UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

þ		Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended September 30, 2007

o		Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from                      to                     

Commission file number 000-52428

IOWA RENEWABLE ENERGY, LLC

(Name of small business issuer in its charter)

Iowa (State or other jurisdiction of incorporation or organization)		20-3386000 (I.R.S. Employer Identification No.)

1701 East 7th Street, Washington, Iowa (Address of principal executive offices)		52353 (Zip Code)

(319) 653-2890
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

26,331

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      þ Yes     o No

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.       þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o Yes     þ No

State issuer’s revenues for its most recent fiscal year. $16,443,440

As of December 1, 2007, the aggregate market value of the membership units held by non-affiliates (computed by reference to the most recent offering price of such membership units) was $23,581,000.

As of December 1, 2007, there were 26,331 membership units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-KSB its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.

Transitional Small Business Disclosure Format (Check one):     o Yes     þ No

 

 

Table of Contents

PART I			3
ITEM 1. DESCRIPTION OF BUSINESS.			3
ITEM 1A. RISK FACTORS.			23
ITEM 2. DESCRIPTION OF PROPERTY.			32
ITEM 3. LEGAL PROCEEDINGS.			33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.			33
PART II			34
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.			34
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.			35
ITEM 7. FINANCIAL STATEMENTS.			44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.			57
ITEM 8A. CONTROLS AND PROCEDURES.			57
ITEM 8B. OTHER INFORMATION.			57
PART III			57
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.			57
ITEM 10. EXECUTIVE COMPENSATION.			57
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.			57
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.			57
ITEM 13. EXHIBITS.			58
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.			58
SIGNATURES			59
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

AVAILABLE INFORMATION

Our website address is http://www.iowarenewableenergy.com/. Our annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available, free of charge, on our website under the link “SEC Filings,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this annual report on Form 10-KSB.

PART I

ITEM 1. Description of Business.

Business Development

Iowa Renewable Energy, LLC is a an Iowa limited liability company, formed on April 14, 2005 for the purpose of developing, constructing, owning and operating a biodiesel manufacturing plant for the sale of biodiesel near Washington, Iowa. When our fiscal year ended on September 30, 2006, we had more than 500 members and assets exceeding $10 million; as a result, we filed a registration statement on Form 10-SB to register our securities with the Securities and Exchange Commission.

We have completed construction of a biodiesel manufacturing plant with production capacity of 30 million gallons of biodiesel per year. Our plant is located near Washington, Iowa, in southeast Iowa. Our business is the production of biodiesel and crude glycerin for sale. On September 30, 2007, when our fiscal year ended, we had generated $16,443,440 in revenues primarily from the sale of biodiesel and glycerin since our plant began operations in July 2007.

Our biodiesel plant is complete and fully operational. Equipment verification began in May 2007 and hot testing production commenced in June 2007. Hot testing is a type of equipment verification that occurs after the boiler has been lit and is operating. On July 1, 2007, we began start-up operations. This process tested each system of our plant one at a time and built up to the whole plant being in operation excluding animal fat pretreatment system. We started operating our animal fat pretreatment system in mid December 2007 and have recently began producing biodiesel from animal fat for sale.

We began producing biodiesel on July 10, 2007 and obtained our certificate of substantial completion of our plant on July 12, 2007 from Renewable Energy Group, Inc. (REG), our design-builder. After having our biodiesel independently tested to certify that our biodiesel meets the American Society for Testing and Materials (ASTM) standards, we began shipping our first lot of 7,200 gallons of biodiesel on July 12, 2007. Since start-up, we have had several temporary shut downs for various reasons. The plant was operating at full capacity until the end of September 2007, with only minor temporary shut downs for maintenance and a weather-related power outage. The following chart shows our days operating and days shut down since October 2007.

Operating		Not Operating
		October 1 through October 18
October 19 through November 2		November 3 through November 4
November 5 and November 6		November 7
November 8 through November 17		November 18 through November 25
November 26 through November 29		November 30 through December 2
December 3 through December 6

The majority of our recent shut downs have been due to a lack of soybean oil supply. We ordered soybean oil for delivery during these times of shut downs, however, our supplier did not have adequate amounts of soybean oil available to send us and rail shipping times were experiencing unusually long delays. We have alleviated some of the shipping delays by arranging for more of our soybean oil to be shipped by truck. We expect to operate the biodiesel plant at approximately 60-65% of its production capacity through the remaining winter months. We expect to accomplish this by operating at full capacity for a period of time until we have filled our biodiesel storage tanks and then ceasing operations for a period of time while we sell our biodiesel. We expect this strategy to be more efficient than continuously running the plant at 60-65% of its production capacity. We anticipate we will begin producing more biodiesel from animal fat, rather than soybean oil, as we anticipate this feedstock will be easier and less expensive to acquire. As of December 1, 2007, we have shipped approximately 7,869,463 gallons of biodiesel from our plant.

We financed the development and construction of the plant with a combination of equity and debt capital. We raised approximately $19,371,000 by issuing 19,371 of our units to investors through an Iowa intrastate offering, which supplemented our seed capital offering proceeds of $2,680,000. We also received a $400,000 loan from the Iowa Department of Economic Development (IDED), $100,000 of which is forgivable. To complete project financing, we received $34,715,000 in debt financing from Marshall Bankfirst Corporation (Bankfirst) consisting of a $29,715,000 term loan and a $5,000,000 revolving line of credit which closed on October 26, 2006. On October 30, 2006 we raised an additional $550,000 by issuing 1,100 of our units to directors that exercised a unit option agreement. In addition, on May 14, 2007 we entered into a Railroad Revolving Loan and Grant Program Agreement with the Iowa Department of Transportation (IDOT) for an amount of up to $168,000 (or 13.3% of the cost for the railroad project, whichever is less) and a loan amount of up to $132,000 (or 10.5% of the cost for the railroad project, whichever is less). Interest on the loan amount will be at 3.67% per year for five years beginning on June 22, 2008. Subsequent to our fiscal year end, we have received the entire $300,000 in funds from this program. We are currently in the process of negotiating with the Marshall Financial Group for a new line of credit up to $7,000,000 to be used for working capital and other short term financing requirements relating to inventory and risk management, however, we have not finalized this agreement and may never do so.

On May 2, 2006, we entered into a design-build contract with Renewable Energy Group, LLC for the design and construction of the plant for a total price of $39,445,500, subject to further adjustment for change orders. This total price did not include the cost for constructing the administrative building. REG began construction of the administrative building and then we hired subcontractors to complete the work on the administrative building. On April 20, 2007 we entered into a change order with REG in the amount of $325,000 for the work they did on the administrative building. We paid approximately $234,492 to various subcontractors to complete the administrative building. Our staff began occupying the administrative building on June 1, 2007. We have made all required payments for the administrative building.

On August 8, 2006 we consented to Renewable Energy Group, LLC assigning this design-build agreement to Renewable Energy Group, Inc. Renewable Energy Group, Inc. (REG) was the company created as a result of a merger between Renewable Energy Group, LLC, InterWest, L.C. and West Central Cooperative. We entered into several change orders which resulted in a final design build amount of approximately $40,664,805. This amount, less a $300,000 retainage, has been paid to REG. We have made a request to Bankfirst to take a draw in order to pay the $300,000 retainage, however, this draw has not yet gone through.

Over the past 14 months we have been in the process of installing the infrastructure necessary to support plant operations and began start-up operations. This includes rail siding, natural gas lines and substation and transmission lines. REG’s work on the rail installation was complete as of June 28, 2007. The plant requires 100 gallons of water per minute. The plant’s water is being provided by the City of Washington. We do not have a long-term agreement with the City of Washington for water, and instead receive monthly invoices at variable rates. We require a significant supply of natural gas. We estimate that our plant requires approximately 1,750,320 therms of natural gas per year. Alliant Energy is supplying the natural gas to our plant. A meter has been installed and we receive monthly invoices for natural gas at variable rates. On June 6, 2006 we entered into a facilities service agreement with Interstate Power and Light Company, an Alliant Energy Company, for installation of a new 13,200/7,620 volt primary electric service. This service consists of one overhead metering location, transformers, cabling, and switchgear located at the Iowa Renewable Energy plant. Under the agreement, we paid Interstate Power and Light Company $146,280 for this work. The installation was completed on September 25, 2006. In addition, we entered into a commercial and industrial marketing facilities services agreement with Interstate Power and Light Company on September 27, 2006 for installation of a gas line. We paid Interstate Power and Light Company $26,840 for this work. The gas line installation was complete on October 6, 2006. We have obtained all of the permits required to construct and operate the plant to date. We have 25 employees who operate the plant and provide administrative services to support our plant operations. We may hire one or two additional employees, depending upon our needs in the future. In addition to the employees we hired to operate our biodiesel plant, REG has hired our General Manager and Operations Manager. The General Manager and Operations Manager are and will continue to be employees of REG. REG has hired Alan Yoder to be our General Manager and has hired Glen Hansel to be our Operations Manager. In the future, we anticipate that REG will employ our General Manager and Operations Manager and we will continue to employ all other employees at our plant.

On August 25, 2006 we entered into a management and operational services agreement with REG for start-up management and operational services. Pursuant to this agreement, REG provides for the overall management of our plant, places a general manager and an operations manager at our plant, acquires feedstock and basic chemicals necessary for the operation of the plant and performs the administrative, sales and marketing functions for the plant. The sales and marketing functions include marketing all our biodiesel and glycerin. Under the terms of the agreement, REG takes title to the biodiesel when loaded for delivery FOB the plant. REG pays over to us all proceeds received from sales of our biodiesel and glycerin net of the marketing fees we pay to REG pursuant to our management and operational services agreement. REG remits this payment to us by the close of business each Wednesday for all such proceeds received during the previous seven days. In exchange for these services, we have agreed to pay REG a monthly fee. The management and operational services agreement provides for the payment of a yearly bonus not to exceed $1,000,000 based on the profitability of the plant. For the first month in which our biodiesel was sold, and for six months thereafter, we pay a monthly management fee of 5.7 cents per gallon of biodiesel sold. For the first month after the initial period we will pay 5.7 cents per gallon for any biodiesel that was produced but not sold during the initial period in addition to a 5.7 cents per gallon fee for all biodiesel we produce in the first month after the initial period. After that we will pay a monthly management fee of 5.7 cents per gallon of biodiesel produced. In addition, the agreement provides for the payment of a yearly management bonus of 2% of net income between $1 and $2 million, 4% of net income between $2 and $3 million, and 6% of net income in excess of $3 million. The bonus will not exceed $1,000,000. The agreement has an initial term of 3 years after the end of the first month of production and will be renewed for successive one year terms unless either party gives a written notice of termination.

Since our start-up of operations, due to the current high soybean oil prices, we have been dealing with short term liquidity issues. On August 3, 2007 we entered into an amendment to our management and operational services agreement with REG to accelerate payment on our receivables. The amendment was in effect for four weeks beginning on August 5, 2007. For the period the amendment was in effect, REG took title to our biodiesel when loaded for delivery FOB our plant and REG paid us each week for biodiesel sales made the prior week. REG deducted from this payment REG’s cost of capital incurred as a result of making such payment to us before collecting proceeds from the ultimate customers and any other amounts then due from Iowa Renewable Energy to REG pursuant to our management and operational services agreement. We entered into this amendment so that we could receive payment for our biodiesel the week following shipment, as opposed to the week following payment from the third-party purchaser, which often results in a delay of 30 days or more. This has not completely solved our liquidity problem and we expect to continue to seek other alternatives to solve our liquidity issues. We expect to operate the biodiesel plant at approximately 60-65% of its production capacity through the remaining winter months. This may result in us scaling back biodiesel production or temporarily shutting down the biodiesel plant depending on our cash situation and our ability to purchase raw materials to operate the plant. We may also seek to produce biodiesel on a toll basis where we would produce biodiesel using raw materials provided by someone else. We anticipate we will begin producing more biodiesel from animal fat, as we expect this feedstock to be easier to acquire.

General Demand

Biodiesel has received attention from consumers and policymakers in recent years for several reasons. Biodiesel is made from renewable sources and provides environmental benefits over petroleum diesel, including reduced emissions of carbon dioxide, carbon monoxide, particulate matter, and sulfur. In addition, a 1998 study by the U.S. Department of Energy and the U.S. Department of Agriculture found that biodiesel has a positive energy balance: for every 3.2 units of energy produced, only 1.0 unit of energy is consumed in the production process. Biodiesel mixes easily with diesel fuel at rates between 2% and 100%, and it improves the lubricity of petroleum based diesel fuel at levels as low as 2%. The increased lubricity reduces the friction of petroleum based diesel fuel and may result in longer equipment life and protection of fuel injectors.

However, the biodiesel industry is still relatively new and unknown especially when compared to the ethanol industry. The U.S. consumes 140 billion gallons of gasoline and 60 billion gallons of diesel fuel annually. While the ethanol industry currently produces over 5 billion gallons of ethanol each year, the biodiesel industry sold only approximately 225 million gallons of biodiesel in 2006 and will produce an estimated 300 million in 2007, which constitutes a small part of the U.S. diesel fuel market. The National Biodiesel Board estimates the current dedicated biodiesel production capacity of operating biodiesel plants is approximately 1.85 billion gallons per year. However, some of these biodiesel plants do not operate at their full capacities. Further, reported plant construction and expansion, if realized, are expected to result in another 1.37 billion gallons of annual biodiesel production capacity, for total annual production capacity of almost 3.22 billion gallons.

Several factors may lead to an increase in biodiesel demand. The EPA Ultra Low Sulfur Diesel Mandate, enacted in 2006, seeks to reduce sulfur emissions through regulations that take effect over the next several years. Because low-sulfur diesel and ultra-low-sulfur diesel have lubricity problems, biodiesel may be an attractive alternative to satisfying the requirements of the mandate. However, EPA regulations are subject to change. If the mandate was cancelled or suspended, or if waiver of the mandate requirements were allowed, future biodiesel demand may be less than expected.

In August 2005, the Energy Policy Act of 2005 was signed into law. The law contains the Renewable Fuels Standard (RFS), which mandates that 7.5 billion gallons of renewable fuels, including biodiesel, be used annually by 2012. The RFS may result in an increased demand for biodiesel. However, 2004 ethanol production was over 3 billion gallons and the 2005 ethanol production was over 4 billion gallons. In 2006, ethanol production increased to over 5 billion gallons per year and as of October 30, 2007 the Renewable Fuels Association estimates ethanol production is currently at approximately 7 billion gallons. As a result, the mandates of the RFS may be met substantially by ethanol and have a much smaller, if any, on the biodiesel industry.

On December 19, 2007, President Bush signed into law the Energy and Security Act of 2007, H.R.6, which expands the existing RFS to require the use of 9 billion gallons of renewable fuel in 2008 and increasing to 36 billion gallons of renewable fuel by 2022. This act contains a requirement that 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to 1 billion gallons by 2012. We anticipate this act may increase the demand for biodiesel, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurance that demand will be increased by this act, as current biodiesel production capacity already exceeds the 2012 mandate.

Currently, we are operating at approximately 60-65% of our nameplate capacity due to difficulty in receiving feedstock and a seasonal decline in the demand for biodiesel. Historically, the demand for biodiesel follows a seasonal trend and demand decreases in colder months particularly because of the risk for the biodiesel to gel in colder temperatures. We anticipate we will begin producing more biodiesel from animal fat, as we expect this feedstock will be easier and less expensive to acquire. We believe that we will begin operating at increased capacity with less shut downs starting early in the second quarter of the 2008 fiscal year. However, if we are unable to increase our production capacity, this will have a negative impact on our revenues.

Principal Products and Markets

The principal products produced at our plant are biodiesel and crude glycerin. Iowa Renewable Energy’s biodiesel facility is able to pretreat crude vegetable oils and animal fats. Our plant, however, does not have a soybean crushing facility. We expect the plant to have an annual capacity to process approximately 160,000,000 pounds of soybean oil and 70,000,000 pounds of animal fats and grease into approximately 30 million gallons of biodiesel and 3 million gallons of crude glycerin per year. Our equipment does, however, allow a variance from this ratio to compensate for changes in feedstock cost and availability.

Primary Product- Biodiesel

Biodiesel is a clean-burning alternative fuel produced from domestic, renewable resources primarily used in compression ignition (diesel) engines. Biodiesel can also be used as home heating oil. Biodiesel is comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats. A chemical process called transesterification removes the free fatty acids from the base oil and creates the desired esters. Transesterification is the reaction of vegetable oil or animal fat with an alcohol, such as methanol or ethanol, in the presence of a catalyst. The process yields four products: mono-alkyl ester (biodiesel), glycerin, feed quality fat, and methanol. The methanol can be used again in the process. Biodiesel can then be used in neat (pure) form, or blended with petroleum diesel.

Biodiesel that is in neat (pure) form is typically designated in the marketplace as B100. The 100 indicates that the fuel is 100% biodiesel. Biodiesel is frequently blended with petroleum based diesel. When biodiesel is blended, it is typically identified in the marketplace according to the percentage of biodiesel in the blend. For instance, B20 indicates that 20% of the fuel is biodiesel and 80% is petroleum-based diesel.

Biodiesel’s physical and chemical properties, as they relate to operations of diesel engines, are similar to petroleum-based diesel fuel. As a result, biodiesel, in its pure form or blended with petroleum diesel, may be used in most standard diesel engines without making any engine modifications. Biodiesel demonstrates greater lubricating properties, referred to as lubricity, than petroleum-based diesel. This could lead to less engine wear in the long-run as biodiesel creates less friction in engine components than petroleum-based diesel. Biodiesel also demonstrates greater solvent properties. With higher percentage blends of biodiesel, this could lead to break downs in certain rubber engine components such as seals. The solvent properties of biodiesel also can cause accumulated deposits from petroleum-based diesel in fuel systems to break down. This could lead to clogged fuel filters in the short-term. Fuel filters should initially be checked more frequently when using biodiesel blends. These problems are less prevalent in blends that utilize lower concentrations of biodiesel compared to petroleum-based diesel.

Co-products

Glycerin is the primary co-product of biodiesel production. Glycerin is produced at a rate of approximately 10% of the quantity of biodiesel produced. Glycerin possesses a unique combination of physical and chemical properties that make it suitable for use in a wide variety of products. It is highly stable under typical storage conditions, compatible with a wide variety of other chemicals and comparatively non-toxic. Glycerin has many applications, including as an ingredient or processing aid in cosmetics, toiletries, personal care, drugs, and food products. Our glycerin, however, will not be able to be used in pharmaceutical products without further processing, and we do not have the capabilities to refine our glycerin into pharmaceutical quality. In addition, new uses for glycerin are frequently being discovered and developed.

Biodiesel Markets

Biodiesel is primarily used as fuel for compression ignition (diesel) engines. Biodiesel can also be used as home heating oil. It is produced using renewable resources including plant oils and animal fats. It provides environmental advantages over petroleum-based diesel fuel such as reduced vehicle emissions. Our ability to market our biodiesel is heavily dependent upon the price of petroleum-based diesel fuel as compared to the price of biodiesel, in addition to the availability of economic incentives to produce biodiesel. The biodiesel industry is faced with the challenge of becoming an acknowledged alternative to pure petroleum diesel. To this end, biodiesel must be marketed as a product with superior qualities to petroleum-based diesel and at a comparable price to that of petroleum-based diesel. Part of the biodiesel industry’s ability to competitively price its product with that of petroleum-based diesel is due to the availability of economic incentives for biodiesel. Federally, there is an excise tax credit, which is a tax incentive that provides for a credit of one penny per percent of biodiesel in a fuel blend made from agricultural products like vegetable oils. This tax incentive will make biodiesel more competitive in the market and assist REG in the marketing of our biodiesel. In addition, several states provide additional incentives to expand the use of biodiesel. Two states that have these incentives are Iowa and Illinois. Iowa provides for a three cents tax credit for retailers per gallon of blended biodiesel that is 2% biodiesel or higher, if they sell more than 50% biodiesel blends. Illinois waives the sales tax on the full purchase price for diesel blends of 11% or greater. Because of our location, these incentives may be particularly beneficial to REG in their efforts to market our biodiesel. The federal or state tax incentives are not, however, guaranteed to continue and the loss of such incentives could hinder REG’s ability to market our biodiesel as a competitively priced alternative to petroleum-based diesel.

Biodiesel is frequently used as fuel in transport trucks, ships, trains, in farming activities and in many government vehicles. According to the United States Department of Energy, the United States consumes approximately 60 billion gallons of diesel fuel annually; however, in 2006 biodiesel accounted for only approximately 250 million gallons of this market. The National Biodiesel Board estimates that in 2007, 300 million gallons of biodiesel will be produced. Government legislation that seeks to encourage use of renewable fuels could lead to an expansion of the market for biodiesel in the future. Further market increases might occur as a result of growing environmental concerns by American consumers as well as an increased awareness of energy security and the United States’ ability to supply its own fuel needs.

Wholesale Market / Biodiesel Marketers

Our biodiesel is sold exclusively on the wholesale market, directly to fuel blenders or through biodiesel marketers. Fuel blenders purchase B100 and B99.9 biodiesel, and mix it with petroleum-based diesel. The fuel blenders actually deliver the final product to retailers.

There are only a few wholesale biodiesel marketers in the United States. Two examples are World Energy in Chelsea, Massachusetts and REG in Ralston, Iowa. These companies use their existing marketing relationships to market the biodiesel of individual plants to end users for a fee. REG does not have any retail distribution equipment and typically only sells to customers who have blending capabilities. REG does not sell to individuals. Typically REG sells to distributors and refineries but may also sell to corporate fleets or terminal facilities that do not need as large of quantities of biodiesel, but have their own blending capabilities. These distributors may include transport trucks and jobbers. We have entered into an agreement with REG to market the biodiesel we produce. REG has agreed to use its best efforts to market all of our biodiesel, and if they cannot sell all of our biodiesel we may have to attempt to market it ourselves or find other marketers, which could be costly and ultimately unsuccessful.

Retail

The retail market consists of biodiesel distribution primarily through fueling stations to transport trucks and jobbers, which are individuals that buy product from manufacturers and sell it to retailers, who supply farmers, maritime customers and home heating oil users. Retail level distributors include oil companies, independent station owners, marinas and railroad operators. The biodiesel retail market is still in its very early stages as compared to other types of fuel. The present marketing and transportation network must expand significantly in order for our company to effectively market our biodiesel to retail users. With increased governmental support of renewable fuels and greater consumer awareness of renewable fuels, the availability of biodiesel may increase in the future.

The government has increased its use of biodiesel since the implementation of the Energy Policy Act (EPACT) of 1992, amended in 1998, which authorized federal, state and public agencies to use biodiesel to meet the alternative fuel vehicle requirements of EPACT. Although it is possible that individual plants could sell directly to various government entities, it is unlikely our plant could successfully market our biodiesel through such channels. Government entities have very long sales cycles based on the intricacies of their decision making and budgetary processes.

Distribution of Principal Products

We entered into a management and operational services agreement with Renewable Energy Group, Inc. (REG) for the purpose of start-up management and operational services. These services include REG marketing all of our biodiesel and glycerin. We pay REG a fee of 5.7 cents per gallon of biodiesel produced for all the services under this agreement. REG estimates a break down of this fee to be two cents (2¢) per gallon for biodiesel marketing services. Additionally, REG estimates one fifth cent (1/5¢) per gallon of this fee to be for the sales and marketing of glycerin. The sales and marketing services of REG include certain transportation services such as: arranging for transportation, logistics, and scheduling of biodiesel shipments; where advantageous, arranging for leased tankers for rail shipments; analyzing and auditing bulk transportation providers; overseeing reconciliation of shipments, invoicing and payments on a weekly basis; and providing invoicing and accounts receivable management for biodiesel shipments. Under the terms of the agreement REG takes title to the product when loaded for delivery FOB the plant.

Our products can be delivered by truck or rail, however, our rail service has been running slow. In order to alleviate some of these delays, we have increased our truck service. Our property is located approximately thirty-five miles from Interstate 80 and thirty miles from the Mississippi River. We have established rail service directly to the plant so that we are able to ship biodiesel to our customers by rail. Rail service is provided by the Iowa, Chicago and Eastern Railroad and REG coordinates all of our transportation services.

Pursuant to our Management and Operational Services Agreement, for the fiscal year ended September 30, 2007, we incurred service fees of $300,891.

Sources and Availability of Raw Materials

Feedstock Supply

The cost of feedstock is the largest single component of the cost of biodiesel production, accounting for 70% to 90% of the overall cost of producing biodiesel. As a result, increased costs of feedstock greatly impacts the biodiesel industry. Soybean oil is the most abundant feedstock available in the United States, however, demand is increasing rapidly with the expansion of the biodiesel industry and as a result costs of soybean oil are increasing. The twenty-year average price for soybean oil is approximately 21 cents per pound. The USDA’s Economic Research Service reported on November 13, 2007 that the forecasted average soybean oil price for 2007/2008 would be 37.5 to 41.5 cents per pound. The average October price for soybean oil was 38.1 cents per pound, the highest since May 1984. Early November prices were averaging 42 cents per pound, the highest price since summer of 1974, according to the USDA. Soybean oil prices have increased by 54% in the last year. If these current soybean oil prices persist, it may result in temporary or permanent shutdown of the biodiesel plant.

We have entered into a management and operational services agreement with REG for the purpose of start-up management and operational services. These services include REG procuring feedstock for our biodiesel plant, however, our agreement with REG does not address feedstock allocation between REG and its other customers. Additionally, the agreement requires REG to provide analysis and audit of feedstock suppliers, purchase feedstock meeting specifications and in adequate quantities to fill the production schedule of the facility, negotiate for discounts, and provide transportation, logistics, and scheduling of feedstock deliveries. We pay REG a fee of 5.7 cents per gallon of biodiesel produced for all the services under this agreement. REG estimates a break down of this fee to be 1.5 cents per gallon for feedstock procurement services. The inability of REG to obtain adequate feedstock for our facility at prices that allow us to operate profitably could have significant negative impacts on our ability to produce biodiesel and on our revenues. We are in direct competition with REG for procurement of feedstock. In addition, REG may procure feedstock for other biodiesel plants that are our competitors. In the event that REG cannot procure adequate feedstock at reasonable prices for its biodiesel plant, our biodiesel plant and the other biodiesel plants that REG manages, we may not be able to purchase adequate amounts of alternative feedstock at reasonable prices and we may not be able to successfully operate the plant. If we cannot find sufficient feedstock to operate the plant at reasonable prices, we may have to cease operations, either temporarily or permanently.

Pretreatment Costs

Crude soybean oil and all animal fats need to be pretreated before being processed into biodiesel. Pretreatment takes crude soybean oil and any animal fat or grease, removes the impurities and prepares the feedstock to go through the biodiesel process. Some feedstock needs more pretreatment than others. For example, virgin soybean oil can be easier and cheaper to pretreat than turkey fat, and turkey fat can be easier and cheaper to pretreat than beef tallow. The cost of the process is driven by the structure of the feedstock and the impurities in the feedstock.

For soybean oil, the pretreatment process results in refined and bleached (RB) oil. The price differential between RB oil and crude soybean oil is ordinarily $0.05 per pound. Our processing plant has pretreatment capabilities allowing us to utilize crude vegetable oil and many types of fat or grease as feedstock in our facility. This added flexibility allows us to choose the feedstock that will produce biodiesel in the most cost effective manner possible.

Feedstock Procurement.

REG, Inc. is responsible for arranging for the purchase of soybean oil, together with other feedstocks as may be needed in the future. Per our contract, REG, Inc. will utilize its best efforts to procure all feedstocks necessary for production, and to:

	•		Provide analysis and audit of feedstock suppliers;
	•		Purchase feedstocks at competitive prices meeting specifications and in adequate quantities to fill the production schedule of our plant;
	•		Review on a monthly basis the average prices we pay for feedstock, including comparisons to industry averages;
	•		Provide us with the specifications for feedstock being required of suppliers;
	•		Negotiate for discounts where obtainable on feedstock;
	•		Arrange for transportation, logistics, and scheduling of feedstock deliveries; and
	•		Provide analysis and audit of bulk transportation providers.

Chemical Inputs Procurement.

REG, Inc. is responsible for purchasing methanol, sodium methylate, hydrochloric acid, and caustic soda, together with such other chemical inputs as may be needed in the future. REG, Inc. will utilize its best efforts to procure all basic chemical inputs necessary for production, and to:

	•		Perform due diligence requirements for investigation of suppliers of the chemical inputs;
	•		Provide analysis and audit of chemical suppliers;
	•		Provide us with the specifications for chemical inputs being required of suppliers;
	•		Purchase chemical inputs at competitive prices meeting specifications for use in our plant;
	•		Review on a monthly basis the average prices we paid for chemical inputs, including comparisons to industry averages;
	•		Negotiate for discounts where obtainable on chemicals;
	•		Procure adequate chemical inputs to meet our production schedules;
	•		Provide analysis and audit of bulk transportation suppliers; and
	•		Arrange for transportation, logistics, and scheduling services for chemical input deliveries by suppliers.

Utilities

Our biodiesel plant requires a significant and uninterrupted supply of electricity, natural gas and water to operate. We do not have any long term agreements for our utilities but receive them on a monthly invoice basis.

Electricity. We require a significant supply of electricity to operate our plant. Alliant Energy supplies us with our electricity needs, on a monthly basis at variable rates.

Water and Sewer. We require a significant supply of water to operate our plant. The City of Washington supplies us with water, on a monthly basis at variable rates. We have entered into an agreement to have our wastewater handled by the City of Cedar Rapids until the City of Washington has the capacity to handle our wastewater.

Natural Gas. We require a significant supply of natural gas. Alliant Energy supplies us with natural gas on a monthly basis at variable rates.

Rail. Our rail access is complete and we are currently shipping our soybean oil biodiesel by both rail and truck. The Iowa, Chicago & Eastern Railroad supplies our plant with rail service and REG makes all of our transportation arrangements.

New Products and Services

We have not introduced any new products or services during the fiscal year ended September 30, 2007 after the start up of the plant.

Government Regulation and Federal Biodiesel Supports

Federal Biodiesel Supports

The biodiesel industry is dependent on economic incentives to produce biodiesel, including federal ethanol supports. Current legislation may lead to increased demand for biodiesel in the United States over the next 10 years.

Renewable Fuels Standard

The most recent biodiesel supports are contained in the Energy Policy Act of 2005. Most notably, the Act creates a 7.5 billion gallon Renewable Fuels Standard (RFS). The RFS requires refiners to use 4.7 billion gallons of renewable fuels in 2007, 5.4 billion in 2008, and increasing to 7.5 billion gallons by 2012.

On April 10, 2007 the EPA published final rules implementing the RFS program. The RFS program final rules were effective as of September 1, 2007. The new regulation proposes that 4.02% of all the gasoline sold or dispensed to United States motorists in 2007 be renewable fuel. Pursuant to the final rules, the EPA will calculate and publish the annual RFS in the Federal Register by November 30^th for the following year. The RFS must be attained by refiners, blenders, and importers (collectively the “obligated parties”). Compliance with the RFS program will be shown through the acquisition of unique Renewable Identification Numbers (RINs). RINs are assigned by the producer to every batch of renewable fuel produced to show that a certain volume of renewable fuel was produced. Each obligated party is required to meet their own Renewable Volume Obligation. Obligated parties must produce or acquire sufficient RINs to demonstrate achievement of their Renewable Volume Obligation. The EPA has assigned “equivalence values” to each type of renewable energy fuel in order to determine compliance with the RFS.

Each RIN may only be counted once toward an obligated party’s Renewable Volume Obligation and must be used either in the calendar year in which the RINs were generated, or in the following calendar year. At least 80% of the Renewable Volume Obligation for a given calendar year must come from RINs generated that year. An obligated party may purchase RINs from third parties if it fails to produce the adequate RINs in the calendar year to meet its Renewable Volume Obligation. If the obligated party fails to satisfy is Renewable Volume Obligation in a calendar year, the obligated party may carry the deficit forward for one year. Such deficit will be added to the party’s obligation for the subsequent year.

The RFS system will be enforced through a system of registration, recordkeeping and reporting requirements for obligated parties, renewable producers (RIN generators), as well as any party that procures or trades RINs, either as part of their renewable purchases or separately. Any person who violates any prohibition or requirement of the RFS program may be subject to civil penalties for each day of each violation. For example, under the final rule, a failure to acquire sufficient RINs to meet a party’s renewable fuels obligation would constitute a separate day of violation for each day the violation occurred during the annual averaging period. The enforcement provisions are necessary to ensure the RFS program goals are not compromised by illegal conduct in the creation and transfer of RINs.

The 2007 proposed equivalence values used ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to one credit towards RFS compliance) and assigned biodiesel an equivalence value of 1.5 (so that for each gallon of biodiesel used, the obligated party will receive one and one-half gallons credit towards its RFS compliance).

The increasing annual renewable fuels standards under the Energy Policy Act of 2005 may lead to an increase in U.S. demand for biodiesel in the long-term. However, the mandates of the RFS are expected to largely be met by ethanol and thus may have a much smaller impact on the biodiesel industry. The 2006 RFS was 4 billion gallons of renewable fuels, while the ethanol industry alone produced nearly 5 billion gallons of ethanol in 2006. By contrast, the National Biodiesel Board reported that only approximately 250 million gallons of biodiesel were produced in the United States in 2006. The RFS for 2007 is currently set at 4.7 billion gallons and the EPA recently announced that the RFS for 2008 will be 5.4 billion gallons. Current ethanol and biodiesel production capacity combined is approximately 8.85 billion, according to the Renewable Fuels Association and National Biodiesel Board. While some ethanol and biodiesel production facilities produce less than their nameplate production capacity of biofuels, the total production capacity is significantly higher than the RFS for both 2007 and 2008. Furthermore, since the renewable fuels industry is expanding rapidly, in both biodiesel and ethanol production capacity, there is no assurance that additional production of renewable fuels will not continually outstrip any additional demand for biodiesel that might be created by the RFS. If the RFS does not significantly increase demand compared to increases in supply, the RFS will not likely lead to an increase in biodiesel demand or the price at which we can sell our biodiesel. If the current high costs for feedstock such as soybean oil and animal fat continue to persist, we will be required to increase the sale price of our biodiesel in order to be profitable. In such a case, however, there are no assurances that we would be able to sell our biodiesel at such increased prices.

The Energy Policy Act of 2005 also provides for a tax subsidy for small biodiesel producers with total annual production capacities not exceeding 60 million gallons. The subsidy is applicable to the first 15 million gallons of Biodiesel produced annually and is available through 2012. The subsidy is equivalent to $0.10 credit per gallon of biodiesel produced annually and the maximum subsidy per biodiesel producer is $1.5 million.

Biodiesel Blender Tax Credit

The American Jobs Creation Act of 2004 originally created the biodiesel blenders’ excise tax credit known as the Volumetric Ethanol Excise Tax Credit (VEETC). VEETC provides a tax credit of $1.00 per gallon for agri-biodiesel, which is biodiesel derived solely from virgin vegetable oil and animal fats that are blended with petroleum biodiesel. VEETC also provides a tax credit of $0.50 per gallon for non agri-biodiesel blended with petroleum diesel, which is biodiesel made from non-virgin vegetable oil and animal fats. This includes esters derived from crude vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambo, rapeseeds, safflowers, flaxseeds, rice bran, and mustard seeds. VEETC may be claimed in both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel markets. The desired effect of VEETC is to streamline the use of biodiesel and encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more biodiesel to be used in the marketplace. VEETC also streamlines the tax refund system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending. Below-the-rack blenders are those blenders that market fuel that is for ground transportation engines and is not in the bulk transfer system.

In addition to VEETC, the American Jobs Creation Act creates incentives for alternative fuel refueling stations. The energy bill conference agreement establishes a credit for installing alternative fuel refueling property. The provision permits taxpayers to claim a 30% credit (up to $30,000) for the cost of installing clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer, or installed at the principal residence of the taxpayer. Under the provision, clean fuels are any fuel that is at least 85% ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen, and any mixture of diesel fuel containing at least 20% biodiesel. The provision is effective for property placed in service after December 31, 2005 and before January 1, 2010. While it is unclear how this credit will affect the demand for biodiesel in the short-term, it may help raise consumer awareness of alternative sources of fuel and could positively impact future demand for biodiesel.

VEETC was originally set to expire in 2006, but was extended through December 31, 2008 by the Energy Policy Act of 2005. Legislation has been introduced in Congress that may remove the sunset provisions of the VEETC, thereby making it a permanent tax credit. We cannot assure you that this legislation will be adopted

The Clean Air Act Amendment

Environmental laws such as the Clean Air Act Amendments that are aimed at lowering fuel emissions may also promote biodiesel consumption. The Clean Air Act Amendments of 1990 required the EPA to regulate air emissions from a variety of sources. In a 2001 rule, the EPA provided for the decrease of emissions from vehicles using on-road diesel by requiring the reduction in the sulfur content of diesel fuel from 500 parts per million (ppm) to a significantly lower 15 ppm commencing in June 2006, and 10 ppm by 2011.

Reducing the sulfur content of petroleum-based diesel leads to a decrease in lubricity of the fuel, which may adversely impact motor engines. On the other hand, even though biodiesel contains virtually no sulfur (and therefore does not emit sulfur dioxide), biodiesel is able to supply lubricity, which makes biodiesel an attractive blending stock.

Energy Independence and Security Act of 2007

On December 19, 2007, President Bush signed into law the Energy Independence and Security Act of 2007, H.R. 6, which expands the existing RFS to require the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. Only a portion of the renewable fuel used to satisfy the expanded RFS may come from conventional corn-based ethanol. The act requires that 600 million gallons of renewable fuel used in 2009 must come from advanced biofuels, such as ethanol derived from cellulose, sugar, or crop residue and biomass-based diesel, increasing to 21 billion gallons in 2022. The act further includes a requirement that 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to 1 billion gallons by 2012. We anticipate that this act may increase demand for biodiesel, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurance that demand for biodiesel will be increased by this act. As of September 2007, the National Biodiesel Board estimated that national biodiesel production capacity was approximately 1.85 billion gallons per year, which already exceeds the 2012 biodiesel and biomass-based diesel use mandate contained in this act. Accordingly, there is no assurance that additional production of biodiesel and biomass-based diesel will not continually outstrip any additional demand for biodiesel that might be created by this new law. We also anticipate that most of the renewable fuel used to satisfy the expanded RFS created by this act will be primarily satisfied by corn-based ethanol and other types of ethanol, including cellulose-based ethanol.

Small Agri-Biodiesel Producer Tax Credit

The Energy Policy Act of 2005 also provides for a tax subsidy for small agri-biodiesel producers with total annual production capacities of 60 million gallons or less. The subsidy is applicable to the first 15 million gallons of biodiesel produced annually and is available through December 31, 2010. The subsidy is equivalent to a 10 cent credit per gallon of biodiesel produced annually and the maximum annual subsidy per biodiesel producer is $1.5 million. This tax credit may foster additional growth and increase competition among biodiesel producers whose plant capacity does not exceed 60 million gallons per year. Because Central Iowa Energy is organized as a limited liability company, this credit passes through to its members and is used as a credit against their federal income tax liability, subject to various limitations.

State Legislation

Several states are currently researching and considering legislation to increase the amount of biodiesel used and produced in their states. However, Minnesota is the first and only state to mandate biodiesel use. The legislation, which became effective in September 2005, requires that all diesel fuel sold in the state contain a minimum of 2% biodiesel. The 2% soy biodiesel blend has nearly the same cold flow properties as No. 2 petroleum diesel, which allows it to be used in Minnesota’s colder climate much the same as petroleum diesel throughout the year.

Other states, including Iowa, have enacted legislation to encourage (but not require) biodiesel production and use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel production, blending, and use. In addition, several governors have issued executive orders directing state agencies to use biodiesel blends to fuel their fleets.

On May 30, 2006, the Governor of Iowa signed HF 2754 and HF 2759, two renewable fuels bills passed by the Iowa House and Senate during the 2006 legislative session. The purpose of the bills is to expand and fund consumer access to biodiesel and ethanol blended fuels through a RFS and a series of retail tax credits. HF 2759 provides retailers with an opportunity for cost sharing grants and provides funding for some of the programs contained in HF 2754. The incentives contained in HF 2754 include the following:

	•		An Iowa RFS starting at 10% in 2009 and increasing to 25% by 2019;
	•		A retail tax credit for biodiesel blends of $0.03 per gallon for retailers who sell more than 50% biodiesel blends; and
	•		An expanded infrastructure program designed to help retailers and wholesalers offset the cost of bringing E85 and biodiesel blends to customers.

While this legislation does not specifically require increased use of biodiesel, we anticipate that it will significantly encourage renewable fuels usage in Iowa, which may include increased biodiesel consumption in Iowa.

Effect of Government Regulation

The biodiesel industry and our business depend upon continuation of the federal biodiesel supports discussed above. These incentives have supported a market for biodiesel that might disappear without the incentives. Alternatively, the incentives may be continued at lower levels than at which they currently exist. The elimination or reduction of such federal biodiesel supports would make it more costly for us to sell our biodiesel and could negatively impact our future financial performance.

Furthermore, environmental regulations that may affect our company change frequently. It is possible that the government could adopt more stringent federal or state environmental rules or regulations, which could increase our operating costs and expenses. The government could also adopt federal or state environmental rules or regulations that may have an adverse effect on the use of biodiesl. Furthermore, the Occupational Safety and Health Administration (OSHA) will govern our plant operations. OSHA regulations may change such that the costs of the operation of the plant may increase. Any of these regulatory factors may result in higher costs or other materially adverse conditions affecting our operations, cash flows and financial performance. These adverse effects could decrease or eliminate the value of our units.

Competition

We operate in a very competitive environment. Biodiesel is a relatively uniform commodity where competition in the marketplace is predominantly based on price, consistent fuel quality, and to a lesser extent delivery service. We compete with large, multi-product companies and other biodiesel plants with varying capacities. Some of these companies can produce biodiesel in a more efficient manner than we are able. We face competition for capital, labor, management, feedstock and other resources. Some of our competitors have greater resources than we currently have or will have in the future. Some of our competitors have soy-crushing facilities and are therefore not reliant upon third parties for their feedstock supply. According to the United States Department of Agriculture, the 2007 soybean crop is estimated to yield approximately 2.6 billion bushels of soybeans. Since soybeans are an agricultural product, seasonal changes can affect the soybean yield. If fewer soybeans were produced in any given year, we could face significant competition from other biodiesel producers for soybean oil. This has increased soybean oil costs and could affect our ability to generate a profit and could reduce or eliminate the value of our units. Current soybean oil prices have reached levels where, at times, our costs of production have exceeded the price we receive for our biodiesel. The USDA reported on December 12, 2007 in its Oilseed Crop Outlook report that prices for soybean oil may continue to rise because farmers may plant too little soybean acreage in 2008 to remedy the narrowing gap with consumption.

We expect additional biodiesel producers to enter the market if the demand for biodiesel increases. When new producers enter the market, they will increase the supply of biodiesel in the market. If demand does not keep pace with additional supply, the selling price of biodiesel will likely decrease and we may not be able to operate our plant profitably.

In 2005, approximately 75 million gallons of biodiesel were purchased in the United States. The National Biodiesel Board reports that in 2006 approximately 250 million gallons of biodiesel were purchased in the United States. The National Biodiesel Board estimates that in 2007, 300 million gallons of biodiesel will be produced. We believe biodiesel production will continue to increase. Biodiesel plants are operating or have been proposed in a total of at least 42 states. The National Biodiesel Board estimates that as of September 7, 2007 there were 165 biodiesel companies actively producing biodiesel in the United States, 4 of which are planning to expand their operations to increase their annual production capacity. Additionally, 80 companies are constructing biodisesel plants that are anticipated to be complete within 18 months in the United States, including a proposed 120 million gallon per year plant in Dade City, Florida. With a projected annual production capacity of 120 million gallons, the Dade City, Florida plant will be significantly larger than any plant currently operating in the United States. Other large plants include the 100 million gallon per year Imperium Grays Harbor plant that recently became operational, the 85 million gallon per year Archer Daniels Midland Co. (ADM) plant in Velva, North Dakota, the 86 million gallon per year Green Earth Fuels of Houston plant in Houston, Texas. Additionally, there is an 80 million gallon per year plant owned by Louis Dreyfus Agricultural Industries, LLC under construction in Claypool, Indiana and an 80 million gallon per year plant owned by Delta Biofuels, Inc. currently operating in Natchez, Mississippi.

Currently, many biodiesel plants do not operate at their full production capacity. Should we continue to experience liquidity problems, we may cut back production or cease production altogether, either temporarily or permanently.

Currently, there are thirteen active biodiesel plants in Iowa, other than us. Renewable Energy Group, Inc. (REG), located in Ralston, Iowa produces biodiesel primarily from feedstock produced at its soybean crushing facility. We have entered into a design-build agreement and a management and operational services agreement with REG, making REG a third party we are dependent upon and a direct competitor of our company. The Ralston facility was previously owned by West Central Cooperative; however, West Central Cooperative combined all of its biodiesel-related products and services under REG. The West Central Cooperative facility began producing biodiesel on a small scale in 1996-1997, then constructed a continuous flow biodiesel production facility in 2002 capable of producing 12 million gallons of biodiesel annually. REG is in the process of constructing two 60 million gallon per year biodiesel refineries to be owned and operated by REG. One will be located in Emporia, Kansas, and one will be located in St. Rose, Louisiana.

A second biodiesel producer in Iowa is Ag Processing Inc. (AGP) in Sergeant Bluff. This facility produces biodiesel from refined bleached and deodorized soybean oil produced at its solvent extraction processing plant in Eagle Grove, Iowa. AGP recently completed an expansion increasing its production capacity from 7 to 12 million gallons per year. The company has also announced plans for another plant expansion that would increase its production capacity to approximately 30 million gallons per year.

A third biodiesel production facility in Iowa is Soy Solutions of Iowa, LLC located in Milford, Iowa. This is a stand-alone facility that purchases soybean oil from the market. The facility has the capacity to produce approximately 2 million gallons annually, and utilizes virgin soybean oil as its sole feedstock.

A fourth biodiesel production facility in Iowa is Western Iowa Energy, LLC located in Wall Lake, Iowa. This facility has the capacity to produce 30 million gallons annually and utilizes both soybean oil and animal fats as its feedstock. This biodiesel plant was constructed by REG and is currently managed by REG.

A fifth biodiesel production facility in Iowa is Cargill Inc. located in Iowa Falls. Cargill’s facility has an annual production capacity of 37.5 million gallons and is currently the largest biodiesel plant operating in Iowa. Cargill uses soybean oil as its primary feedstock and is located adjacent to its soybean crush facility.

The sixth biodiesel production facility in Iowa is Clinton County BioEnergy, L.L.C. located in Clinton, Iowa. This facility has the capacity to produce 10 million gallons annually and uses soybean oil as its primary feedstock.

The seventh biodiesel production facility in Iowa is Tri-City Energy near Keokuk, Iowa. The facility has the capacity to produce 5 million gallons of biodiesel per year.

The eighth operating biodioesel production facility in Iowa is Central Iowa Energy. Central Iowa Energy has capacity to produce 30 million gallons of biodiesel per year, from either vegetable oil or animal fat, and is located near Newton, Iowa. This biodiesel plant was constructed by REG and is currently managed by REG.

The ninth operating biodiesel production facility in Iowa is Freedom Fuels, LLC near Mason City, Iowa. The facility has capacity to produce 30 million gallons of biodiesel per year.

The tenth operating biodiesel plant is Western Dubuque Biodiesel located in Farley, Iowa. The facility has capacity to produce 30 million gallons of biodiesel per year from vegetable oil. The biodiesel plant was constructed by REG and is currently managed by REG and is currently producing biodiesel from soybean oil.

The eleventh plant is East Fork Biodiesel, LLC, which constructed a 60 million gallon plant in Algona, Iowa. East Fork Biodiesel will be the largest biodiesel plant in Iowa, however, it has currently suspended operations.

The two remaining plants are operated by Sioux Biochemical, Inc. and Riksch Biofuels L.L.C. Sioux Biochemical has capacity to produce 1.5 million gallons of biodiesel each year and Riksch Biofuels has capacity to produce 10 million gallons of biodiesel each year.

According to the Iowa Renewable Fuels Association, there are at least 2 companies in Iowa that have biodiesel plants under construction. Also, Maple River Energy, LLC has a 5 million gallon per year facility under construction near Galva, Iowa. Finally, Soy Energy, LLC started construction on a 30 million gallon per year biodiesel plant in Marcus, Iowa but has discontinued construction.

When these new plants and expansions are completed, they will push Iowa biodiesel production capacity to more than 350 million gallons per year. In addition to the existing plants and those currently under construction, multiple other companies have previously announced plans to construct biodiesel facilities in Iowa. Southern Iowa BioEnergy, LLC plans to build a 30 million gallon per year multi-feedstock plant near Osceola, and Farmer’s Cooperative Company intends to construct a 30 million gallon per year multi-feedstock plant near Marble Rock. Additionally, Hawkeye Bio Energy, LLC intends to construct a 60 million gallon per year multi-feedstock plant near Camanche. Northern Bio Energy, LLC is planning to construct a 60 million gallon per year biodiesel facility near Estherville. Natural Innovative Renewable Energy, LLC plans to construct a 60 million gallon per year plant in Plymouth County Iowa. These companies are in the process of raising equity for their biodiesel facilities. It should be noted that recent efforts to raise equity for some biodiesel facilities have been unsuccessful.

While REG markets our biodiesel to end users throughout the United States, biodiesel plants in Iowa are direct competitors for local end users and resources other than customers. We compete with the plants in Iowa for capital, labor and management. These resources tend to be utilized from a local market, and additional strains placed on these resources by increased competition in Iowa could result in our company being forced to expend additional funds on recruiting labor and management to relocate from other areas. In addition, while we may receive feedstock from areas beyond the state of Iowa, the most cost-efficient feedstock will likely come from local suppliers, as this will reduce transportation costs. We directly compete with Iowa biodiesel plants for business from a limited number of local feedstock suppliers. Local end users will also be the most cost-efficient customers for REG, due to reduced transportation expenses. Therefore, we compete directly with Iowa biodiesel producers, including REG, for these local customers.

Our management and operational services agreement with REG does not prevent REG from providing marketing and sales services for our competitors. If REG provides marketing and sales services for the biodiesel of our competitors, the result will be increased competition among those biodiesel producers. Biodiesel producers that work with REG, including our company, rely on REG to market their biodiesel and if REG cannot market all of the biodiesel it has committed to sell, then all of the biodiesel producers that work with REG are at risk that this loss will be allocated to them.

The following map produced by the National Biodiesel Board indicates the locations of current active plants in the U.S as of September 7, 2007. Active plants are those companies that are actively producing biodiesel.

Commercial Biodiesel Production Plants (September 7, 2007)

Source: National Biodiesel Board, http://www.biodiesel.org/buyingbiodiesel/producers_marketers/ProducersMap-Existing.pdf

The following table provides a list of the active biodiesel plants in the United States as of September 7, 2007, as reported by the National Biodiesel Board. Some newly constructed plants, are not listed.

						Annual
						Production
State		Company		City		Capacity				Primary Feedstock
AL
		Alabama Biodiesel Corporation		Moundville						Soy
		Allied Renewable Energy, LLC		Birmingham			15,000,000			Soy
		Eagle Biodiesel, Inc.		Bridgeport			30,000,000
		Independence Renewable Energy Corp		Perdue Hill			40,000,000			Multi Feedstock
AR
*		FutureFuel Chemical Company		Batesville			24,000,000			Multi Feedstock
		Patriot Biofuels		Stuttgart			3,000,000			Multi Feedstock
AZ
		Amereco Arizona, LLC		Arlington			15,000,000			Multi Feedstock
CA
		Bay Biodiesel, LLC		San Jose			3,000,000			Soy
		Blue Sky Bio-Fuels, Inc.		Oakland						Multi Feedstock
		Central Valley Biofuels, LLC		Orange Cove						Soy, Cottonseed
		Energy Alternative Solutions, Inc.		Gonzales			4,000,000			Multi Feedstock
		Evergreen Biodiesel		Big Oak Flat			50,000			Recycled Cooking Oil
*		Imperial Western Products		Coachella			8,000,000			Multi Feedstock
		So Cal Biofuels, Inc.		Anaheim			1,100,000			Yellow Grease
		Yokayo Biofuels, Inc.		Ukiah			250,000			Recycled Cooking Oil
CO
		American Agri-diesel LLC		Burlington			6,000,000			Soy
		Bio Energy of America		Denver			10,000,000			Soy
		Bio Energy of America		Denver			8,000,000			Soy
		Great White Bottling, Inc.		Denver			1,300,000			Soy
CT
		Bio-Pur Inc.		Bethlehem			1,000,000			Multi Feedstock
DE
		Mid-Atlantic Biodiesel		Clayton			6,500,000			Multi Feedstock
FL
		Agri-Source Fuels, Inc.		Dade City			30,000,000			Multi Feedstock
*		Purada Processing, LLC		Lakeland			18,000,000			Soy
GA