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NEVADA, IOWA
Volume XIl, Issue I August 2016
INSIDE THIS EDITION
Lincolnway Energy, LLC
59511 W. Lincoln Highway
Nevada, Iowa 50201
Office: 515-232-1010
Fax: 515-663-9335
www.lincolnwayenergy.com
I have been struggling for a topic for the newsletter
but thought I could talk to you about an accounting
rule in the ethanol world that is universal, non-
intuitive, but impacts your investment either
positively or negatively every month. It is called
Mark to Market. This is a rule ethanol plants have
to live by and it is difficult to understand. It does
not impact decisions we make during the month
but it does directly impact financial results.
A basic rule of the agricultural world is you have
to buy corn when the farmer wants to sell. If you
don’t buy it then he will sell it to someone else,
another end user or an elevator, but in any case
your next shot at that bushel is going to be, at best,
more expensive than that initial opportunity or at
worse gone for good. We want to be the preferred
destination for Story County and Marshall County
corn. This means we need to buy corn for the
current month needs but also have a bid going for
new crop, at least, but usually out 12 months from
today which is much further in the future than it
would make sense to sell ethanol or DDGS.
In order to protect ourselves from price swings, as
we are often buying corn that has not been planted
yet, we hedge ourselves in the Chicago Board of
Trade (CBOT) on every bushel we buy. For example,
Rick Ogle, our corn buyer, will buy 30,000 bushels
AS THE MAD HATTER SAID TO ALICE, “IT’S ONLY
MARK TO MARKET, IT ALWAYS COMES BACK.”
of corn for delivery in December from a farmer
and immediately pick up the phone and hedge
that purchase with a sale of futures at the CBOT.
At this point we are mostly indifferent to the price
of corn from a risk perspective as any move in the
underlying price of corn will be offset with the
move in futures. The only “risk” we have taken is
on the basis or the difference in the cash price and
the Chicago futures on the day we bought the corn.
When it comes time to sell the ethanol or DDGS
this corn we bought will be used for, we will sell the
end product and lift the corn derivative and then
have a locked in gross margin.
As crazy as all that sounded, it is not the end of
the story as I now have to take off my risk manager
hat and put on my grain accounting hat and this
is where the Mark to Market concept impacts our
results. At any given time, our corn position is in
one of three buckets. We either have inventory
(corn in the bin), forward purchased corn
(contractual obligation to buy corn in the future
at a price), or corn futures (future contracts at the
CBOT). We try not to speculate in the corn market
so the inventory plus forward purchased corn
less the futures position, less sales of ethanol or
DDGS, should add to zero at any given time. The
accounting problem is that, unlike a co-op, we
must mark our derivative piece to market every
As the Mad Hatter said to Alice...
Forward Looking Statements
Financial Results
Changing U.S. Motor Fuel Markets
New Employee
Visit from Secretary of
Agriculture Vilsack
1-2
UNIT TRADING
December 2015: No Sales
January 2016: No Sales
February 2016: No Sales
March 2016: No Sales
April 2016: No Sales
May 2016: No Sales
June 2016: No Sales
Some of the information in this newsletter may contain forward looking statements that express Lincolnway
Energy’s current beliefs, projections and predictions about future results or events, such as statements with respect
to financial results and condition; future trends in the industry or in business, revenues or income; litigation or
regulatory matters; business and operating plans and strategies; competitive position; and opportunities that may be
available to Lincolnway Energy. Forward looking statements are necessarily subjective in nature and are made based
on numerous and varied estimates, projections, beliefs, strategies and assumptions, and are subject to numerous
risks and uncertainties. Forward looking statements are not guarantees of future results, performance or business
or operating conditions, and no one should place undue reliance on any forward looking statements because actual
results, performance or conditions could be materially different.
FORWARD LOOKING STATEMENTS
continued on page 2
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2-3
3-4
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The Energy Forum
By Eric Hakmiller, President and CEO
MEMBER APPRECIATION
PICNIC
September 16, 2016
4 p.m. - 7 p.m.
RSVP to 515-817-0150
kgammon@lincolnwayenergy.com
Exhibit 99
Volume XIl, Issue I
2
month but cannot mark our inventory or forward position at the same time.
It’s as if our accountants do not see our corn as a commodity but a bunch
of spare parts with no resale value. Over the long run this has no impact on
results but in quarters where there is big commodity price moves it will impact
the results in ways that feel sometimes like Alice through the Looking Glass.
If you could imagine, we have bought 2.0 million bushels over the next 12
months at a price of $4.00 per bushel at a basis price of -$0.35 per bushel
which historically is very good for our market. From a business sense we have
bought this corn very well (good basis) and from a risk sense we are hedged
(forward corn purchases equal futures). Now imagine corn on the CBOT drops
$0.50 per bushel. Accounting rules would require us to take a $1.0 million gain
on our derivative position; however, we are not allowed to take the offsetting
$1.0 million loss on our forward corn purchase position or corn inventory. This
loss will be taken over the next 12 months as the farmer delivers corn to us
at $4.00 in a market that is $3.50 (assuming the market stays the same). In a
sense, the accountants make us take our gains up front and let the offsetting
loses trickle in in a falling market and the reverse in a rising market.
continued from page 1
August 2016
FINANCIAL RESULTS
Lincolnway Energy, LLC reported a net loss of $4.1 million for the six months
ended March 31, 2016. The industry continues to struggle with lower ethanol
prices with surplus supply in the market. Sales volume decreased due to
infection issues in production. DDG values also decreased primarily due to
lower corn prices. In October, the plant had a four-day scheduled shutdown.
Expenses continue to be monitored to keep costs low. The chart below shows
net income levels over the last six quarters.
By Kris Strum, Director of Finance
A comparative income statement for the six months ended March 31, 2016,
and 2015 is presented below.
A complete SEC 10Q report for the quarters ended December 31, 2015, and
March 31, 2016, can be found on a link on the Lincolnway Energy’s website
under the heading Investors and SEC Financial Report.
For the six months ended March 31, 2016, working capital was $5.0 million;
$2.8 million was spent on capital improvements including the construction of
a new grain bin. The book value per share was $878.
The chart below shows the book value per share for the last six quarters.
By Blair Picard, Commercial Manager
Lincolnway Energy is like the vast majority of American businesses. We want to
grow the volume of our business and our returns to investment over time. As
an ethanol producer, we have two ways we can grow our profits-by increasing
ethanol volumes produced and sold and by increasing the profit margin
on those volumes we produce. The volume factor is primarily determined
by gasoline demand as that determines how much ethanol production the
market will require. Our profit margin is largely determined by how much
ethanol making capacity there is relative to that volume demand. It is the
classic supply and demand situation.
There have been more changes in the gasoline consumption landscape over
the last 10 years in this country than there have been since the invention of the
CHANGING U.S. MOTOR FUEL MARKETS
I have spent a decade frustrated with this accounting rule as it often seems
like the right decisions are punished in the results. I can buy inexpensive corn
in terms of basis, hedge it properly, and then the USDA can issue a report on
the last day of the quarter and flip the results. I have looked at it from every
angle and in the end concluded it is a perfect box. There is no way out. Until we
can mark all components of our position to market, our results will look better
in a falling market than a rising one while the business performance is the
same. It is something that as an investor you should be aware of as you watch
the returns from any of your ethanol investments and as a manager I need to
follow so the results can have meaning.
I will now step slowly way from the soap box. There are other rules in this
area such as lower cost or market which impacts our inventory valuation and
our results occasionally but if you stuck with me to the end of a rant against
accounting rules I will not burden you with another one. As always, I appreciate
your support of our company. If anyone ever has questions about this or any
other aspect of our business, please feel free to give me a call.
Net Income
Book Value Per Share
Six Months Ended March 31
(Unaudited)
2016 2015Income Statement Data
Revenue
Cost of goods sold
Gross profit
General and admin. expenses
Operating income
Other net income (expense)
Net income
46,864,241
49,453,901
(2,589,660)
1,475,654
(4,065,314)
(24,760)
(4,090,074)
60,188,987
57,099,539
3,089,448
1,610,935
1,478,513
(10,470)
1,468,043
$
$
$
$
Volume XIl, Issue I August 2016
3
continued on page 4
internal combustion engine. For over 100 years, up to 2005, gasoline demand
rose every year, except 1932. In the last 10 years, essentially the lifespan of
ethanol as a significant factor in the US fuel stream, gasoline demand has
fallen in half of those years and is still below its peak set in 2005. We have
studied the reasons and it is a fascinating story.
A very large component of total vehicle miles driven is determined by the
economy, and more specifically, by unemployment. Many of miles driven are
people going to and from work. If they aren’t working, they aren’t making
this trip each day. As unemployment began spiking upward in the wake of the
2007/08 economic collapse, miles driven commenced a four-year slide. The
annual decrease was 120 billion miles driven or about 5.6 billion gallons of
gasoline demand. In terms of ethanol production, that is the equivalent of 10
Lincolnway Energy plants or about 3.6 percent of the industry’s capacity. As
the economy and employment recovered, miles driven have gone back to and
even exceeded the 2007 high water mark.
But the recovery in miles driven is nowhere near what one would predict
given the employment gains. And the gasoline consumption increase has
barely been able to take us back to the record gasoline consumption highs of
2005, two years before the miles driven peak. Why?
Fuel Economy
Certainly the US fleet’s fuel economy has improved. In fact, it is up 25 percent
in the last 10 years from around 20 mpg up to 25 mpg. However, for the
last two years, fuel economy has stagnated as cheaper gasoline and social
preferences have fueled light truck sales at the expense of automobile sales.
We now buy more new F-150s, Silverados, and Rams than we do Impalas,
Camrys, and Fusions. Those trucks, according to government studies, get 40
percent lower gas mileage than do cars. But the mpg trend is long term up.
Demographics
Our population is growing slowly and aging rapidly. At current rates, the
US population is forecast to grow by 24 percent by 2050. The share of the
population above 64 years old is forecast to grow by 56 percent during that
same time period. Older people drive less. In fact, the above 64 year old cohort
on average drives half (7,650 miles per year) as much as their prime working
age (35-54 years old) counterparts. In the last nine years, just this aging of the
population and the resulting reduction in miles driven has caused a reduction
in new car sales of 500,000 units per year. That is staggering.
Social Habits
This is a catchall term for a number of factors. Fewer people are getting their
driver’s licenses and they are waiting longer to do it. This is less noticeable in
relatively nonurban Iowa where a driver’s license is still a rite of passage. In
the entire country, only 69.5 percent of 19 year olds now have driver’s licenses
versus 87.3 percent in 1983. While not quite as large across the spectrum, this
decline does hold across all age groups. A lower percentage of the population
is driving.
The three primary reasons are reflections of our culture and our changing
economy. 1) Electronic communication has reduced the need for actual
contact. In fact, driving interferes with texting, tweeting, etc. The government
actively discourages texting and driving. Many young people opt for the text.
2) The shift in economic outcomes has made it difficult for young people to
buy and maintain a vehicle. As the gulf has widened between the top and the
bottom of our economic participants, those on the bottom are buying fewer
automobiles. And when they do, they are buying gas sippers. 3) Young people
are migrating to large cities where public transportation is a more reasonable
alternative.
Finally, and this is the most important statistic of all, we are all driving less.
Adjusted for population growth, the peak miles driven occurred in 2005.
America is slowly moving away from the car. Is it the internet? An aging
population? Urbanization? An end of our love affair with the automobile?
Probably a little bit of everything. In fact, sometime during the next three to
WELCOME BECCA WHITAKER
Hi. My name is Becca Whitaker. I am the new staff
accountant at Lincolnway Energy.
I grew up on a farm in southeast Iowa and moved
to Ames in 2009 to attend the Business College at
Iowa State, after receiving my associates degree
at Southeastern Community College. I graduated
with a degree in accounting in 2012 and moved
back to southeast Iowa. I worked in the accounting
department at Cambridge Investment Research, Inc.,
in Fairfield for almost four years before accepting a
job at Lincolnway Energy and moving back to the area.
In my free time I like to keep busy with my hobbies: knitting, scrapbooking,
cross-stitch, painting, and more. I also enjoy watching movies, reading, and
listening to music. I love spending time with my family, especially watching my
seven month old niece learn and grow.
I have truly enjoyed my first three months at Lincolnway Energy, meeting the
staff and some of the truckers and farmers, and the work that I am doing.
I look forward to the rest of my training, growing within the company, and
getting to know more people in the future.
VISIT FROM SECRETARY OF
AGRICULTURE VILSACK
Last month we got a call from the USDA asking for a tour of the facility. It
soon became clear Secretary Vilsack himself would be visiting and he would
be bringing an entourage of foreign dignitaries. Who these dignitaries would
be remained a mystery until the advance crew confirmed it would be the U.S.
Ambassador from Cuba and his staff who would be visiting Iowa for the first
time. It appears the next generation of leaders in Brazil have looked at their
vast unused acreage that was formally sugar and modernized their view of
ethanol as an energy source. Perhaps they will build an industry and in some
small way the visit to Lincolnway will help them on the way.
five months, experts are predicting gasoline consumption in this country will
begin a long term decline and we will never again see gasoline usage as high
as it is right now. As the noted transportation expert, Casey Stengel, once said,
“The trick is growing up without growing old.”
Lincolnway Energy, LLC
59511 W. Lincoln Highway
Nevada, Iowa 50201
Volume XIl, Issue I August 2016
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continued from page 3
VISIT FROM SECRETARY OF AGRICULTURE VILSACK