as farmers utilized their normal process of deferring payments for their grain sales until the new tax year.

During the first quarter, we also utilized about $18 million of cash on our investments in corn oil extraction, the acquisition of the Otter Tail plant and normal capital expenditures. In addition, we've utilized our cash to lock away margin in our cash flow hedging programs and to maintain a balanced risk position within our grain elevators. Deposits with commodity brokers are a critical component of managing our risk and are a central reason we closely guard our liquidity.

We also made $23 million in debt repayments during the quarter. These repayments included $13 million in year-end cash sweeps related to the term debt at our production facilities. The sweeps are based on generating cash flow at each of our ethanol production facilities in excess of said amount. So that further reflects a solid performance in 2010.

Throughout the growth we've completed in this past year, we have managed to maintain a solid capital structure, particularly in our ethanol production business. Our total ethanol plant debt at March 31, 2011 was $494 million, which was an increase of $87 million over last year. But with our increased production capacity and our continued repayment, we have reduced our debt per gallon from $0.85 to $0.67 and that's in a 12-month period. We expect to continue this progress going forward as our margin management strategy is directly linked to our debt service requirements.

Now I would like to turn the call back over to Todd for some of his closing comments.

Thanks, Jerry. I'd like to spend a few minutes on the macro factors within our industry as well as highlight some recent developments in our BioProcessAlgae joint venture. Ethanol continues to be the cheapest motor fuel in the world and as a result, our industry fundamentals are still very solid. Ethanol is still trading at a very big discount to gasoline for the rest of 2011.

US ethanol exports have totaled about 117 million gallons for the first two months of the year and we think that will put the industry on pace to export approximately 700 million gallons in 2011. Combining export demand with the 12.6 billion gallon mandate for US refiners and blenders, and the economic incentive to blend, ethanol is an important source of octane for subgrade CBOB and an oxygenate for reformulated gasoline markets.

2011 remains a solid opportunity for ethanol producers. We believe the tightness in the corn market will not be a prolonged event as we have been out securing the physical corn for the upcoming quarters. We have made a concerted effort to secure physical corn through late summer, so we have available product to convert into ethanol. Much of this corn is unpriced physical basis only purchased from both farmers and commercials.

As margins expand during the third quarter, we believe this will give us the opportunity to sell ethanol to end-users and then further lock in our corn costs.

We believe the 2011/2012 crop year, this crop will get planted, yields will recover, world production will increase and we will hopefully return to a somewhat more normal market pattern. Early discussions with our farmer customers lead us to believe that with the profitability advantage of corn versus soybeans, there is a potential for even more expansion of corn acres versus what the USDA recently reported.

In addition, we strongly believe that the USDA is underestimating ethanol yields in the industry and their supply and demand balance sheet. The industry is trending towards higher averages which could be in excess of 2.8 gallons per bushel of corn processed. Even at Green Plains, we are using less corn as a company to make the same amount of ethanol in comparison to previous crop years.

We have worked diligently over the last 30 months to create a diversified business that can weather the margin volatility and cyclical downturns presented from commodity processing businesses.

It was our honor and privilege to host the US Secretary of Agriculture, Tom Vilsack, at the grand opening of BioProcessAlgae Phase II a couple weeks ago. The technology represents a true intersection between first-generation technologies and advanced technologies. We are showing the world that not only does carbon have value but that carbon and other byproducts of an ethanol plant like warm water and heat can create a product that will give us food, feed and energy.

Our goal initially was to become the farmer of this product or just grow and harvest algae. What we have discovered is that we have moved faster than the downstream markets have. So now as Phase II growing a good amount of algae at a commercial scale, we have turned our attention to focus on downstream uses of algae.

In the feed market, BioProcessAlgae is starting feed trials with Iowa State University next month. This will show us the value of a high protein product in animal feed in the future. In the food market, algae will be used for antioxidants, pigments, Omega 3s and protein. We are starting to develop products for all of these sectors using the algae grown from these reactors.

And then finally, in the energy market, algae gives us one of the greatest opportunities to break our dependence on foreign oil. Not only can the lipids in oil extracted from algae be used for biodiesel, our algae is currently being tested on the viability to go directly into a refinery to make it a bio crude product.

Finally, and although it is in early days, we have made ethanol using our algae at Shenandoah. Producing next-generation fuels, ethanol energy and creating high-value animal feed and high value food products is key to the success of this venture. We think this is a very exciting venture that we're involved in. We have some great partners as well. We're really excited about what the future will hold as we continue to make progress.

We continue to prove that the business platform we are building is one of the most efficient and effective in the industry. In addition, our focus on growing our non-ethanol operating income which could be close to $50 million in 2011 shows the importance of being a diversified platform in the agricultural value chain.

We often get locked in as a pure play ethanol company. But as we continue our transformation, a higher percentage of our operating income will come from other sources. We are focused on growing all aspects of our business and particularly interested in the agribusiness segment where we are actively looking at acquisitions.

As we grow this business, we are optimistic it may potentially lead to new vertical business and product offerings down the road. We will keep you informed of our progress during the year.

Finally, as we look downstream our distribution and marketing segment we are close to finishing the conversion of our Nashville Blendstar terminal to begin selling blended gasoline in that market. We feel because of our location we have an advantaged position to now service our customers not only with ethanol but with gasoline blended with ethanol and for the first time become a small obligated party to begin to share in the downstream opportunities and margins.

We are rolling this out in Nashville, and we will make the determination if we want to expand this to our other terminals. In addition, we have secured additional throughput capacity of biodiesel at several of our terminals as well.

We're working on opportunities to expand our terminal capacity down the road. Remember, these terminals are not only downstream for our ethanol capacity, they are potential outlets for other feed products as well and we're exploring that opportunity.

Needless to say it will be an interesting summer, but we believe our long-term thesis of growing our platform, diversifying our income, being a low-cost producer, always keeping intact our core competency of managing risk and maintaining a strong financial position continues to be the right models for our shareholders and stakeholders.

Thanks for calling in today and now I would like to ask Mimi to start the question-and-answer session.

(Operator Instructions). Mike Ritzenthaler, Piper Jaffray.

Good morning, guys. I'm trying to get a sense -- and thank you for your color on the 2011 market. But I think as investors increasingly look at 2012, I would like to get a better picture for that year. The RFS mandate is about 13.2 billion gallons, export prospects still look healthy from what we've seen. So I just wanted to get your thoughts on supply levels, exports in 2012, what it can mean for pricing and margins next year?

We're optimistic for 2012 for sure. I mean, with the increase in the mandate, if we see exports remain healthy, which we think they will based on what we're seeing out of South America right now in terms of just demand for US ethanol, and in general hopefully what is an overall tempering of the corn market if we get the crop planted and get the yields that hopefully we are looking forward to. I think when you put all that together, we are already starting to see signs of that in the fourth quarter of 2011 where we have opportunity to lock margins away closer to historical -- closer to historical kind of EBITDAs per gallon that we've been dealing with for the last couple of years if not greater.

And then when we look at 2012, ethanol is still [60] under gasoline for all of 2012. So when you look at it and you look at the positive economics for the blender, we also believe that in 2012, we could see early adopters of E15 show up and it will be -- Midwest farm states typically are always the early adopters. We think that we will get through the EPA's health effects, we will get through the labeling, it will be done shortly, and then hopefully we'll get some early adopter states that start to look at E15 through the blender -- or flex pump program that USDA is offering.

When you look at all of that, we think we have a great base demand against a production that should not exceed that demand if you added it all together. And I think we will get ourselves back in line.

We came off of a quarter where inventories were built again in the first quarter much like last year and the quarter got very soft. And now we're dealing with volatility in the corn market, but we think we will have opportunities in the third quarter of this year. But we are looking forward to getting out of the volatility -- hopefully the volatility this year of the corn market and getting into something a little bit more steady where we can lock margins away.

Okay, thanks. That's really helpful. My other question is on the algae project. I guess a sense for the commercialization strategy -- I know you are doing some feed trials and things like that and we've heard from other companies that are kind of up and coming in the clean tech space that applications in food and nutraceuticals can be pretty lucrative. Is the thought that you would go to market with a partner? And I guess I have a follow-up to that on how much CO2 would have to be removed from a plant to be able to claim that the ethanol from the corn would be an advanced biofuel? Is that something that's possible?

Yes, well let me talk to you a little bit about what we announced at the grand opening of the commercial reactors. We are going to break ground, if we haven't done it already, in Shenandoah on a five-acre footprint where we're going to build a vertical and a horizontal reactor, the company which is obviously a partnership of four companies.

We are going to then be able to do that and what we've been able to also do with our algae, when you harvest algae, it's basically 99.9% water. And because we are partnered with water filtration partners that have brought the technology to us, they have started to dewater the algae to get it to a more of like -- you can think of it as a toothpaste form. And from that toothpaste form we've been able to then to distribute that algae to feed, food and fuel uses and we're testing all of that right now.

Our goal is never to make anything downstream. But the problem is that the downstream hasn't developed fast enough. And it's really not -- it is really not that difficult to develop products out of algae, but we do have interest right now from fuel use. We have interest from the feed use. We have interest from pigment, interest -- guys that are interested in the pigment and the antioxidant market and then as well as some other downstream uses.

So we are getting a lot of calls from people that are interested in the finished algae so they can utilize that and make something out of it and those are coming from all three sources.

S I think we are really excited about it. We got here faster than we thought. We were going to break ground on this footprint next summer. And because we moved so quickly through commercialization, we are able to move into it this summer. And if anybody was at our opening in Shenandoah when the US Agricultural Secretary was there, he was absolutely impressed with what we have done there and made the comment that he has not seen anything else like it out there. We think we've made great progress on the production.

When you look at the CO2 footprint, we are taking industrial CO2 out of our plant right now to make the algae, it is linked directly to our stack. And as we grow out the acres, we will take more and more out of it.

Our goal then is to -- a plant like Shenandoah, just to give you an example, produces 150,000 tons of carbon approximately. And then if we could capture all that carbon, we think we are able to make 50,000 tons of biomass and 7 million to 10 million gallons of just liquid fuel out of that. And then hopefully the EPA will reconsider corn as an advanced fuel because of our negative carbon footprint which we think will be unlike anybody else's.

Again, we have some work to do around that. But we are very excited about the progress we've made around this technology. It's not something that's going to move our needle today. We don't have any earnings related to it. But based on the early discussions we have had with people that know the space, and we've been flying below the radar, and I think the recent opening kind of let people under the veil to see what we've in doing and Shenandoah, Iowa which is really exciting.

Excellent. Thanks very much.

Laurence Alexander, Jefferies.

Good morning. I guess three quick questions. One is, as you look across your facilities now, how much scope do you see for further debottlenecking over the next 18 to 24 months?

I think what you're seeing over the last two years taking up our production at levels we are able to do, I don't think you will be able to see that over the next 18 months. We'll start to see small increments, but it will be in very small increments. We're focusing on yield as well. We think [2.8] yields can continue to be improved by better uses of enzymes, chemicals and process. And so that's where we're focusing is getting more ethanol out of the corn kernel instead more ethanol out of the plant.

So I think for the most part a lot of low hanging fruit has basically been harvested and I think from here we're just going to have to go after small wins.

And secondly, on the algae, you made a comment about making ethanol directly from the algae. Can you elaborate on that?

Yes, we've been able in our labs used very basic enzyme and chemical applications like we do out of ethanol and taking the algae in that toothpaste form and have made ethanol out of it. And we are not talking about commercial levels, but algae has starch and there is carbohydrates and you can grow varieties for that. We wanted to see if we could get it done in a sterile laboratory environment and we were able to accomplish that. Whether that is game changing or not is something that is yet to be seen which, again, we're not -- that is probably the lowest value product in terms of just product value of what you can make out of algae which would be ethanol. But again, it's just another use of the product.

We think we've been able to do that. I mean really the bigger uses -- if you are going to grow it, before you build out 10 of these commercial scale facilities taking all the carbon, there will be plenty of opportunities in feed and especially in the nutraceutical and food applications long before you would need to take it in fuel, but you have to be heading in that direction.

I think more importantly is that we have worked with major universities on bio oil extracting and we have also announced that -- or have said that our algae product is now at a refiner's laboratory and they are seeing if they can take that bio oil and use it on the front end of a crude refinery as well.

So I think we are doing all the work that we need to do that we didn't expect we would have to do because we can grow all the algae you want. It's just a function of if we're just doing it for the value of carbon and you have nothing to do with your algae, that's not the right reason to do it. But if you can find -- if you can take your carbon and create high-value products out of it, then there's a reason to do it and expand it and we think we are on the right track right now.

And then just lastly, you've taken a fairly low key or capital light approach to doing this. What's your -- as you look at the next stage, what kind of financial hurdles are you setting yourself to before you start seriously allocating capital to this?

Well, I mean the farm that we're going to build at Shenandoah, the five-acre commercial facility, which we think will be one of the most unique in the world, that is going to be funded still through the partners and that will still be -- because of the way we've been able to scale this technology, it will be not too capital intense to get that that five acres. Once we start to build out kind of a full commercial scale facility, the expectation would be that at that point we would start to look at alternative sources of capital instead of the partners continuing to fund that growth.

Depending on though what the value is of the product, if you have finished product contracts and offtake agreements, you might be able to fund some of that through project finance if you have those offtakes and you are showing you have finished product. Or else there's a lot from other programs, there are grants, there is the government loan guarantees, and then there's also -- which we haven't really focused on all. We did the small grants with the Iowa Power Fund but we have not gone to any government guarantees or government grants, US government grants.

I think we will have opportunities to raise capital for this business from outside investors, but we haven't gone down that road yet. What we want to do is build this farm out this summer, show the capabilities of it and then from that, we will make the determination. But it will be capital intensive as we ramp up from this point, it will just be -- we just want to get to this next step which is funded from the partners and then beyond that, we will have to look at -- we may have to look at external capital at that point.

Thank you.

(Operator Instructions). Farha Aslam, Stephens Inc.

Hi, this is actually Eric Gottlieb for Farha. I had a few questions. I want to talk a little bit about whether. I'm wondering if there's any impact from the recent storm in the Midwest and also from the flooding that's been going on in the South and the corn crop getting into the ground a little slowly.

Obviously you saw from last week the corn -- they didn't do much work last week. The window is starting to open up a little bit here. I think what -- while we were behind last week and we will probably remain there for a little while, the window is starting to open up. I think the Midwest will get planted. Take last year, we planted so early that a lot of farmers didn't even go into their fields in May. But it got cold and wet in May and that might be some of the reason that maybe the crop didn't quite yield as well last year.

And I think the farmers we talk about, they still believe they'll get their crop planted, they're starting to get back into the field, we're starting to see a pickup in our fertilizer business up North again and I think that will happen.

The South is still running a little bit behind, especially in Tennessee. Whether that translates to more bean acres is yet to be seen. But I think when you look at just the positive advantage of corn over soybeans, then I think that they'll plant corn as long as they can. And we've had some farmers in Southwest Iowa tell us they'll go to June 10 if they have to to continue to plant corn. Now that will affect yield obviously, but I think we'll get the acres in.

I think we'll get the government acres in and the question really is will we get more than that based on the advantage of corn over soybeans.

Interesting. Okay, and I'm wondering with the price of corn shooting up so high if you've seen any plants going idle or shutting down completely and if there's any M&A opportunities there?

We've seen some comments from some plants that they are slowing down. We haven't seen anything necessarily shutting down yet. But I think plants are starting to slow down a little bit here at the end of the third quarter -- or first quarter and into the second quarter. We're still running full throttle at all of our plants, I can tell you that with certainty today. And we have no intention at all to slow those plants down as of right now. So from that standpoint, we haven't seen anything shut down.

In terms of M&A opportunities, margin volatility often brings some M&A opportunities, especially with a strong balance sheet and the ability to integrate assets very quickly. I think that we have started to see some of those opportunities start to at least be talked about, but nothing today that is terribly interesting for us. But we think there will be some opportunities over the next six months as margin volatility will probably increase with the volatility of the corn market.

So we're just standing by, we're still actively looking for ethanol plants. We are also still actively looking upstream and downstream as well.

Okay. And some housekeeping items. The corn oil contributions, given the update in soy oil pricing, where do you see that contributing? I know you originally said $18 million -- $16 million, $18 million. Where's that currently?

Well basically what we said is somewhere between -- somewhere approximately around $30 million of operating income, mainly because we don't have all our plants running. I think people are very confused about corn oil pricing in the market. I'm glad you asked me the question.

When you look at kind of crude corn oil prices that some people have said are higher than soy oil prices, those are for food grade corn oil, not feed grade corn oil. So you can't compare the two, you're not selling this for feed grade. This is a discount to soy oil and often times will trade more towards fat than tallows. So I think there's a big misconception out there that this is a food grade corn oil.

So what we've seen is with soy, I think kind of a 10% to 20% discount to soy oil for volume and right around that -- and I think the floor is at fats and tallows price.

And so we've seen pretty good demand, we haven't had any trouble selling it, the biodiesel guys are making money right now especially with corn oil. The feeders are very interested in it as a replacement in feed rations. We are starting to even see more and more interest in it. We've seen major feeders come to us and start to realize that there is an additional feed product out there that competes with fats and tallows and soy oil and I think that's very important.

But in general, we've been performing better than we thought. When we came in we thought it would be about an $0.18 a gallon net impact and now it is -- $0.18 a pound, sorry -- now it's greater than that. Remember, what we report -- there is a gross price. We will take off the DDG loss of that because we keep our plants whole. So for example if you sell for $0.45 a pound and DDG is trading for $160 a ton which is equivalent to $0.08 a pound, that would be $0.37 a pound before operating costs so that's where you get more into that low $0.30 per pound.

And I think often people think that the gross value of corn oil is the value and it's really a net value of corn oil is what we report. But we're very happy with the performance. It will pay off very quickly and we're locking away a lot of 2011 and we're even starting to focus on 2012 as the soy oil curve is very strong into 2012 and we're focusing on locking away portions of 2012 as well.

Okay, very good. Thanks for clearing that up. One last thing, on the 700 million gallons exported for ethanol, do you see any seasonality to that? And then I'll pass it on.

Do you see any seasonality to that?

Yes, it correlates a little bit with the driving season as it kicks in worldwide and the southern hemisphere obviously. So you'll see more.

Brent Rystrom, Feltl & Co.

I've got just a couple quick questions for you. The fertilizer side, I'm curious if the later planting is going to push it more towards urea. And is that more profitable for you guys to sell than anhydrous or is it a wash or how would you view that?

I mean, we haven't seen any producers yet talk to us about switching over. I mean, anhydrous is -- or the nitrogen is still what they're going to put on and we hey haven't seen a lot -- and big switch yet. What's that? Yes it's mostly presold anyway when we get here. So if they want to switch they'll have to give us a call.

All right. And from the perspective of the flooding that was asked earlier, from my understanding on your side of the river none of the levees have broken, right? It's the west side of the river where the issues are.

We haven't -- well, first of all in our area, Northwest Iowa, we haven't seen obviously much issue there. They're going to get that crop planted. And down in Tennessee we haven't seen any issues down there as well. I mean, it's obviously stopped raining (multiple speakers)

That's what I was referring to. (multiple speakers)

Yes, where 17 miles in from the river. So if you go to Hickman and go 17 miles, that's our closest location. So you're not going to -- we should not see a very big impact at all. And even last year during the Tennessee floods, right when we bought the elevators, we had no flooding damage at all near any of our elevators. So it seems like ours are on high enough ground.

Okay. I was down there last week, I was up and down the delta looking across. And crops definitely for that particular facility looked like they're going to be -- I'm mostly worried about the west side in Arkansas, but everywhere else it looks like it's a bitter corn crop starting off this year than it did last year (multiple speakers)

Yes, we think acres will be up 10% to 20% across the board on corn down near our elevators.

Okay, so that's going to be a positive as far as supply. When you say you've recovered in corn yields and supply, are you talking -- do you think that's going to actually happen this year or you think it's more likely next year?

I mean, we took from the beginning of the reporting period last year, we took about 10 bushels an acre off. If we can get back towards trend from the 152-ish area where we are this year and we can get to 92 million acres, we start to have a recovering corn carry out, at least a little bit, something a little bit better. I think we also have to look at yields.

I think also something that's possibly missed is where is the impact of sorghum produced ethanol. Because the USDA lumps in all ethanol into corn and they don't break it out at all into sorghum. Yet we think 50 million to 80 million bushels of sorghum is used to produce ethanol as well. We just think some of this needs to get sorted out.

As the ethanol industry becomes a much bigger piece of the USDA balance sheet, number one, as an industry, we have to do a better job reporting our yields to them in some way, shape or form. Number two, they have to do some better job around understanding what is driving this industry, especially around corn and especially around sorghum, to make sure those match up as well.

We haven't had any trouble so far, even in early August, procuring physical corn from hedgers and from farmers. In fact, we're done through July and we're into August now, and we will buy August as we see opportunities at the right basis levels but obviously we want to make sure that we don't carry corn down the inverse.

But from a standpoint of that quarter selling ethanol, that's going to be the quarter that it's a standoff between the blender and the ethanol producer and we're not willing to sell ethanol here and the blender is not willing to buy it here and we're going to have to stand each other off for a little while until we get to a point where it works for both of us.

But from the standpoint of blending economics, they are excellent for the blender in the third period -- in the third quarter and they just need to get realistic on ethanol price.

And then I had two quick questions, Todd, beyond that. You asked earlier about turning the algae into a crude equivalent. You gave an answer; did you happen to say who you might be looking at partnering with to do that?

No, we haven't given that out except to say that our algae is at a -- in a refiners laboratory and they are looking at the extraction of that to use on the front end of a refinery. It's very early days but it is happening. And we will see what the results are and we'll see what they get out of it.

But I think even more than that, we have worked with a major university and they have -- if anybody was at our opening, they saw the bio oil that was extracted from a major university research center and we saw very positive results there. And then we actually -- interestingly enough, we blended that with corn oil just to see what that would look like in a biodiesel feedstock.

And so I think there are a lot of uses out of it, I just think it's very early days. But I think it's the chicken and the egg theory, because you produce enough algae to make something out of it and I think we could do that. And now we're here, now we've got to figure out what to do with the product.

It's not just about sequestering carbon, but that is a nice piece of it as well.

A final, final question then is -- the USDA's change in the wording ethanol to ethanol and I forget what else they call it, but there seems to be kind of a change in a little of a PR spin that was negative historically and you guys using 5 billion bushels of corn and now they can basically reposition to say well technically ethanol has a byproduct of 3.5 billion bushels of DDGs. Are you seeing some benefit to that change?

I think people are understanding that when you look at food now, oftentimes oil is finally getting the blame and energy costs much more now I think than ethanol. The old food versus fuel still comes up, but I think we try to, again, prove that data is really incorrect. I think what's important is that when you take the corn kernel, one-third of it goes back into animal feed. And if you look over the last 10 years, from when you look at animal feed numbers and you look at ethanol numbers, you see that ethanol use is up, exports are steady, animal use is down and DDG production is up.

And if you look up at the growth in the US corn crop of 3.5 billion bushels is basically the growth in the use of corn and ethanol, yet the feed use is down from a standpoint of the actual corn kernel because we're feeding more DDGs. It's a very complicated story to get to the -- to change public perception, but I think it is the first step to people understanding that a lot of what we do is we give back a lot of animal feed to feed your cattle which by the way, it is a good question, it's trading at 70% to 80% the price of corn.

So as an animal feeder, you're getting the great benefit of the best part of the corn kernel at a discount to corn and it's lowering your animal feed costs which, by the way, has a direct impact in lowering the cost of food.

But again, it's a complicated story but we are making progress.

Thanks, guys.

Ian Horowitz, Rafferty Capital Management.

Hi, guys. So I missed basically everything with this technical difficulty. So if I'm repeating a question, please forgive me. But did you guys talk -- it sounded like Brett was kind of asking a little bit about blender economics. Did you talk about a forward curve in terms of the spread and why you think it is worth that and how to narrow it up? Did you (multiple speakers)?

Yes, we talked a little bit about that. But I mean in terms of the rest of the year, we are at a significant discount. All of 2012 we are sitting at $0.60 a gallon discount for gasoline and in those economics, we still see profit opportunities along the curve.

I think what we're getting out is the winter doldrums, getting the summer driving season, we've built inventories up towards the high 20s. What we watch often is the days of inventory, we built that over the winter into the high 20s and 25 to 28 days and we are moving back down into the low 20s. And once we start to get around that 20 -- 19 to 21 days we start to see margins improve.

We have great demand right now for ethanol because of the blender economics and I think that will continue. And I think we're just dealing with the volatility of corn.

What we see is ethanol seems to be very sticky while corn is jumping around $0.20 and $0.30 and $0.40 either direction any given time. And I think what we'll see is as we move through and get into summer driving season, hopefully we get -- we close that gap and even looking into the fourth quarter, where economics are very good, we close that gap as well.

So I think we came out of the winter pretty soft, I think we'll start to see better demand and we'll just have to -- hopefully we won't see a slowdown in gasoline use which we've already started to feel a little bit of that. We haven't really seen too much of that impact ethanol today.

Do you think that the spread, as wide as it is and as sticky as it is because of the understanding that the credit is basically completely on the table for being removed at this point and so they're going to, one, extract that economic value from you now rather than from the combined government and blend margin?

No. We're not there with -- that the market is that efficient. I think we're here because as an industry, we came out of the winter with a bit of oversupply and a little bit too much inventory. We had some new plants come on and we're coming into a stronger demand season. And if you look at last year, we kind of did the same thing and we closed that gap pretty fast in the summer and towards fourth quarter.

So no, I don't think that has a lot to do with it. I think the economics are good either way. If you look at 2012 though, we are sitting at 60 under gasoline and there's talk that credit could go away in 2012 and I think the economics will still be there to produce ethanol as long as we produce a good corn crop.

Conversion rate per production was again -- up again this quarter over last. Again, I asked this last time -- is this an indication of what you think the increase is due to the quality of the corn crop versus your efficiencies and where you think that this conversion rate can get to over the near term? And again, I apologize if these were questions that were already asked.

Okay. Look, the corn crop weighed more this year and was drier and that always helps conversion rates across the industry. But I think in general the industry is doing better even without that. I'd say 20% to 30% is due to the corn crop, maybe a little bit higher, and the rest is due to just operating your plants better, understanding enzyme and chemical usage and understanding where a lot of that, either the residual sugars or the vapors are that you can continue to capture.

Jeff, do you have a comment on that?

No, I think that's right, Todd. I mean, we have done some projects that typically gear towards yield improvement and conversion rates. Those are paying benefits. But as Todd said, we are also seeing some benefit to the corn crop. And as we look further out into the year, those should hold based on the corn crop quality at this point.

I guess another way to ask this, do you guys think you can get three gallons here over the next -- I mean if you map out your rate of change you could be there by the end of the year.

No.

Is that something reasonable to assume?

No, I don't think that's reasonable to assume. I think that would be a monstrous step to go to three bushels -- three gallons per bushel I think. But I think you can get -- continue to look over the next several years and continue to get more ethanol out of that corn kernel through better production processes and just continuing to go after yield. But there are others in the industry that are pushing to nine and there are others still in the [2.7]. So I think is an industry, we are all moving up and it depends on the plant. Sometimes it depends on the corn, sometimes it depends on the process, sometimes it just depends on the operator, sometimes it depends on the enzyme or the way you use the enzyme.

So I mean, lots of different things going to yield, but to think that we're going to go to three without some breakthrough, some technological breakthrough or cracking some code, I don't think the industry goes to three anytime soon.

Fair enough. Last question, the agribusiness, first of all, Jerry, was there an adjustment made in the first quarter 2010? I had in my model 7800 bushels of grain and 126 tons of fertilizer per 1Q 2010. It seems like there was a little bit of an adjustment there.

And then the second part of that question, looking at this quarter, a huge year-over-year change and second quarter is a very -- second and fourth are very good quarters for agribusiness. Can I reasonably map out some sort of rate of change back on 2010? That would seem to be an enormous number coming forward, but I don't think that that's correct, is it?

There was a slight adjustment to our fertilizer tonnage in 2010. But the second part of your question, I guess in terms of performance, the second quarter is a big quarter -- is a bigger quarter for the segment. But we are really smoothing it out quite a bit with the addition of the Tennessee assets. They have performed very well in terms of just realizing the carry in that first quarter and it really helped us out on our seasonality of our income there.

But in general, we came out of harvest basically full at a lot of our elevators and had more capability in the balance sheet to carry more corn. And as we've grown the segment we've had more capability now, like we took the revolvers and the (inaudible) all the way over $100 million and last year we didn't have that ability to do that.

And so between carrying more corn and focusing on the ability to carry more corn from a financing perspective, we're starting to hopefully smooth out earnings throughout the year and have a little bit less volatility. But the fourth quarter will really be the biggest quarter as we get into harvest and see those first handle bushels and then from there, it will hopefully smooth the rest of the year out.

You did 50 -- what did you do -- 57 million bushels of grain and bought 60,000 tons of fertilizer in 2010. I know this isn't guidance. What can we expect out of this business for 2011, just in terms of volume? Is it just too hard to even think about?

We'll get through the crop. I think we will have to see where the crop is. You have to remember that this year you have to -- if you're a grain handler you better be empty in late July/early August or you're going to carry a bunch of grain from old crop to new crop through a bid inverse. So I think we'll handle more in 2011 than we handled in 2010 both from a fertilizer and a grain perspective, mainly because we are adding more space as well. By the time we get to harvest, we will have additional space and kind see that we are building and so I think we'll handle more in general.

We're really focused on originating more in Iowa at our Iowa assets. I think we lagged there the last couple of years. We have made a big effort to make sure we don't lag through this harvest as well. So we think we have some opportunity to grow our volumes.

Good.

Okay, thanks.

(Operator Instructions). Charlie Antrim, SAC Capital.

Good morning, guys -- or I guess afternoon now. I just had a -- was hoping to get some comments on the DDG market. You touched on a few things that are positive from an overall industry standpoint in terms of the feeder action. But given some of the actions in China, you created more DDGs within the United States and certainly it has not helped out soybean crush margins. Any sign you may see an uptick in exports for DDGs moving forward? How would you kind of characterize that market currently?

Well, it was interesting, since we stopped the China program as a percentage of corn, DDGs actually increased. So I thought that was interesting, but we were also a pretty good discount from a protein substitute in the feeder ration. And I think as we got to that 80% price of corn and corn rallied versus soy, we started to be a premium as a protein substitute and we saw that percentage of corn break back a little bit overall.

I mean, we have great demand. We've seen all of the animal sectors increase their ration of DDGs. We have to be a little careful against soy right now, but in general I think that the domestic demand is very good. We are starting to see more demand around the world as well, at least a lot of interest in it. And we'll have to see what the Chinese do.

But I think a lot of people thought with the Chinese gone it would back up DDGs and we would have no place to go. And actually because corn rallied into the mid-7s, and DDGs at 20% less than the value of corn becomes a very big positive feed economic if you're using them and we've been able to suck up the extra supply that wasn't going to China pretty much into the domestic market US.

Okay, but if you have -- if we have a decent harvest and you see a new crop of corn somewhat declining in value, the incentive from an economic standpoint declines. Could we potentially see that back up as -- that people were expecting if you have no movement of the Chinese or is that -- you would expect (multiple speakers)

Let's just take a look at the soy. Now we are at $7.50 corn, let's say all the analysts are talking at least $5 corn through the rest of the year if not higher than that, even the USDA is there. And 20% less than that is the equivalent of $1.00 a bushel less than your feed ration. So I just don't think that you'll see -- I think it will be widely used, I think it will be expanded and I don't think you'll see any backup.

Now if you were at 100% the price of corn looking to be -- looking for [homes] and corn at $5.00, maybe then. But we continue to remain a discount to corn and I think it will be widely used and widely excepted. So I don't anticipate any backup in DDGs throughout the year.

Everybody's been calling for that for several years and it still hasn't backed up yet.

So it would be more of a negative impact for soybean meal and the soybean crushers and keeping those margins pretty anemic (multiple speakers)?

It really depends on the corn soy spread at that point. Because, like I said, it's not just used in the animals -- is a substitute for soy meal as well. So when it's over soy meal, it's positive and when it's under soy meal, then we are a substitute for that.

Okay. That was it. Thank you very much.

Matt Farwell, Jr., Imperial Capital.

Hi, good morning. You mentioned that you locked in your physical corn needs I believe for the third quarter. Is that take or pay? And how will the product be priced?

No, no. What we said is we locked in our physical procurement through July and a little bit into August. But that is just basis on priced corn. So it just fits into our model against the crush we use -- we use base of corn and we can -- now we know we have the corn so we can sell the ethanol. I think the key in third quarter is to make sure that you procure the physical corn and then you sell ethanol against it.

We felt the basis level we procured for historical and were opportunistic from our standpoint that we could have -- not have the corn if somebody wants to buy ethanol in the third quarter. But no, it's not take or pay, it's just physical on priced corn, but it does have a basis price level established. So now we can always convert that to a flat price and then sell ethanol against it.

Okay. And just looking at some of the ethanol supply and demand data, it seems like supply has been fluctuating between 13 billion gallons and 14 billion gallons per year. The demand has picked up recently and I'm just trying to figure out is it clear to you that ethanol is the marginal source of demand now with corn approaching $8.00? Or are there other sources of corn demand that could be destroyed with the feedstock at these levels?

Well, I think we haven't seen any demand destruction in the animal sector yet. I think we'll have to watch our exports over the summer. And often times, if we get some good wheat crops around the world as well as some other crops coming on over the summer, we may see possible shift out of the exports which I think is a logical place to look before you look at domestic ethanol demand.

But I also think, again as I mentioned, I also think the yield is to low at the USDA and I think the first place you are going to find more corn is by raising the yield in the S&B and from there you'll then figure out where you're really at, whether you really need demand destruction or not.

But I think from the standpoint of is ethanol the easiest bushel to go after, yes, ethanol is the easiest bushel to go after. But we are already seeing it in this quarter now where we're hearing plants slow down 10%. And you get that widespread and every 10 million bushels is meaningful to this balance sheet and if you get some of the industry or half the industry to slow down 10% for four or five or six months, you'll temper the impact, the balance sheet a little bit.

So I think exports and ethanol will be the place that people look for. I think the animal sector will be the hard one to destroy.

So would you ever consider inventorying ethanol in the third quarter? If so, what would your capacity to do so be?

Well, I mean we inventory ethanol. The market structure is to carry ethanol from one month to the next, we have -- basically where we are at today and we have a little bit of a carry, we will inventory ethanol and sell it the next month.

But in terms of inventorying ethanol at a destination terminal, if the market is structured correctly, we would inventory ethanol. But we're not just going to inventory it though if we can't hedge it correctly and earn the carry just like corn. And you're able to do that some months between -- even at our own plants, we will fill all of our inventory up so we can carry it to the next month because the carry will easily pay for that and it will expand your margin opportunity.

That's why I think often times people sometimes miss that is that when you look at the ethanol carry, it might be $0.03 to $0.04 for a month, we will fill all of our inventory storage up at our plants and carry that -- well send half the margins to the next month.

So while we would look at it in our own inventory I don't see us putting a bunch into terminal storage unless the market really pays you because you've got to pay storage there as well. It's not just [interest cost].

Okay. And last question is you mentioned the expansion of the agribusiness assets. I assume that the cost of expansion is around -- is around $2.00 a bushel. And also, could you -- do you have any idea what market value for grain storage are these days?

Well, I mean in terms of building a new elevator, brand-new greenfield grain elevator, it's definitely more than $2.00 a bushel. When we're looking at our projects what we do is for example, we will build an upright and we will build a flat and we try to keep it more towards -- well, much below the $2.00 a bushel expansion costs, but $2.00 a bushel is probably for full upright expansion of a grain elevator probably in the range. And if you do flat storage, it will go down from there.

And corn sits very well in flat storage for a long time. So in terms of acquisition opportunities, a good business with a good location. Businesses are trading not necessarily on cost of space but more on what the income stream and what the carry revenue is and what the opportunity is to earn a return from an EBITDA perspective.

So I think if you want to buy a business and not just a grain elevator, it's a little bit different. But I think still grain elevators just in terms of space, I think they run up a little bit here but there still are some opportunities in certain markets to still look to acquire assets.

Okay. Well, thank you very much.

Okay, thanks Matt. Thanks for calling.

Farha Aslam, Stephens Inc.

Hi, good morning. Just a few questions. In terms of M&A opportunities, could you just comment -- and if you've already covered cover this, I'm sorry, I missed part of the call. What M&A opportunities you're seeing in the ethanol space? With the pullback in production, are you seeing more plants going up for sale right now? And what price are being traded at right now?

No, we're not seeing all of a sudden a huge inventory of opportunities just yet. We think margin volatility, I think people are starting to realize that it will be an interesting summer that they will have to deal with. Remember, they came out of the strong 2010. First quarter, we're not sure how the industry performed, but in general they were probably able to cover costs and now they have to deal with Q2 and Q3. And so it's a little early to think that we are going to have a bunch of opportunities.

But they are starting to -- we are starting to see some people start to look but nothing that we've seen from our standpoint yet that we could say they we're working very hard on. So as of this point, we have not seen a lot, but that may change over the summer as we get more into what could potentially be a volatile summer.

Thanks. And then my final question is on sugar and ethanol export opportunities. Lately the price of sugar has come down a bit and there is talk of increased ethanol production in Brazil. Could you just comment on export opportunities as far as US ethanol?

Yes, we're still very bullish on export opportunities. We still think in a relative cost perspective of US ethanol, where its price right now is still very competitive even with $0.22 and $0.24 sugar. We're not seeing any slowdown in interest. The Brazilian market is still very active; they still have to supply themselves before they can supply anybody else and I think the US will continue to be part of that equation for them.

So in general, while sugar has broken from the highs, the sugar profitability is still very good to not make ethanol out of it. And we're still seeing the opportunity to sell all of our markets that we have been selling. Steve, do you want to comment a little bit just to follow up?

Yes, you're still seeing a lot of Gulf Coast interest, it's looking that way for them. And it's through year end right now. There are people out starting to look for things. So the interest is still there, the valuations are still in favor of us exporting.

I think another important point, Farha, is that Brazil isn't just exporting or importing ethanol, they're importing --

125,000 barrels a day of crude (multiple speakers).

125,000 barrels a day of crude because they're not producing enough there either. So something's happening down there fundamentally that they're driving more and they have bigger demand so they need to import more crude and the ethanol industry isn't keeping up with that down there. So in general we're very -- still very optimistic on world demand for US ethanol.

All right, thank you very much.

Okay, thank you.

Thank you. I'm showing no further questions in the queue. I'll hand the call back over to Mr. Todd Becker.

Okay, thanks, everybody, for coming out today. Sorry about the technical glitch we experienced. I'm glad you still all held on. We appreciate all the questions and everybody on the call. We're still very optimistic, we're still very excited about our business that we run. We think we are doing great things at Green Plains and we believe the future is very, very bright for this Company and we will continue to work hard on behalf of our shareholders and stakeholders.

So we appreciate everybody coming out today. Thank you very much, we'll talk to you soon.

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