Heron Lake BioEnergy, LLC (Form: 10-K, Received: 01/30/2012 17:10:04)

GAVILON, LLC — OMAHA

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended October 31, 2011.

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

for the transition period from to .

Commission File Number 000-51825

Heron Lake BioEnergy, LLC

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

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

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

Name of Exchange on Which Registered: None

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

Large Accelerated Filer o		Accelerated Filer o

Non-Accelerated Filer x		Smaller Reporting Company o

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

As of April 30, 2011, t he aggregate market value of the Company’s Class A Units held by non-affiliates is not able to be calculated. The Company is a limited liability company whose outstanding common equity, consisting of its Class A Units, is subject to significant restrictions on transfer under its Member Control Agreement. No public market for common equity of Heron Lake BioEnergy, LLC is established and it is unlikely in the foreseeable future that a public market for its common equity will develop.

As of January 26, 2012, the Company had outstanding 38,622,107 Class A Units.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

Table of Contents

PART I

Item 1.	Business
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	[Removed and Reserved]

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information

PART III

Item 10.	Directors, Executive Officers and Corporate Governance
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions, and Director Independence
Item 14.	Principal Accountant Fees and Services

PART IV

Item 15.	Exhibits and Financial Statement Schedules

SIGNATURES

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PART I

When we use the terms “Heron Lake BioEnergy,” “we,” “us,” “our,” the “Company”, “HLBE” or similar words in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and its subsidiaries, Lakefield Farmers Elevator, LLC, with grain facilities at Lakefield and Wilder, Minnesota, and HLBE Pipeline Company, LLC. Additionally, when we refer to “units” in this Annual Report on Form 10-K, unless the context otherwise requires, we are referring to the Class A units of Heron Lake BioEnergy, LLC.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report under Part I, Item 1A. “Risk Factors” of this Form 10-K.

We undertake no duty to update these forward-looking statements, even though our situation may change in the future. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

ITEM 1. BUSINESS

Overview

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

We operated a dry mill, coal fired ethanol plant in Heron Lake, Minnesota. After completing a conversion in November 2011, we are now a natural gas fired ethanol plant. Our subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC, the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company’s ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota. Our subsidiary, Lakefield Farmers Elevator, LLC, has grain facilities at Lakefield and Wilder, Minnesota. At nameplate, our ethanol plant has the capacity to process approximately 18.0 million bushels of corn each year, producing approximately 50 million gallons per year of fuel-grade ethanol and approximately 160,000 tons of distillers’ grains with soluble (“DGS”). On September 21, 2007, we began operations at ethanol plant. Fiscal year 2007 was the first fiscal year that includes any revenue generated from our operations. In both our fiscal years 2011 and 2010 which ended October 31, 2011 and 2010, we sold approximately 53.4 million gallons of ethanol, respectively.

The following table sets forth a summary of significant milestones in our company’s history until we began operations at our plant.

Date		Milestone
February 2002		We obtained an option on land that is now part of the 216 acre site of our ethanol plant.

October 2003		We entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors.

Early 2004		We selected Fagen, Inc. to be the design-build firm to build our ethanol plant near Heron Lake, Minnesota, using process technology provided by ICM, Inc.

September 2005		We entered into a Standard Form of Agreement between Owner and Designer — Lump Sum with Fagen, Inc.

December 2005		We purchased certain assets relating to elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota with a combined storage capacity of approximately 2.8 million bushels.

May 2006		We entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County.

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Date		Milestone
August 2006		We entered into an electric service agreement with Interstate Power and Light Company (a wholly-owned subsidiary of Alliant Energy Corporation).

December 2006		We entered into a contract with Federated Rural Electric Association for the construction of the distribution system and electrical substation for the plant.

June 2007		We entered into a master coal supply agreement with Northern Coal Transportation Company (NCTC) to provide Powder River Basin (PRB) coal for the plant.

June 2007		We entered into a coal transloading agreement with Southern Minnesota Beet Sugar Cooperative (SMBSC).

September 2007		We began operations at our dry mill, coal fired ethanol plant.

Production

Since the beginning of operations at our ethanol plant, our primary business is the production and sale of ethanol and co-products, including dried distillers’ grains. We currently do not have or anticipate we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and ethanol co-products.

Our Ethanol Plant

Our ethanol plant was designed and built by Fagen Inc. under a September 2005 design-build agreement who used certain proprietary property and information of ICM, Inc. in the design and construction of our ethanol plant.

Our ethanol plant uses a dry milling process to produce fuel-grade ethanol and distillers’ grains. The dry milling process involves grinding the entire corn kernel into flour and the starch is converted to ethanol through fermentation that also produces carbon dioxide and distillers’ grains.

The ethanol plant consists principally of a natural gas combustion area; storage and processing areas for corn; a fermentation area comprised mainly of fermentation tanks; a distillation finished product storage area; and a drying unit for processing the dried distillers’ grains. Additionally, the ethanol plant contains receiving facilities that have the ability to receive corn by rail and truck, store it for use in the plant and prepare the corn to be used in the plant. We have storage tanks on site to store the ethanol we produce. The plant also contains a storage building and silos to hold distillers’ grains until it is shipped to market.

The Union Pacific Railroad is the railroad adjacent to our ethanol plant. The ethanol plant has the facilities necessary to receive corn by truck and rail, coal by truck, and to load ethanol and distillers grains onto trucks and rail cars.

Our ethanol plant requires significant and uninterrupted amounts of electricity, natural gas and water. We have entered into agreements for our supply of electricity, natural gas and water.

We are required to comply with various requirements of state and federal law regulating the operations at our plant, including regulations relating to air emissions. On July 2, 2010, we entered into a mutual release and settlement agreement with Fagen, Inc. and ICM, Inc. relating to the arbitration commenced by us in September 2009 in which we asserted claims against Fagen based on the design-build agreement for our ethanol plant and the plant’s air emissions. Please review the section entitled “Compliance with Environmental Laws and Other Regulatory Matters” for a description of how compliance with regulatory requirements, including requirements relating to air emissions, has impacted our business.

Our Principal Products

The principal products that we produce are fuel grade ethanol and distillers’ grains. Raw carbon dioxide is also a product of the ethanol production process, but we do not capture or market any carbon dioxide gas.

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Ethanol

Ethanol is a type of alcohol produced in the U.S. principally from corn. Ethanol is primarily used in the U.S. gasoline fuel market as:

· an octane enhancer in fuels;

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

· a gasoline substitute generally known as E85, a fuel blend composed of 85% ethanol; and

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

Ethanol used as an octane enhancer or fuel additive is blended with unleaded gasoline and other fuel products. The principal purchasers of ethanol are generally wholesale gasoline distributors or blenders.

Distillers’ Grains

The principal co-product of the ethanol production process is distillers’ grains, a high protein and high-energy animal feed ingredient.

Dry mill ethanol processing creates three primary forms of distillers’ grains: wet distillers’ grains, modified wet distillers’ grains, and dried distillers’ grains with solubles. Wet distillers’ grains are processed corn mash that contains a substantial amount of moisture. It has a shelf life of approximately three days and is primarily sold to feeders of beef animals within the immediate vicinity of the ethanol plant. Modified wet distillers’ grains are similar to wet distillers’ grains except that it has been partially dried and contains less moisture. Modified wet distillers’ grains has a shelf life of a maximum of fourteen days, contains less water to transport, is more easily adaptable to some feeding systems, and is sold to both local and regional markets, primarily for both beef and dairy animals. Dried distillers’ grains with solubles are corn mash that has been dried to approximately 10% moisture. It has an almost indefinite shelf life and may be sold and shipped to any market and to almost all types of livestock. Most of the distillers’ grains that we sell are in the form of dried distillers’ grains.

Procurement and Marketing Agreements

Corn Procurement

The primary raw material used in the production of ethanol at our plant is corn. We need to procure approximately 18 million bushels of corn per year for our dry mill ethanol process. We generally do not have long-term, fixed price contracts for the purchase of corn and our members are not obligated to deliver corn to us. Typically, we purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

We generally purchase corn through cash fixed-price contracts and may utilize hedging positions in the corn futures market for a portion of our corn requirements to manage the risk of excessive corn price fluctuations. Our fixed-price forward contracts specify the amount of corn, the price and the time period over which the corn is to be delivered. These forward contracts are at fixed prices or prices based on the Chicago Board of Trade (CBOT) prices. Our corn requirements can be forward contracted on either a fixed-price basis or futures only contracts. The parameters of these contracts are based on the local supply and demand situation and the seasonality of the price. We also purchase a portion of our corn on a spot basis.

The price and availability of corn is subject to significant fluctuation depending upon a number of factors that affect commodity prices generally. These include, among others, crop conditions, crop production, weather, government programs, and export demands.

Natural Gas Procurement

Effective November 2011, the primary source of energy in our manufacturing process is natural gas. We have a facilities agreement with Northern Border Pipeline Company which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We entered into a transportation agreement with Agrinatural Gas, LLC (“Agrinatural Gas”). Agrinatural Gas, owned by our subsidiary, HLBE Pipeline Company, LLC, and Rural Energy Solutions, was formed to own and operate the pipeline. Our Company owns 73% of the pipeline and its associated delivery of natural gas to the plant.

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We also entered into a base agreement for sale and purchase of natural gas with Constellation NewEnergy — Gas Division, LLC (“Constellation”). We will buy all of our natural gas from Constellation and this agreement runs for a three year period from November 1, 2011 to October 31, 2014.

Ethanol and Distillers’ Grains Marketing

Effective September 1, 2011, the Company entered into certain marketing, corn supply and corn storage agreements with Gavilon, LLC (“Gavilon”) to market the Company’s ethanol and distillers’ grains products and to supply the Company’s ethanol production facility with corn. Gavilon is now the exclusive corn supplier and ethanol and distillers’ grains marketer for the Company’s production facility beginning September 1, 2011 and for an initial term of two years. The Company believes that working with Gavilon to manage the Company’s marketing and procurement needs will provide a comprehensive solution to help the Company achieve its risk management objectives in a competitive market and will enable the Company to reduce its working capital requirements and more effectively manage its processing margins in both spot and forward markets.

The Company pays Gavilon a supply fee consisting of a per bushel fee based on corn processed at the facility and a cost of funds component determined on the amount of corn financed by Gavilon for supply to the Company’s ethanol production facility based on the length of time between when Gavilon pays for the corn stored in or en route to or from the Company’s elevator facilities or production facility, and when the Company is invoiced for that corn at the time it is processed at the Company’s production facility. The supply fee was negotiated based on prevailing market-rate conditions for comparable corn supply services. Both Gavilon and the Company have the ability to originate the corn requirements for the production facility. On the effective date of the corn supply Agreement, Gavilon purchased all corn inventory currently owned by the Company and located at its production facility or elevator facilities, at current market prices, to facilitate the transition to Gavilon supplying 100% of the Company’s corn requirements at the production facility and the repayment of the Company’s line of credit with AgStar Financial Services, PCA (“AgStar”).

Under the ethanol and distillers’ grains marketing agreement, Gavilon will purchase, market and resell 100% of the ethanol and distillers grains products produced at the Company’s ethanol production facility and the Company will pay Gavilon a marketing fee based on a percentage of the applicable sale price of the ethanol and distillers grains products. The marketing fees were negotiated based on prevailing market-rate conditions for comparable ethanol and distillers grains marketing services. On the effective date of the marketing agreement, Gavilon purchased all ethanol and distillers grains inventory currently owned by the Company and located at the Company’s production facilities, at current market prices.

The Company entered into a master netting agreement under which payments by the Company to Gavilon for corn under the corn supply agreement will be netted against payments by Gavilon to the Company for ethanol and distillers’ grains products produced and sold to Gavilon under the marketing agreement. Under the terms of the master netting agreement, the Company is giving Gavilon a first priority security interest in, and a right of set off against, the Company’s non-fixed assets including any rights it has to corn under the corn supply agreement, ethanol and distillers’ grains under the marketing agreement, the work-in-process at the Company’s ethanol production facility, and the other transactions under the Gavilon agreements. The master netting agreement is integral to the transition to the Gavilon agreements, and the termination and payoff of the Company’s seasonal revolving line of credit with AgStar.

As part of the transition to the Gavilon agreements, the Company entered into a termination agreement with CHS Inc. and C&N to terminate the marketing agreements the Company had with each, with termination dates of August 31, 2011 for each. The Company assumed certain rail car leases with the termination of the ethanol marketing agreement and will pay a termination fee of $325,000 over the remaining term of the original contract, which is scheduled to end September 30, 2012.

Pricing of Corn and Ethanol

The sale of ethanol represented approximately 80% of our revenue for the year ended October 31, 2011. The cost of corn represented approximately 76% of our cost of sales for the year ended October 31, 2011. We expect that ethanol sales will represent our primary revenue source and corn will represent our primary component of cost of goods sold. Therefore, changes in the price at which we can sell the ethanol we produce and the price at which we buy corn for our ethanol plant present significant operational risks inherent in our business.

Generally, the price at which ethanol can be sold does not track with the price at which corn can be bought. Historically, ethanol prices have tended to correlate with wholesale gasoline prices, with demand for and the price of ethanol increasing as supplies of petroleum decreased or appeared to be threatened, crude oil prices increased and wholesale gasoline prices increased. However, the prices of both ethanol and corn do not always follow historical trends. Trends in ethanol prices and corn prices are subject to a number of factors and are difficult to predict.

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Demand for Ethanol

In recent years, the demand for ethanol has increased, particularly in the upper Midwest, in part because of two major programs established by the Clean Air Act Amendments of 1990: the Oxygenated Gasoline Program and the Reformulated Gasoline Program. Under these programs, an additive (oxygenate) is required to be blended with gasoline used in areas with excessive carbon monoxide or ozone pollution to help mitigate these conditions. According to the EPA, reformulated gasoline is currently used in 17 states and the District of Columbia pursuant to the requirements of federal law. Additionally, according to the EPA, there are fifteen states that have their own clean fuel program. Approximately 30% of the gasoline sold in the United States is reformulated. Because of the potential health and environmental issues associated with methyl tertiary butyl ether (MTBE) and the actions of the EPA, ethanol is now used as the primary oxygenate in those areas requiring an oxygenate additive.

In addition to demand for ethanol as an oxygenate, ethanol demand has increased because of the adoption of programs setting national renewable fuels standards (RFS). The first RFS program (RFS1) was introduced through the Energy Policy Act of 2005. RFS1 required 7.5 billion gallons of renewable fuel to be blended into gasoline by 2012. With the passage of the Energy Independence and Security Act of 2007, Congress made several important revisions to the RFS that required the EPA to promulgate new regulations to implement these changes. In February 2010, the EPA establish the revised annual renewable fuel standard (RFS2) and to make the necessary program modifications as set forth in the Energy Independence and Security Act of 2007. Further, for the first time, the EPA set volume standards for specific categories of renewable fuels including cellulosic, biomass-based diesel, and total advanced renewable fuels. In order to qualify for these new volume categories, fuels must demonstrate that they meet certain minimum greenhouse gas reduction standards, based on a lifecycle assessment, in comparison to the petroleum fuels they displace. Our ethanol does not qualify for the new volume categories of renewable fuels and therefore, the total renewable fuel requirement for each year will be most relevant to the demand for, and required use of, ethanol such as ours. Under RFS2, the total renewable fuel requirement will increase from 12.95 billion gallons in 2010 to 36 billion gallons by 2022. Of the 12.95 billion gallons of total renewable fuel required for 2010, 100 million gallons must be from cellulosic biofuels, 650 million gallons biomass-based diesel, and 950 million gallons must be from advanced biofuels, with the remaining 11.25 billion gallons consisting of other renewable fuels. Of the 36 billion gallons of total renewable fuel required for 2022, 16 billion gallons must be from cellulosic biofuels, the requirement for biomass-based diesel will be determined by the EPA but will not be less than 1.0 billion gallons, and 21 billion gallons must be from advanced biofuels, with the remaining gallons consisting of other renewable fuels. The RFS for 2011 is approximately 14 billion gallons, of which corn based ethanol can be used to satisfy approximately 12.6 billion gallons. Current ethanol production capacity exceeds the 2011 RFS requirement which can be satisfied by corn based ethanol. We believe the RFS program creates greater market for renewable fuels, such as ethanol, as a substitute for petroleum-based fuels.

In addition to the RFS program, one important incentive for the ethanol industry and its customers is the Volumetric Ethanol Excise Tax Credit, commonly referred to as the “blender’s credit.” The tax credit is provided to gasoline distributors as an incentive to blend their gasoline with ethanol. For each gallon of gasoline blended with ethanol, the distributors receive a tax credit. For 2008, the tax credit was 51¢ per gallon of pure ethanol or 5.1¢ per gallon of gasoline blended with 10% ethanol. The per gallon credit was reduced to 45¢ per gallon of pure ethanol in 2009. The tax credit of 45¢ per gallon of pure ethanol was authorized through, and expired on, December 31, 2011.

Markets for Ethanol

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

The markets in which our ethanol is sold will depend primarily upon the efforts of Gavilon, which buys and markets our ethanol. However, we believe that local markets will be limited and must typically be evaluated on a case-by-case basis. Although local markets will be the easiest to service, they may be oversold because of the number of ethanol producers near our plant, which may depress the price of ethanol in those markets.

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

We believe that the E10 “blend wall” is one of the most critical governmental policies currently facing the ethanol industry. The “blend wall” issue arises because of several conflicting requirements. First, the renewable fuels standards dictate a continuing increase in the amount of ethanol blended into the national gasoline supply. Second, the EPA mandates a limit of 10% ethanol inclusion in non-flex fuel

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vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. Total gasoline usage by the U.S. is expected to decrease over the next 5 years as fuel mileage standards are changed. RFS2 dictates an increasing amount of blending of total renewable fuels: 13.95 billion gallons in 2011, 15.2 billion gallons in 2012, and increasing to 36 billion gallons by 2022. To reach the standard as dictated by RFS2 in 2011, assuming 135 billion gallons of total gasoline usage nationally, each gallon of gasoline sold would have to be blended with greater than 10% ethanol. The EPA limit of 10% ethanol inclusion in non-flex fuel vehicles and the RFS increasing blend rate are at odds, which is sometimes referred to as the “blend wall.” While this issue has been considered by the EPA, there have been no regulatory changes that would reconcile the conflicting requirements. This issue is a major risk to the ethanol industry. During 2011, the United States Environmental Protection Agency allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

Markets for Distillers’ Grains

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

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

Competition

Producers of Ethanol

We sell our ethanol in a highly competitive market. We are in direct competition with numerous other ethanol producers, both regionally and nationally, many of which have more experience and greater resources than we have. Some of these producers are, among other things, capable of producing a significantly greater amount of ethanol or have multiple ethanol plants that may help them achieve certain benefits that we could not achieve with one ethanol plant. Further, new products or methods of ethanol production developed by larger and better-financed competitors could provide them competitive advantages over us and harm our business. A majority of the ethanol plants in the U.S. and the greatest number of gallons of ethanol production are located in the corn-producing states, such as Iowa, Nebraska, Illinois, Minnesota, South Dakota, Indiana, Ohio, Kansas, and Wisconsin.

According to the Renewable Fuels Association (RFA), as of January 2011, approximately 204 biorefineries have nameplate capacity of 14.1 billion gallons of ethanol per year

Below is the U.S. ethanol production by state in millions of gallons for the ten states with the most total ethanol production as of January 2011:

State	Nameplate	Operating	Under Construction/ Expansion	Total
Iowa	3,595.0	3,595.0	0	3,595.0
Nebraska	1,864.0	1,839.0	113	1,977.0
Illinois	1,480.0	1,480.0	5	1,485.0
Minnesota	1,136.6	1,118.6	0	1,136.6
Indiana	998.0	906.0	113	1,111.0
South Dakota	1,016.0	1,016.0	33	1,049.0
Ohio	538.0	424.0	0	538.0
Kansas	491.5	436.5	20	511.5
Wisconsin	498.0	498.0	3	501.0

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State	Nameplate	Operating	Under Construction/ Expansion	Total
Texas	250.0	250.0	115	365.0
Total	11,867.1	11,563.1	402	12,269.1

Source: Renewable Fuels Association, January 2011

Because Minnesota is one of the top producers of ethanol in the U.S., we face increased competition because of the location of our ethanol plant in Minnesota. Therefore, we compete with other Minnesota ethanol producers both for markets in Minnesota and markets in other states.

In addition to intense competition with local, regional and national producers of ethanol, we expect increased competition from imported ethanol and foreign producers of ethanol. Ethanol imported to the U.S. was subject to a 2.5 percent ad valorem tax and an additional 54 cents a gallon surcharge, both of which expired on December 31, 2011. As a result, we will face increased competition from imported ethanol and foreign producers of ethanol.

Producers of Other Fuel Additives and Alternative Fuels

In addition to competing with ethanol producers, we also compete with producers of other gasoline oxygenates. Many gasoline oxygenates are produced by other companies, including oil companies, that have far greater resources than we have. Historically, as a gasoline oxygenate, ethanol primarily competed with two gasoline oxygenates, both of which are ether-based: MTBE (methyl tertiary butyl ether) and ETBE (ethyl tertiary butyl ether). Many states have enacted legislation prohibiting the sale of gasoline containing certain levels of MTBE or are phasing out the use of MTBE because of health and environmental concerns. As a result, national use of MTBE has decreased significantly in recent years. Use of ethanol now exceeds that of MTBE and ETBE as a gasoline oxygenate.

While ethanol has displaced these two gasoline oxygenates, the development of ethers intended for use as oxygenates is continuing and we will compete with producers of any future ethers used as oxygenates.

A number of automotive, industrial and power generation manufacturers are developing alternative fuels and power systems, both for vehicles and other applications. Fuel cells have emerged as a potential alternative power system to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions.

Additionally, there are more than a dozen alternative and advanced fuels currently in development, production or use, including the following alternative fuels that, like ethanol, have been or are currently commercially available for vehicles:

· biodiesel

· electricity

· hydrogen

· methanol

· natural gas

· propane

Several emerging fuels are currently under development. Many of these fuels are also considered alternative fuels and may have other benefits such as reduced emissions or decreasing dependence upon oil. Examples of emerging fuels include:

· Biobutanol: Like ethanol, biobutanol is an alcohol that can be produced through the processing of domestically grown crops, such as corn and sugar beets, and other biomass, such as fast-growing grasses and agricultural waste products.

· Biogas: Biogas is produced from the anaerobic digestion of organic matter such as animal manure, sewage, and municipal solid waste. After it is processed to required standards of purity, biogas becomes a renewable substitute for natural gas and can be used to fuel natural gas vehicles.

· Fischer-Tropsch Diesel: Diesel made by converting gaseous hydrocarbons, such as natural gas and gasified coal or biomass, into liquid fuel, including transportation fuel

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· Hydrogenation-Derived Renewable Diesel (HDRD): The product of fats or vegetable oils—alone or blended with petroleum—that has been refined in an oil refinery

· P-Series: A blend of natural gas liquids (pentanes plus), ethanol, and the biomass-derived co-solvent methyltetrahydrofuran (MeTHF) formulated to be used in flexible fuel vehicles

· Ultra-Low Sulfur Diesel: This is diesel fuel with 15 parts per million or lower sulfur content. This ultra-low sulfur content enables the use of advanced emission control technologies on vehicles using ULSD fuels produced from non-petroleum and renewable sources that are considered alternative fuels.

Additionally, there are developed and developing technologies for converting natural gas, coal and biomass to liquid fuel, including transportation fuels such as gasoline, diesel, and methanol.

We expect that competition will increase between ethanol producers, such as HLBE, and producers of these or other newly developed alternative fuels or power systems, especially to the extent they are used in similar applications such as vehicles.

Producers of Distillers’ Grains

The amount of distillers’ grains produced annually in North America is expected to increase significantly as the number of ethanol plants increase. We compete with other producers of distillers’ grains products both locally and nationally, with more intense competition for sales of distillers’ grains among ethanol producers in close proximity to our ethanol plant. There are seven ethanol plants within an approximate 50 mile radius of our plant with a combined ethanol capacity of 436 million gallons that will produce approximately 1.4 million tons of distillers’ grains. These competitors may be more likely to sell to the same markets that we target for our distillers’ grains.

Additionally, distillers’ grains compete with other feed formulations, including corn gluten feed, dry brewers’ grain and mill feeds. The primary value of these products as animal feed is their protein content. Dry brewers’ grain and distillers’ grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower protein contents. Distillers’ grains contain nutrients, fat content, and fiber that we believe will differentiate our distillers’ grains products from other feed formulations. However, producers of other forms of animal feed may also have greater experience and resources than we do and their products may have greater acceptance among producers of beef and dairy cattle, poultry and hogs.

Competition for Corn

We will compete with ethanol producers in close proximity for the supplies of corn we will require to operate our plant. Ethanol production consumes a significant portion of Minnesota’s corn crop, approximately 29% in 2009 and 34% in 2010. The existence and development of other ethanol plants, particularly those in close proximity to our plant, will increase the demand for corn that may result in higher costs for supplies of corn. We estimate that the seven ethanol plants within an approximate 50 mile radius of our plant will use approximately 160 million bushels of corn and that we will compete with these other ethanol plants for corn for our ethanol plant.

We compete with other users of corn, including ethanol producers regionally and nationally, producers of food and food ingredients for human consumption (such as high fructose corn syrup, starches, and sweeteners), producers of animal feed and industrial users. According to estimates by the Minnesota Department of Agriculture for 2010, 34% of Minnesota corn production was used in ethanol production, 44% was exported, 15% was used for feed, 4% was put to a residual use, and 3% was used in other processing.

Competition for Personnel

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

Hedging

We may hedge anticipated corn purchases and ethanol and distillers’ grain sales through a variety of mechanisms.

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We procure corn through spot cash, fixed-price forward, basis only, futures only, and delayed pricing contracts. Additionally, we may use hedging positions in the corn futures and options market to manage the risk of excessive corn price fluctuations for a portion of our corn requirements.

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

To hedge a portion of our exposure to corn price risk, we may buy and sell futures and options positions on the CBOT. In addition, our facilities have significant corn storage capacity. We generally maintain inventories of corn at our ethanol plant, but can draw from our elevators at Lakefield and Wilder to protect against supply disruption. At the ethanol plant, we have the ability to store approximately 10 days of corn supply and our elevators have capacity for approximately an additional 50 days of supply.

Effective September 1, 2011, Gavilon is the exclusive marketer for all of the ethanol produced at our facility. Gavilon is obligated to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by our marketer, we may utilize ethanol swaps, over-the-counter (“OTC”) ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce.

Our marketing and risk management committee assists the board and our risk management personnel to, among other things, establish appropriate policies and strategies for hedging and enterprise risk.

Compliance with Environmental Laws and Other Regulatory Matters

Our business subjects us to various federal, state and local environmental laws and regulations, including those relating to discharges into the air, water and ground; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of our employees.

These laws and regulations require us to obtain and comply with numerous permits to construct and operate our ethanol plant, including water, air and other environmental permits. The costs associated with obtaining these permits and meeting the conditions of these permits have increased our costs of construction and production.

In particular, we have incurred additional costs relating to an air-emission permit from the Minnesota Pollution Control Agency (“MPCA”). We applied for a synthetic minor air-emissions source permit in July 2004 that was granted by the MPCA in May 2005. In June 2005, a coalition of two environmental groups and one energy group challenged the granting of this air emissions permit by an appeal to the Minnesota Court of Appeals. In July 2006, the Minnesota Court of Appeals affirmed the MPCA’s issuance of the permit. In conjunction with the permit and the permit dispute and to prevent further appeals by the coalition, we entered into a compliance agreement with the MPCA on January 23, 2007.

Under the compliance agreement, we agreed to submit an amendment to our air permit to qualify our facility as a “major emissions source.” The compliance agreement also allowed us to continue with the construction of our facility. Under the compliance agreement, we agreed to operate our facility such that each type of emission generated by our ethanol plant was within an established amount and we agreed to comply in all other respects with the air emissions permit previously issued by the MPCA. Accordingly, we submitted an amendment to our existing air-emissions permit in December 2008, and, following air pollution control device testing, we submitted a second amendment to our air permit in September 2009, seeking amendments to permit conditions and adjustments to other components of plant operations and production.

On December 16, 2010, the MPCA issued a permit to us that supersedes our previously issued air permit and the compliance agreement. The new permit establishes the applicable limits for each type of emission generated by our ethanol plant. The permit also requires us to take additional actions relating to our plant and our operations within certain time frames.

We have also incurred additional expense to resolve a notice of violation issued by the MPCA in March 2008 that alleged violations certain rules, statutes, and permit conditions, including emission violations and reporting violations. On December 16, 2010, we entered into a stipulation agreement with the MPCA relating to this March 2008 notice of violation. Under the stipulation agreement, we agreed to pay a civil

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penalty of $66,000, of which $54,000 was paid within thirty days and up to $12,000 may be satisfied through our delivery of the building capture efficiency study referred to above.

We have incurred costs associated with obtaining the air permits and costs associated with the compliance agreement of approximately $452,000 in fiscal year 2009, $315,000 in fiscal year 2010, and $163,000 in fiscal year 2011.

Compliance with environmental laws and permit conditions in the future could require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment, as well as significant management time and expense. A violation of these laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations and/or plant shutdown, any of which could have a material adverse effect on our operations. Although violations and environmental incompliance still remain after the conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

We have also experienced significant additional expense in fiscal year 2009 and part of fiscal year 2010 associated with equipment failures and/or warranty and other claims against Fagen, Inc. that were the subject of an arbitration action we brought against Fagen, Inc. relating to the design-build agreement and air emissions at our plant. While we settled this arbitration action against Fagen, Inc. on July 2, 2010, we incurred costs and expenses associated with our claims of approximately $743,000 in fiscal year 2010 and approximately $2,700,000 in fiscal year 2009.

Employees

As of October 31, 2011, we had 44 full-time employees, of which 36 were in operations and 8 were in executive, general management and administration. We also have four part-time employees of which two were in operations and two in executive, general management and administration. We do not maintain an internal sales organization, but instead rely upon third-parties to market and sell the ethanol and distillers’ grains that we produce.

Corporate Information

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

Additionally, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

ITEM 1A. RISK FACTORS

If any of the following risks actually occur, our results of operations, cash flows and the value of our units could be negatively impacted.

Risks Related to Our Financial Condition

While we have relied upon on our master loan agreement to fund our past operations and past losses, we must generate a sufficient level of net income and obtain additional working capital to fund our ongoing operations.

We had net income of approximately $540,000 for our fiscal year ended October 31, 2011 and $1.7 million for our fiscal year ended October 31, 2010, which included one-time settlement income of approximately $2.6 million. We experienced a net loss of approximately $11.3 million for the fiscal year ended October 31, 2009. Our income or loss has primarily been driven by our low or negative margins. For example, our cost of goods sold (including lower of cost or market adjustments) as a percentage of revenues was 95.8% and 93.9% for the fiscal years ended October 31, 2011 and October 31, 2010, respectively. Whether we achieve a sufficient level of net income to fund our operations will depend on a number of factors, including:

· our revenue in any given period, which depends both on the volume of our products produced and the price we receive for these products;

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· our expense levels, particularly our operating expenses relating to corn; and

· the efficiency of our plant, particularly managing costs and expenses associated with repairs and air emissions compliance and remediation plans and avoiding plant shut downs and slow downs.

We have historically financed our operations primarily through borrowing under our master loan agreement with AgStar, and, to a lesser extent, cash from operating activities. As of October 31, 2011, we had cash and cash equivalents (other than restricted cash) of approximately $7.1 million. As of October 31, 2011, our indebtedness under the master loan agreement with AgStar was approximately $46.6 million.

The amount currently available under our master loan agreement is insufficient to fund our ongoing operations. To fund our ongoing cash needs and to service our indebtedness, we must increase the income and cash generated from our operations. We cannot assure you that we will improve our liquidity to the extent required to enable us to service or reduce our indebtedness or to fund our other capital needs, if at all.

Certain provisions of our master loan agreement with AgStar present special risks to our business.

As of October 31, 2011, our debt with AgStar consists of approximately $20.0 million in fixed rate obligations and $26.6 million in variable rate obligations. The variable rate on a portion of our debt may make us vulnerable to increases in prevailing interest rates. If the interest rate on our variable rate debt were to increase, our aggregate annualized interest and principal payments would also increase and could increase significantly.

The principal and interest payments on our $40.0 million term loan are calculated using an amortization period of ten years even though the note will mature on September 1, 2016, five years from the date of its issuance. As a result, at maturity of the term loan, there would be approximately $29.0 million in principal remaining under the term loan. In order to finance this large payment of principal that would be due at maturity, we may attempt to extend the term of the loan under the master loan agreement, refinance the indebtedness under the master loan agreement, in full or in part, or obtain a new loan to repay the term loan. We cannot assure you that we will be successful in obtaining an extension of or refinancing our indebtedness. We also cannot assure you that we will be able to obtain a new loan in an amount that is sufficient for our needs, in a timely manner or on terms and conditions acceptable to us or our members.

If we are unable to service our debt, AgStar may accelerate all of our indebtedness and may seize the assets that secure our indebtedness, causing us to lose control of our business. We may also be forced to sell our assets, restructure our indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection.

Risks Relating to Our Operations

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

Our success depends on our ability to efficiently produce and sell ethanol, and, to a lesser extent, distillers’ grains. We do not have any other lines of business or other significant sources of revenue to rely upon if we are unable to produce and sell ethanol and distillers’ grains, or if the market for those products decline. Our lack of diversification means that we may not be able to adapt to changing market conditions, changes in regulation, increased competition or any significant decline in the ethanol industry.

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

The substantial majority of our revenues are derived from the sale of ethanol. Our gross profit relating to the sale of ethanol is principally dependent on the difference between the price we receive for the ethanol we produce and the price we pay for the corn we used to produce our ethanol. Because we do have contracts establishing the price we receive for the ethanol we produce or for the corn we purchase, the price for both ethanol and corn will be determined in significant part by prevailing market conditions affecting these commodities.

The price we receive for our ethanol is dependent upon a number of factors. Increasing domestic ethanol capacity may boost demand for corn, resulting in increased corn prices and corresponding decrease in the selling price of ethanol as production increases. Further, the price of corn is influenced by weather conditions (including droughts or over abundant rainfall) and other factors affecting crop yields, farmers’ planting decisions and general economic, market and regulatory factors, including government policies and subsidies with respect to agriculture

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and international trade, and global and local supply and demand. Declines in the corn harvest, caused by farmers’ planting decisions or otherwise, could cause corn prices to increase and negatively impact our gross margins.

We have experienced low or negative margins in the past, reflecting a higher expenses for the corn we purchase and lower revenues from ethanol we produce. For example, our cost of goods sold (including lower of cost or market adjustments) as a percentage of revenues was 95.8% and 93.9% for the fiscal years ended October 31, 2011 and October 31, 2010, respectively. Reduction in ethanol prices without corresponding decreases in corn costs or increases in corn prices without corresponding increases in ethanol prices has adversely affected our financial performance in the past and may adversely affect our financial performance in the future.

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

According to the RFA, domestic ethanol production capacity has increased steadily each year from 1999 to 2011. However, demand for ethanol may not increase as quickly as expected or to a level that exceeds supply, or at all.

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

If ethanol prices decline for any reason, including excess production capacity in the ethanol industry or decreased demand for ethanol, our business, results of operations and financial condition may be materially and adversely affected.

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

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

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

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

Competition in the ethanol industry is intense. We face formidable competition in every aspect of our business from both larger and smaller producers of ethanol and distillers’ grains. Some larger producers of ethanol, such as Archer Daniels Midland Company, Cargill, Inc., Valero Energy Corporation, have substantially greater financial, operational, procurement, marketing, distribution and technical resources than we have. Additionally, smaller competitors, such as farmer-owned cooperatives and independent companies owned by farmers and investors, have business advantages, such as the ability to more favorably procure corn by operating smaller plants that may not affect the local price of corn as much as a larger-scale plant like ours or requiring their farmer-owners to sell them corn as a requirement of ownership.

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

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U.S. was subject to an ad valorem tax and a per gallon surcharge that helped mitigate the effects of international competition for U.S. ethanol producers, the tax and per gallon surcharge expired on December 31, 2011. Because the tax and surcharge on imported ethanol was not extended beyond December 31, 2011, we will face increased competition from imported ethanol and foreign producers of ethanol. In addition, ethanol imports from certain countries are exempted from these tariffs under the Caribbean Basin Initiative to spur economic development in Central America and the Caribbean. Imports of ethanol from Central American and Caribbean countries represents a significant portion of the gallons imported into the U.S. each year and a source of intense competition for us due to the lower production costs these ethanol producers enjoy.

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

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

In an attempt to offset some of the effects of pricing and margin volatility, we may hedge anticipated corn purchases and ethanol and distillers’ grain sales through a variety of mechanisms. Because of our hedging strategies, we are exposed to a variety of market risks, including the effects of changes in commodities prices of ethanol and corn.

Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us. Hedging activities can themselves result in losses when a position is purchased in a declining market or a position is sold in a rising market. Our losses or gains from hedging activities may vary widely.

There can be no assurance that our hedging strategies will be effective and we may experience hedging losses in the future. We also vary the amount of hedging or other price mitigation strategies we undertake, and we may choose not to engage in hedging transactions at all. As a result, whether or not we engage in hedging transactions, our business, results of operations and financial condition may be materially adversely affected by increases in the price of corn or decreases in the price of ethanol.

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

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

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

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

We ship our ethanol to our customers primarily by the railroad adjacent to our site. We also have the potential to receive inbound corn via the railroad, although we currently receive corn by truck from our facilities in Lakefield, Minnesota and Wilder, Minnesota, each of which is less than 15 miles away from our plant. Our customers require appropriate transportation and storage capacity to take delivery of the products we produce. We also receive our natural gas through a pipeline that is approximately 16 miles in length. Without the appropriate flow of natural gas through the pipeline our plant may not be able to run at desired production levels or at all. Therefore, our business is dependent on the continuing availability of rail, highway and related infrastructure. Any disruptions in this infrastructure network, whether caused by labor difficulties, earthquakes, storms, other natural disasters, human error or malfeasance or other reasons, could have a material adverse effect

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on our business. We rely upon third-parties to maintain the rail lines from our plant to the national rail network, and any failure on their part to maintain the lines could impede our delivery of products, impose additional costs on us and could have a material adverse effect on our business, results of operations and financial condition.

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

· additional rail capacity;

· additional storage facilities for ethanol;

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

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

· growth in service stations equipped to handle ethanol fuels.

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

Competition for qualified personnel in the ethanol industry is intense and we may not be able to hire and retain qualified personnel to operate our ethanol plant.

Our success depends in part on our ability to attract and retain competent personnel. For our ethanol plant, we must hire qualified managers, operations personnel, accounting staff and others, which can be challenging in a rural community. Competition for employees in the ethanol industry is intense, and we may not be able to attract and retain qualified personnel. If we are unable to hire productive and competent personnel and retain our existing personnel, our business may be adversely affected and we may not be able to efficiently operate our ethanol business and comply with our other obligations.

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

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

Ethanol production methods are constantly advancing. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass such as agricultural waste, forest residue and municipal solid waste. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas that are unable to grow corn. Another trend in ethanol production research is to produce ethanol through a chemical or thermal process, rather than a fermentation process, thereby significantly increasing the ethanol yield per pound of feedstock. Although current technology does not allow these production methods to be financially competitive, new technologies may develop that would allow these methods to become viable means of ethanol production in the future. If we are unable to adopt or incorporate these advances into our operations, our cost of producing ethanol could be significantly higher than those of our competitors, which could make our ethanol plant obsolete. Modifying our plant to use the new inputs and technologies would likely require material investment.

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If ethanol fails to compete successfully with other existing or newly-developed oxygenates or renewable fuels, our business will suffer.

Alternative fuels, additives and oxygenates are continually under development. Alternative fuels and fuel additives that can replace ethanol are currently under development, which may decrease the demand for ethanol. Technological advances in engine and exhaust system design and performance could reduce the use of oxygenates, which would lower the demand for ethanol, and our business, results of operations and financial condition may be materially adversely affected.

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

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

Our success in achieving revenue from the sale of ethanol and distillers’ grains will depend upon the continued viability and financial stability of our marketer. Our marketer may choose to devote its efforts to other ethanol producers or reduce or fail to devote the necessary resources to provide effective sales and marketing support of our products. We believe that our financial success will continue to depend in large part upon the success of our marketer in operating its businesses. If our marketer does not effectively market and sell our ethanol and distillers’ grains, our revenues may decrease and our business will be harmed.

Risks Related to Government Programs and Regulation

We have experienced significant costs in obtaining and complying with permits and environmental laws, particularly our air emissions permit, and may continue to experience significant costs in the future.

The costs associated with obtaining and complying with permits and complying with environmental laws have increased our costs of construction, production and continued operation. In particular, we have incurred significant expense relating to our air-emission permit in four categories: (1) obtaining our air emissions permit from the Minnesota Pollution Control Agency (“MPCA”); (2) compliance with our air emissions permit and the terms of our compliance agreement with the MPCA; (3) our dispute under the design-build agreement with Fagen, Inc. relating to equipment failures, warranty claims and other claims regarding air emissions at our plant that was the subject of an arbitration action that was settled on July 2, 2010; and (4) a March 2008 notice of violation from the MPCA that was resolved in December 2010 though a stipulation agreement.

While our air emissions permit issue was resolved with the December 16, 2010 issuance of a new air permit by the MPCA, our arbitration action against Fagen, Inc. has been settled, and we have addressed the notice of violation through a stipulation agreement, we anticipate future expense associated with compliance with our air permit and related environmental laws. The permit requires us to take additional actions relating to our plant and our operations within certain time frames.

Continued compliance with our air emissions permit issue will involve management time and expense and may involve ongoing operational expense or further modifications to the design or equipment in our plant. Although violations and environmental incompliance still remain after the conversion from coal to natural gas combustion, the exposure to the company has been greatly reduced.

There can be no assurance that we will be able to comply with any of the conditions of any of our permits, or with environmental laws applicable to us. A violation of environmental laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations or plant shutdown, any of which could have a material adverse effect on our operations.

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

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

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comply with environmental laws, regulations and permits. As discussed above, we have incurred substantial costs relating to our air emissions permit and expect additional costs relating to this permit in the future.

Further, environmental laws and regulations are subject to substantial change. We cannot predict what material impact, if any, these changes in laws or regulations might have on our business. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could require additional capital expenditures, increase our operating costs or otherwise adversely affect our business. These changes may also relax requirements that could prove beneficial to our competitors and thus adversely affect our business. In addition, regulations of the Environmental Protection Agency and the Minnesota Pollution Control Agency depend heavily on administrative interpretations. We cannot assure you that future interpretations made by regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations.

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

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

Various federal and state laws, regulations and programs impact the supply of and demand for ethanol. Some government regulation, for example those that provide economic incentives to ethanol producers, stimulate supply of ethanol by encouraging production and the increased capacity of ethanol plants. Others, such as a federal excise tax incentive program that provides gasoline distributors who blended ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell, stimulate demand for ethanol by making it price competitive with other oxygenates. Further, tariffs generally apply to the import of ethanol from certain other countries, where the cost of production can be significantly less than in the U.S. These tariffs are designed to increase the cost of imported ethanol to a level more comparable to the cost of domestic ethanol by offsetting the benefit of the federal excise tax program. Tariffs have the effect of maintaining demand for domestic ethanol.

Additionally, the Environmental Protection Agency has established a revised annual renewable fuel standard (RFS2) that sets minimum national volume standards for use of renewable fuels. The RFS2 also sets volume standards for specific categories of renewable fuels: cellulosic, biomass-based diesel and total advanced renewable fuels. While our ethanol does not qualify one of the new volume categories of renewable fuels, we believe that the overall renewable fuels requirement of RFS2 creates an incentive for the use of ethanol. Other federal and state programs that require or provide incentives for the use of ethanol create demand for ethanol. Government regulation and government programs that create demand for ethanol may also indirectly create supply for ethanol as additional producers expand or new companies enter the ethanol industry to capitalize on demand. In the case of the RFS2, while it creates a demand for ethanol, the existence of specific categories of renewable fuels also creates a demand for these types of renewable fuels and will likely provide an incentive for companies to further develop these products to capitalize on that demand. In these circumstances, the RFS2 may also reduce demand for ethanol in favor of the renewable fuels for which specific categories exist.

Federal and state laws, regulations and programs are constantly changing. We cannot predict what material impact, if any, these changes might have on our business. Future changes in regulations and programs could impose more stringent operational requirements or could reduce or eliminate the benefits we receive, directly and indirectly, under current regulations and programs. Future changes in regulations and programs may increase or add benefits to ethanol producers other than us or eliminate or reduce tariffs or other barriers to entry into the U.S. ethanol market, any of which could prove beneficial to our competitors, both domestic and international. Future changes in regulation may also hurt our business by providing economic incentives to producers of other renewable fuels or oxygenates or encouraging use of fuels or oxygenates that compete with ethanol. In addition, both national and state regulation is influenced by public opinion and changes in public opinion. For example, certain states oppose the use of ethanol because, as net importers of ethanol from other states, the use of ethanol could increase gasoline prices in that state and because that state does not receive significant economic benefits from the ethanol industry, which are primarily experienced by corn and ethanol producing states. Further, some argue that the use of ethanol will have a negative impact on gasoline prices to consumers, result in rising food prices, add to air pollution, harm car and truck engines, and actually use more fossil energy, such as oil and natural gas, than the amount of ethanol that is produced. We cannot predict the impact that opinions of consumers, legislators, industry participants, or competitors may have on the regulations and programs currently benefiting ethanol producers.

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

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amount of ethanol blended into the national gasoline supply. Second, the Environmental Protection Agency (EPA) mandates a limit of 10% ethanol inclusion in non-flex fuel vehicles, and the E85 vehicle marketplace is struggling to grow due to lacking infrastructure. The EPA policy of 10% and the RFS increasing blend rate are at odds, which is sometimes referred to as the “blend wall.” While the issue is being considered by the EPA, there have been no regulatory changes that would reconcile the conflicting requirements. In 2011, the United States Environmental Protection Agency allowed the use of E15, gasoline which is blended at a rate of 15% ethanol and 85% gasoline, in vehicles manufactured in the model year 2001 and later. Management believes that many gasoline retailers will refuse to provide E15 due to the fact that not all standard vehicles will be allowed to use E15 and due to the labeling requirements the EPA may impose. The EPA is considering instituting labeling requirements associated with E15 which may unfairly discourage consumers from purchasing E15. As a result, the approval of E15 may not significantly increase demand for ethanol.

Approval of a Low Carbon Fuel Standard (“LCFS”) by the California Air Resources Board (“CARB”) may have a negative impact on our ability to market our ethanol in California.

The CARB implemented a LCFS, which set standards for the carbon intensity of fuels used in the State of California starting in 2011. While the rules are still subject to rulemaking process in California, certain provisions of the proposed LCFS rules have the potential to ban ethanol produced at our plant from being sold in California. While we believe there may be some negative impact to our sales from the approval of the LCFS in California, we believe we will still be able to market all the ethanol produced by our plant to markets outside of California. However, if additional states where our ethanol is marketed, or the federal government, adopt similar provisions it could have a severe negative impact on our ability to sell all of the ethanol produced at our plant.

Risks Related to the Units

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

As of October 31, 2011, Project Viking, L.L.C. beneficially owned 43.0% of our outstanding units. Project Viking is owned by Roland J. (Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc., the design-build firm for our ethanol plant. Project Viking, together with our executive officers and governors, together control approximately 46.0% of our outstanding units as of October 31, 2011. As a result, these unit holders, acting individually or together, could significantly influence our management and affairs and all matters requiring member approval, including the election of governors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company and might affect the price of our units.

Additionally, our member control agreement gives members who hold significant amounts of equity in us the right to designate governors to serve on our board of governors. For every 9% of our units held, the member has the right to appoint one person to our board. Project Viking, L.L.C. has the right to appoint four persons to our board pursuant to this provision and has appointed four persons as of October 31, 2011. Although the designated governors do not represent a majority of our board, their presence on the board may allow Project Viking, L.L.C. to have greater influence over the decisions of our board and our business than other members.

Further, the interests of Project Viking, L.L.C. may not coincide with our interests or the interests of our other members. For example, Fagen, Inc. has invested and may continue to invest in a number of other ethanol producers, some of whom may compete with us. As a result of these and other potential conflicting interests, these existing members may make decisions with respect to us with which we or our members may disagree.

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

There is no established public trading market for our units, and we do not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list the units on any stock exchange or automatic quotation system such as OTC Bulletin Board. As a result, units held by our members may not be easily resold and members may be required to hold their units indefinitely. Even if members are able to resell our units, the price may be less than the members’ investment in the units or may otherwise be unattractive to the member.

There are significant restrictions on the transfer of our units.

To protect our status as a partnership for tax purposes and to assure that no public trading market in our units develops, our units are subject to significant restrictions on transfer and transfers are subject to approval by our board of governors. All transfers of units must comply with the transfer provisions of our member control agreement and the unit transfer policy adopted by our board of governors. Our board of governors will not approve transfers which could cause us to lose our tax status or violate federal or state securities laws. On November 5,

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2008, our board of governors adopted a revised unit transfer policy. While the revised policy permits transfers of our units under certain circumstances, including certain transfers of units for value, there continue to be significant restrictions on transfer of our units. Among other things, the revised unit transfer policy places limits on the number of units that may be transferred during any fiscal year and requires the transferor and transferee to complete a unit transfer agreement and application form and submit these to us along with the required documents and an application fee.

On July 2, 2010, in conjunction with our recapitalization efforts and in light of the transactions and agreements the Company entered into with Project Viking, L.L.C., the board of governors determined to suspend approvals of any transfers of units, provided that related-party transfers without consideration would still be considered. This suspension was approved by the board pursuant to its authority under our member control agreement. On July 9, 2010, we notified our members of the suspension of approvals by a letter. We also removed all postings on the unit bulletin board.

On November 30, 2011, in light of the recapitalization transactions we entered into during fiscal year 2011 and the conversion of our ethanol plant to natural gas thermal source, the board approved the lifting of its suspension of approvals of transfers of units, with consideration of such transfers to commence at its next regularly scheduled board meeting. The board will now consider approvals of any transfers of units in accordance with our member control agreement and our unit transfer policy, and postings on the unit bulletin board may resume.

As a result of the provisions of our member control agreement, members may not be able to transfer their units and may be required to assume the risks of the investment for an indefinite period of time.

A transferee may be admitted as a member only upon approval by the board of governors and upon satisfaction of certain other requirements, including the transferee meeting the minimum unit ownership requirements to become a member (which for our present units requires holding a minimum of 2,500 units). Any transferee that is not admitted as a member will be deemed an unadmitted assignee. An unadmitted assignee will be a non-member unit holder and will have the same financial rights as other unit holders, such as the right to receive distributions that we declare or that are available upon our dissolution or liquidation. As a non-member unit holder, an unadmitted assignee will not have the voting or other governance rights of members and will not be entitled to any information or accountings regarding our business or to inspect our books and records.

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

Distributions of our net cash flow may be made at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our member control agreement and restrictions imposed by AgStar under our master loan agreement. Our master loan agreements with AgStar currently materially limit our ability to make distributions to our members and are likely to limit materially the future payment of distributions. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments. If our financial performance and loan covenants further permit, we intend to make distributions in excess of those amounts. However, our board may elect to retain cash for operating purposes, debt retirement, plant improvements or expansion. We may also never be in a position to pay distributions because of our financial performance or the terms of our master loan agreement. Consequently, members may receive little or no return on their investment in the units.

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

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

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

We are managed by a board of governors, currently consisting of five elected governors and four appointed governors. The seats on the board that are not subject to a right of appointment will be elected by the members without appointment rights. An appointed governor serves indefinitely at the pleasure of the member appointing him or her (so long as such member and its affiliates continue to hold a sufficient

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number of units to maintain the applicable appointment right) until a successor is appointed, or until the earlier death, resignation or removal of the appointed governor.

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

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

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

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

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

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

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

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

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

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

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Risks Related to Tax Issues in a Limited Liability Company

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

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

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

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

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

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

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

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

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

You may be subject to federal alternative minimum tax

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

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Preparation of your tax returns may be complicated and expensive.

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

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

We also own elevator and grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota. The elevator and grain storage facilities at each location have grain handling equipment and both upright and flat storage capacity. The storage capacity of the Lakefield, Minnesota facility is approximately 1.9 million bushels and the storage capacity of the Wilder, Minnesota facility is approximately 900,000 bushels.

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

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. [REMOVED AND RESERVED]

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PART II

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

Market Information

There is no established public trading market for the units and we do not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do not intend to list the units on any stock exchange or over-the-counter securities market such as the OTC Bulletin Board.

Effective July 2, 2010, our board of governors determined to suspend approvals of any transfers of units, provided that related-party transfers without consideration would still be considered. This suspension was approved by the board pursuant to its authority under our member control agreement. On July 9, 2010, we notified our members of the suspension of approvals by a letter. We also removed all postings on the unit bulletin board.

Holders of Record

As of January 26, 2012, there were 38,622,107 Class A units outstanding and held of record by 1,156 persons. There are no other classes of units outstanding. As of October 31, 2011 and January 26, 2012, there were no outstanding options or warrants to purchase, or securities convertible into, our units.

Distributions

To date, we have only made tax distributions to our members. Our master loan agreement with AgStar Financial Services, PCA currently materially limits our ability to make distributions, other than tax distributions, to our members and is likely to limit materially the future payment of distributions. If our financial performance and loan covenants permit, we expect to make future cash distributions at times and in amounts that will permit our members to make income tax payments. If our financial performance and loan covenants further permit, we intend to make distributions in excess of those amounts. Cash distributions are not assured, however, and we may never be in a position to make distributions. Under Minnesota law, we cannot make a distribution to a member if, after the distribution, we would not be able to pay our debts as they become due or our liabilities, excluding liabilities to our members on account of their capital contributions, would exceed our assets.

For a further description of the limitations on our ability to make distributions to our members, please see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 9 of the notes to our audited consolidated financial statements.

Securities Authorized for Issuance under Equity Compensation Plans

There are no “compensation plans” (including individual compensation arrangements) under which any of our equity securities are authorized for issuance.

ITEM 6. SELECTED FINANCIAL DATA

Selected Consolidated Financial Data

The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected financial data for the balance sheet as of October 31, 2011 and 2010 and the statement of operations for the years ended October 31, 2011, 2010 and 2009 has been derived from the audited consolidated financial statements included elsewhere in this Annual Report on

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Form 10-K. The selected financial for the balance sheet as of October 31, 2009, 2008 and 2007 and the statement of operations for the years ended October 31, 2008 and 2007 were derived from audit financial statements filed previously.

This selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within Item 7 and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following consolidated financial data.

	Fiscal Year Ended
	October 31,			October 31,			October 31,			October 31,			October 31,
	2011			2010			2009			2008			2007

Statement of Operations Data:
Revenues	$	164,120,375		$	110,624,758		$	88,304,596		$	131,070,642		$	23,560,498
Cost of goods sold	157,163,624			103,690,208			90,857,247			114,411,541			24,313,695
Gross profit (loss)	6,956,751			6,934,550			(2,552,651		)	16,659,101			(753,197		)
Operating expenses	(3,613,465		)	(3,857,492		)	(4,515,476		)	(3,351,252		)	(3,527,199		)
Settlement income	—			2,600,000			—			—			—
Operating income (loss)	3,343,286			5,677,058			(7,068,127		)	13,307,849			(4,280,396		)
Other income (expense)	(2,800,269		)	(3,993,537		)	(4,261,307		)	(4,689,810		)	(1,167,890		)
Net income (loss) before noncontrolling interest	543,017			1,683,521			(11,329,434		)	8,618,039			(5,448,286		)
Noncontrolling income (loss)	(27,838		)	—			—			—			—

Net income (loss)	$	570,855		$	1,683,521		$	(11,329,434	)	$	8,618,039		$	(5,448,286	)

Weighted average units outstanding	33,391,636			28,141,942			27,104,625			27,104,625			26,361,406

Net income (loss) per unit — Basic and diluted	$	0.02		$	0.06		$	(0.42	)	$	0.32		$	(0.21	)

	As of
	October 31,		October 31,		October 31,		October 31,		October 31,
	2011		2010		2009		2008		2007

Balance Sheet Data:
Assets:
Current assets	$	14,237,942	$	18,254,313	$	12,926,672	$	27,223,185	$	24,382,053
Property and equipment	88,592,945		89,803,647		98,560,605		103,882,039		108,852,921
Other assets	1,303,037		1,482,617		1,602,000		2,295,586		724,984
Total assets	$	104,133,924	$	109,540,577	$	113,089,277	$	133,400,810	$	133,959,958

Current liabilities	$	7,807,727	$	60,034,589	$	69,059,727	$	23,552,096	$	29,712,918
Long-term debt	46,844,912		4,068,716		4,775,804		59,265,534		62,281,899
Members’ equity	49,481,285		45,437,272		39,253,746		50,583,180		41,965,141

Total liabilities and members’ equity	$	104,133,924	$	109,540,577	$	113,089,277	$	133,400,810	$	133,959,958

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

The following discussion should be read in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth under “Risk Factors” in Part I, Item 1A of this Form 10-K. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the fiscal year ended October 31, 2011.

Overview

Heron Lake BioEnergy, LLC is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota. The plant has a stated capacity to produce 50 million gallons of denatured fuel grade ethanol and 160,000 tons of dried distillers’ grains (DDGS) per year. Production of ethanol and distillers’ grains at the plant began in September 2007. We began recording revenue from plant production in October 2007, the last month of our fiscal year. Our revenues are derived from the sale and distribution of our ethanol throughout the continental United States and in the sale and distribution of our distillers’ grains (DGS) locally, and throughout the continental United States. Our subsidiary, Lakefield Farmers Elevator, LLC, has grain facilities at Lakefield and Wilder, Minnesota. Our subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas, LLC, the pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company’s ethanol production facility through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.

Our operating results are largely driven by the prices at which we sell ethanol and distillers grains and the costs related to their production, particularly the cost of corn. Historically, the price of ethanol tended to fluctuate in the same direction as the price of unleaded gasoline and other petroleum products. However, during fiscal 2008 and continuing into fiscal 2011, it appears ethanol prices tended to move up and down proportionately, with changes in corn prices. The price of ethanol can also be influenced by factors such as general economic conditions, concerns over blending capacities, and government policies and programs. The price of distillers grains is generally influenced by supply and demand, the price of substitute livestock feed, such as corn and soybean meal, and other animal feed proteins. Our largest component of and cost of production is corn. The cost of corn is affected primarily by factors over which we lack any control such as crop production, carryout, exports, government policies and programs, and weather. The growth of the ethanol industry has increased the demand for corn. We believe that continuing increase in global demand will result in corn prices above historic averages. As an example of our potential sensitivity to price changes, if the price of ethanol rises or falls $.10 per gallon, our revenues may increase or decrease accordingly by approximately $5.0 million, assuming no other changes in our business. Additionally, if the price of corn rises or falls $0.25 per bushel, our cost of goods sold may increase or decrease by $5.0 million, again assuming no other changes in our business. During our fiscal 2011, the market price of ethanol and corn were extremely volatile. The price of corn hit a high of $7.99 per bushel in June 2011 and a low of $5.07 in November 2010, while the price of ethanol fluctuated from a high of $3.07 in July 2011 and a low of $2.04 in November 2010.

Trends and Uncertainties Impacting Our Operations

Our current and future results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing

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construction, among other things. Other factors that may affect our future results of operation include those factors discussed in “Item 1. Business” and “Item 1A. Risk Factors.”

Critical Accounting Estimates

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate.

We reviewed our long-lived assets for impairment at October 31, 2011. As a result of this review and our related analysis, we believe our long-lived assets were not impaired as of October 31, 2011.

We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which along with inventory on hand must be evaluated for potential market value losses. We have estimated a loss on these firm purchase commitments to corn contracts in place and for corn on hand during 2011 where the price of corn exceeded the market price and upon being used in the manufacturing process and eventual sale of products we anticipate losses. Our estimates include various assumptions including the future prices of ethanol, distillers’ grains and corn. For the years ended 2011, 2010 and 2009 we recognized a lower of cost or market losses of approximately $1,592,000, $904,000 and $5,409,000, respectively.

Fiscal Year Ended October 31, 2011 Compared to Fiscal Year Ended October 31, 2010

The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal year ended October 31, 2011 and 2010:

	2011					2010
Income Statement Data	Amount			%		Amount			%
Revenues	$	164,120,375		100.0		$	110,624,758		100.0

Cost of Goods Sold	157,163,624			95.8		103,690,208			93.7

Gross Margin	6,956,751			4.2		6,934,550			6.3

Selling, General, and Administrative Expenses	3,613,465			2.2		3,857,492			3.5

Settlement Income	—			0.0		2,600,000			2.4

Operating Income (Loss)	3,343,286			2.0		5,677,058			5.1

Other Expense	(2,800,269		)	(1.7	)	(3,993,537		)	(3.6	)

Net Income before noncontrolling interest	543,017			0.4		1,683,521			1.5

Noncontrolling Income (Loss)	(27,838		)	0.0		—			0.0

Net Income (Loss)	$	570,855		0.3		$	1,683,521		1.5

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Revenues

Ethanol revenues during the period ended October 31, 2011 were approximately $130.6 million, comprising 80% of our revenues compared to $90.9 million during the period ended October 31, 2010, representing 82% of our revenues.

For the year ended October 31, 2011, we sold approximately 53.4 million gallons of ethanol at an average price of $2.45 per gallon. For the year ended October 31, 2010, we sold approximately 53.4 million gallons of ethanol at an average price of $1.70 per gallon. The price of ethanol during our fiscal year was affected by the demand for ethanol as a motor fuel which is affected by, among other factors, regulatory developments, gasoline consumption, and the price of crude oil. The price was also affected by federal RFS blending mandates.

We may hedge anticipated ethanol sales through a variety of mechanisms. Our marketers, whether C&N or Gavilon, are obligated to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by a marketer, we may utilize ethanol swaps, over-the-counter (“OTC”) ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce. Losses or gains on ethanol derivative instruments recorded in a particular period are reflected in revenue for that period. For the years ended October, 31, 2011 and 2010, we recorded losses of approximately $20,000 and $200,000, respectively, related to ethanol derivative instruments. There are timing differences in the recognition of losses or gains on derivatives as compared to the corresponding sale of ethanol.

We expect to see fluctuations in ethanol prices over the next fiscal year. While the demand for ethanol is expected to continue since gasoline blenders will need increasing amounts of ethanol to meet the Renewable Fuels Standard’s blending requirements, the supply is also expected to increase as additional production facilities are completed or increase production. In addition, low prices for petroleum and gasoline will exert downward pressure on ethanol prices. If ethanol prices decline, our earnings will also decline, particularly if corn prices remain substantially higher than historic averages, as they were in our fiscal year 2011. Future prices for fuel ethanol will be affected by a variety of factors beyond our control including, the demand for ethanol as a motor fuel, federal incentives for ethanol production, the amount and timing of additional domestic ethanol production and ethanol imports and petroleum and gasoline prices.

Total sales of DGS during fiscal years 2011 and 2010 equaled approximately $24.8 million and $13.0 million, respectively, comprising 15% and 12% of our revenues for fiscal years 2011 and 2010, respectively. In fiscal years 2011 and 2010, we sold approximately 136,000 tons and 119,000 tons, respectively, of dried distillers’ grain. The average price we received for distillers’ grain was approximately $176 per ton in fiscal year 2011 and approximately $99 per ton in fiscal year 2010.

Prices for distillers’ grains are affected by a number of factors beyond our control such as the supply of and demand for distillers’ grains as an animal feed and prices for competing feeds. We believe that current market prices for distillers’ grains are approaching levels that can be sustained long-term as long as the prices of competing animal feeds remain steady or increase, livestock feeders continue to create demand for alternative feed sources such as distillers’ grains and the supply of distillers’ grains remains relatively stable. On the other hand, if competing commodity price values retreat and distillers’ supplies increase due to growth in the ethanol industry, distillers’ grains prices may decline.

Cost of Goods Sold

Our costs of sales include, among other things, the cost of corn used in ethanol and DGS production (which is the largest component of costs of sales), coal, processing ingredients, electricity, and wages, salaries and benefits of production personnel. We use approximately 1.5 million bushels of corn per month at the plant. We contract with local farmers and elevators for our corn supply. We are able to store corn that we purchase in our elevators in Lakefield and Wilder, Minnesota, as well as in on-site storage at the plant.

Our costs of sales (including lower of cost or market adjustments) as a percentage of revenues were 95.8% and 93.9% for the twelve months ended October 31, 2011 and, 2010, respectively. The per bushel cost of corn purchased increased approximately 78% in the twelve months ended October 31, 2011 as compared to the fiscal year ended October 31, 2010. Cost of goods sold includes lower of cost or market adjustments of approximately $1.6 million for the fiscal year ended October 31, 2011, which related to forward purchase contracts and inventory where the fixed price was more than the estimated realizable value. The lower of cost or market adjustment for the twelve months ended October 31, 2010 was approximately $0.9 million. We had losses related to corn derivative instruments of approximately $0.4 and $1.0 million for the twelve months ended October 31, 2011 and 2010, respectively, which increased cost of sales. In summary, lower of cost or market adjustments increased approximately $0.7 million for the fiscal year ended October 31, 2011 as compared to the fiscal year ended October 31, 2010. During the same periods, losses on derivatives decreased approximately $0.6 million. The 78% increase in the per bushel cost of corn outweighed the 44% increase in the per gallon sales price of ethanol which caused the increase in the cost of goods sold as a percent of revenues for the twelve months ended October 31, 2011 . Our gross margin for the twelve months ended October 31, 2011 decreased to 4.2% from 6.1% for the twelve months ended

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October 31, 2010. Our gross margin decreased in fiscal year 2011 as compared to fiscal year 2010 due in part to the additional plant downtime for the conversion to natural gas.

The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors that are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We use futures and options contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. Through October 31, 2011, none of our derivative contracts were designated as hedges and, as a result, changes to the market value of these contracts were recognized as an increase or decrease to our costs of goods sold. As a result, gains or losses on derivative instruments do not necessarily coincide with the related corn purchases. This may cause fluctuations in cost of goods sold. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge.

Operating Expense

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs and generally do not vary with the level of production at the plant. These expenses were $3.6 million for the twelve months ended October 31, 2011 down 6.3% from $3.9 million for the twelve months ended October 31, 2010. These expenses generally do not vary with the level of production at the plant and were relatively constant from period to period. Increased revenue for the fiscal year ended October 31, 2011 positively affected operating expenses as a percentage of revenue as total revenues increased approximately 48%.

Settlement Income

From the settlement on July 2, 2010 of our arbitration proceeding involving Fagen, Inc., we recorded $2.6 million of settlement income from cash and noncash proceeds during the third quarter of fiscal year 2010. There was no settlement income in fiscal year 2011.

Operating Income

Our income from operations for fiscal year 2011 totaled $3.3 million compared to fiscal year 2010 operating income of approximately $5.5 million. We experienced a decrease in operating income in fiscal year 2011 compared to 2010 due primarily to the impact of $2.6 million in settlement income.

Other Income and (Expense)

Fiscal Year Ended October 31, 2010 Compared to Fiscal Year Ended October 31, 2009

	2010					2009
Income Statement Data	Amount			%		Amount			%
Revenues	$	110,624,758		100.0		$	88,304,596		100.0

Cost of Goods Sold	103,690,208			93.7		90,857,247			102.9

Gross Margin	6,934,550			6.3		(2,552,651		)	(2.9	)

Selling, General, and Administrative Expenses	3,857,492			3.5		4,515,476			5.1

Settlement Income	2,600,000			2.4		—			0.0

Operating Income (Loss)	5,677,058			5.1		(7,068,127		)	(8.0	)

Other Expense	(3,993,537		)	(3.6	)	(4,261,307		)	(4.8	)

Net Income (Loss)	$	1,683,521		1.5		$	(11,329,434	)	(12.8	)

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Revenues

Ethanol revenues during the period ended October 31, 2010 were approximately $90.9 million, comprising 82% of our revenues compared to $70.4 million during the period ended October 31, 2009, representing 80% of our revenues.

For the year ended October 31, 2010, we sold approximately 53.4 million gallons of ethanol at an average price of $1.70 per gallon. For the year ended October 31, 2009, we sold approximately 46.4 million gallons of ethanol at an average price of $1.52 per gallon. We believe that the number of gallons of ethanol sold was affected by the plant’s productivity that was impacted by scheduled and unscheduled downtime during the fiscal year 2009, including testing and process changes relating to our air emissions. Further, the price of ethanol during our fiscal year was affected by the demand for ethanol as a motor fuel which is affected by, among other factors, regulatory developments, gasoline consumption, and the price of crude oil. The price was also affected by federal RFS blending mandates.

We may hedge anticipated ethanol sales through a variety of mechanisms. Our marketers, whether RPMG or C&N, are obligated to use reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain the best margins on ethanol that is marketed and sold by a marketer, we may utilize ethanol swaps, over-the-counter (“OTC”) ethanol swaps, or OTC ethanol options that are typically settled in cash, rather than gallons of the ethanol we produce. Losses or gains on ethanol derivative instruments recorded in a particular period are reflected in revenue for that period. For the years ended October, 31, 2010 and 2009, we recorded a loss of $0.2 million and a gain $0.4 million, respectively, related to ethanol derivative instruments. There are timing differences in the recognition of losses or gains on derivatives as compared to the corresponding sale of ethanol. As such, the losses or gains recognized could be associated with related sales in fiscal years 2008, 2009 or 2010.

We expect to see fluctuations in ethanol prices over the next fiscal year. While the demand for ethanol is expected to continue since gasoline blenders will need increasing amounts of ethanol to meet the Renewable Fuels Standard’s blending requirements, the supply is also expected to increase as additional production facilities are completed or return to production. In addition, low prices for petroleum and gasoline will exert downward pressure on ethanol prices. If ethanol prices decline, our earnings will also decline, particularly if corn prices remain substantially higher than historic averages, as they were in our fiscal year 2010. Future prices for fuel ethanol will be affected by a variety of factors beyond our control including, the demand for ethanol as a motor fuel, federal incentives for ethanol production, the amount and timing of additional domestic ethanol production and ethanol imports and petroleum and gasoline prices.

Total sales of DGS during fiscal years 2010 and 2009 equaled approximately $13.0 million and $12.8 million, respectively, comprising 12% and 14% of our revenues for fiscal years 2010 and 2009, respectively. In fiscal years 2010 and 2009, we sold approximately 119,000 tons of dried distillers’ grain. The average price we received for distillers’ grain was approximately $99 per ton in fiscal year 2010 and approximately $107 per ton in fiscal year 2009.

Cost of Goods Sold

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1.5 million bushels of corn per month at the plant. We contract with local farmers and elevators for our corn supply. We are able to store corn that we purchase in our elevators in Lakefield and Wilder, Minnesota, as well as in on-site storage at the plant.

Our costs of sales (including lower of cost or market adjustments) as a percentage of revenues were 93.9% and 102.9% for the twelve months ended October 31, 2010 and, 2009, respectively. The per bushel cost of corn purchased (net of losses realized in fiscal year 2009 for bushels delivered in fiscal 2010) decreased approximately 1% in the twelve months ended October 31, 2010 as compared to the twelve months ended October 31, 2009. Cost of goods sold includes lower of cost or market adjustments of $0.9 million for the fiscal year ended October 31, 2010, which related to forward purchase contracts and inventory where the fixed price was more than the estimated realizable value. The lower of cost or market adjustment for the twelve months ended October 31, 2009 was $5.4 million. We had a loss related to corn derivative instruments of approximately $1.0 million for the twelve months ended October 31, 2010, which increased cost of sales. We had a gain related to corn derivative instruments of approximately $1.2 million for the twelve months ended October 31, 2009 that reduced cost of sales. In summary, lower of cost or market adjustments decreased $4.5 million for the fiscal year ended October 31, 2010 as compared to the fiscal year ended October 31, 2009. During the same periods, gains on derivatives decreased $2.2 million. These decreased net costs combined with the 12% increase in the per gallon sales price of ethanol caused the decrease in the cost of goods sold as a percent of revenues for the twelve months ended October 31, 2010 . Our gross margin (loss) for the twelve months ended October 31, 2010 increased to 6.1% from (2.9%) for the twelve months ended October 31, 2009. We had a positive gross margin in fiscal year 2010 as compared to negative gross margin in fiscal year 2009 due to the increase in ethanol prices; decreased costs of goods sold, relative to revenues; and due to a decrease in losses on forward contracts. In addition, higher production levels in fiscal year 2010 contributed to the positive gross margin experienced in fiscal year 2010.

The cost of corn fluctuates based on supply and demand, which, in turn, is affected by a number of factors that are beyond our control. We expect our gross margin to fluctuate in the future based on the relative prices of corn and fuel ethanol. We use futures and options contracts to minimize our exposure to movements in corn prices, but there is no assurance that these hedging strategies will be effective. Through October 31, 2010, none of our derivative contracts were designated as hedges and, as a result, changes to the market value of these contracts were recognized as an increase or decrease to our costs of goods sold. As a result, gains or losses on derivative instruments do not necessarily coincide with the related corn purchases. This may cause fluctuations in cost of goods sold. While we do not use hedge accounting to match gains or losses on derivative instruments, we believe the derivative instruments provide an economic hedge.

Costs of sales also include expenses directly attributable to the repair and maintenance of the plant. Cost of sales as a percentage of revenue was higher in fiscal year 2009 as compared to fiscal year 2010 due to increased costs attributable to the repair and maintenance of the plant. During the third quarter of fiscal year 2009, we incurred costs of approximately $300,000 as part of a five day planned semi-annual shutdown and maintenance procedure. Upon shutdown, portions of the refractory section of the boiler collapsed. While there were no injuries sustained, significant additional costs were incurred to secure the refractory, ensure the safety of the workers completing repairs and to complete the repairs. This added eleven days to the shutdown for a total of sixteen days shutdown during May 2009.

Cost of sales for fiscal year 2010 also reflects the positive impact of an amended railcar leasing agreement we entered into in July 2009. The terms of the amendment reduce the rail cars under lease by 50 cars and increase the monthly rental amount per remaining rail car until July 1, 2014. This has resulted in a monthly cash savings of $425 per rail car or $21,250 per month.

Operating Expense

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs and generally do not vary with the level of production at the plant. These expenses were $3.9 million for the twelve months ended October 31, 2010 down 13.3% from $4.5 million for the twelve months ended October 31, 2009. These expenses generally do not vary with the level of production at the plant and were relatively constant from period to period other than costs of approximately $800,000 incurred for

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environmental emissions testing done and unusual boiler repairs during fiscal 2009. Increased revenue for the fiscal year ended October 31, 2010 positively affected operating expenses as a percentage of revenue as total revenues increased approximately 25%.

Settlement Income

Operating Income

Our income from operations for fiscal year 2010 totaled $5.5 million compared to a loss from operations for fiscal year 2009 of approximately $7.1 million. We experienced operating income in fiscal year 2010 rather than an operating loss primarily due to positive gross margin in fiscal year 2010 of $6.7 million as compared to a negative gross margin of $2.5 million in fiscal year 2009 and the impact of $2.6 million in settlement income in fiscal year 2010.

Other Income and (Expense)

Other expense consisted primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense for fiscal year 2010, which was up slightly as compared to the twelve months ended October 31, 2009, is dependent on the balances outstanding, interest rate fluctuations and default interest accruals. As of October 31, 2010, debt balances were down 10% as compared to balances at October 31, 2009. The average 1 month LIBOR rate, applicable to our line of credit with AgStar, was 0.27% for the twelve months ended October 31, 2010 compared to 0.52% for the twelve months ended October 31, 2009. Balances on our line of credit decreased from $5,000,000 at October 31, 2009 to $3,500,000 outstanding at October 31, 2010. However, balances on our line of credit had a minimum interest rate of 6% during the twelve months ended October 31, 2010 and there was no minimum interest rate during the twelve months ended October 31, 2009. Additionally, we accrued 2% in default interest on all of our indebtedness to AgStar beginning February 1, 2010 through July 2, 2010, which added additional expense for the twelve months ended October 31, 2010. We also accrued the same 2% default interest on all of our indebtedness to AgStar from May 1, 2009 through May 29, 2009. While interest expense remained rather flat from year to year, fiscal year 2009 included the write-off of loan costs of approximately $445,000 in other expense. Because we have not obtained a waiver from AgStar for actual or expected violations of our master loan agreement, our long-term debt with AgStar was classified as a current liability. As such, we wrote-off the remaining loan costs rather than amortizing them over the original contractual term of the loans.

Liquidity and Capital Resources

As of October 31, 2011, we had cash and cash equivalents (other than restricted cash) of approximately $7.1 million, current assets of approximately $14.2 million and total assets of approximately $103.5 million.

Our principal sources of liquidity consist of cash provided by operations, cash and cash equivalents on hand, and available borrowings under our master loan agreement with AgStar. Under the master loan agreement, we have two forms of debt: a term note and a revolving term note. The total indebtedness to AgStar at October 31, 2011 was $46.6 million, consisting of $39.7 million under the term note and $6.9 million under the revolving term note. Our revolving term note allows borrowing up to $8.0 million subject to letters of credit outstanding. Among other provisions, our master loan agreement contains covenants requiring us to maintain various financial ratios and tangible net worth. It also limits our annual capital expenditures and membership distributions. All of our assets and real property are subject to security interests and mortgages in favor of AgStar as security for the obligations of the master loan agreement. Please see “Credit Arrangements — Credit Arrangement with AgStar” for a description of our indebtedness and agreements relating to our indebtedness with AgStar. We have also raised $3.5 million in equity in fiscal 2011 and another $0.7 million in November 2011.

Effective September 1, 2011, the Company entered into a corn supply agreement with Gavilon. Gavilon purchased all corn inventory currently owned by the Company and located at its production facility or elevator facilities, at current market prices, to facilitate the transition to Gavilon supplying 100% of the Company’s corn requirements at the production facility and the repayment of the Company’s line of credit with AgStar.

There is no assurance that our cash, cash generated from operations and, if necessary, available borrowing under our agreement with AgStar, will be sufficient to fund our anticipated capital needs and operating expenses, particularly if the sale of ethanol and DGS does not produce revenues in

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the amounts currently anticipated or if our operating costs, including specifically the cost of corn, natural gas and other inputs, are greater than anticipated. Due to current volatility in the ethanol and corn markets, our future profit margins might be tight or not exist at all.

Year Ended October 31, 2011 Compared to Year Ended October 31, 2010

Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments. During the twelve months ended October 31, 2011, we used cash to make principal payments of approximately $4.2 million against the term note and to pay down $3.5 million on our line of credit.

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

	Year Ended October 31
	2011			2010			2009
Net cash provided by (used in) operating activities	$	14,258		$	(202	)	$	(8,334	)
Net cash used in investing activities	(4,493		)	(519		)	(232		)
Net cash provided by (used in) financing activities	(4,148		)	(940		)	395
Net increase (decrease) in cash and equivalents	$	5,617		$	(1,661	)	$	(8,171	)

During the twelve months ended October 31, 2011, we received $14.3 million in cash for operating activities. This consists primarily of generating net income of $0.5 million plus non-cash expenses including depreciation and amortization of $5.5 million and reductions in inventory and accounts receivable.

During the twelve months ended October 31, 2011, we used approximately $4.5 million for investing activities primarily to pay for capital expenditures which included costs for the conversion to natural gas.

During the twelve months ended October 31, 2011, we used approximately $4.1 million from financing activities consisting primarily of payments on our term note of approximately $4.2 million and $3.5 million on the line of credit. We also raised $3.5 million from member contributions.

Year Ended October 31, 2010 Compared to Year Ended October 31, 2009

During the twelve months ended October 31, 2010, we used $0.2 million in cash for operating activities. This use consists primarily of generating net income of $1.7 million plus non-cash expenses including depreciation and amortization of $5.6 million and cash used to purchase inventory of $6.0 million.

During the twelve months ended October 31, 2010, we used approximately $519,000 for investing activities to pay for capital expenditures and to purchase restricted certificates of deposit.

During the twelve months ended October 31, 2010, we used approximately $940,000 from financing activities consisting primarily of payments on our term note of approximately $5.1 million and $1.5 million on the line of credit. We also generated $4.5 million from member contributions.

Contractual Obligations

The following table provides information regarding the consolidated contractual obligations of the Company as of October 31, 2011:

	Total		Less than One Year		One to Three Years		Three to Five Years		Greater Than Five Years
Long-term debt obligations (1)	$	62,618,917	$	7,042,955	$	12,609,601	$	40,907,292	$	2,059,069
Operating lease obligations	6,785,586		1,647,589		2,778,997		1,666,000		693,000
Purchase obligations (2)	17,142,830		5,350,310		11,792,520		—		—
Total contractual obligations	$	86,547,333	$	14,040,854	$	27,181,118	$	42,573,292	$	2,752,069

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(1) Long-term debt obligations include estimated interest and interest on unused debt.

(2) Purchase obligations primarily include forward contracts for natural gas.

Off Balance-Sheet Arrangements

We have no off balance-sheet arrangements.

Credit Arrangements

Credit Arrangements with AgStar

We have entered into an amended and restated master loan agreement with AgStar Financial Services, PCA (“AgStar”) under which we have two forms of debt as of September 1, 2011: a five-year term loan initially amounting of $40,000,000 and a five-year term revolving loan commitment in the amount of $8,008,689.

AgStar has been granted a security interest in substantially all of the assets of Heron Lake BioEnergy and its subsidiary, Lakefield Farmers Elevator, LLC. We also assigned to AgStar our interest in our agreements for the sale of ethanol and distillers grains, and for the purchases of natural gas, corn and electricity, as well as our design-build agreement with Fagen, Inc. AgStar also received a mortgage relating to our real property and that of Lakefield Farmers Elevator.

During the term of the loans, we are subject to certain financial loan covenants consisting of minimum working capital, minimum debt coverage, and minimum tangible net worth. We are only allowed to make annual capital expenditures up to $500,000 annually without prior approval. The loan agreements also impose restrictions on our ability to make cash distributions to our members.

Upon an occurrence of an event of default or an event that will lead to our default, AgStar may upon notice terminate its commitment to loan funds and declare the entire unpaid principal balance of the loans, plus accrued interest, immediately due and payable. An event of default includes, but is not limited to, our failure to make payments when due, insolvency, any material adverse change in our financial condition or our breach of any of the covenants, representations or warranties we have given in connection with the transaction.

Please see the discussion above in “Liquidity and Capital Resources” regarding our failure to comply with covenants of the master loan agreement and the impact of these covenant violations on our liquidity and capital resources.

Term Note

The Fifth Amended and Restated Master Loan Agreement and related loan documents with AgStar replaced and superseded the Company’s existing loan agreements, related loan documents and the amended forbearance agreements effective September 1, 2011. Under the Fifth Amended and Restated Master Loan Agreement the Company has a five-year term loan in the amount of $40,000,000, comprised of two tranches of $20,000,000 each, with the first tranche bearing interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, and the second tranche bearing interest at 5.75%. The Company must make equal monthly payments of principal and interest on the term loan based on a ten-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016.

Revolving Term Note

Under the Fifth Amended and Restated Master Loan Agreement the Company also obtained a five-year term revolving loan commitment in the amount of $8,008,689, under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016. Amounts borrowed by the Company under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. The Company also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the term revolving loan. Under the

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terms of the new agreement, the term revolving loan commitment is scheduled to decline by $500,000 annually, beginning on September 1, 2012 and each anniversary date thereafter. The maturity date of the term revolving loan is September 1, 2016.

Amounts available under the revolving term note are reduced by outstanding standby letters of credit. The Company does have a $600,000 outstanding standby letter of credit at October 31, 2011.

Line of Credit

In September 2011, the Company negotiated a new debt agreement with AgStar that superseded past agreements, including the forbearance agreements. This new debt agreement extends the maturity date of the loans, increases the potential available balance on the revolving portion of the long-term debt, and allows the Company to reclassify the debt to long-term. As part of this new agreement, the Company repaid in full the line of credit with AgStar in September 2011. The repayment of the line of credit was done as part of the change in ethanol and distillers marketers to Gavilon, LLC (“Gavilon”) in September 2011. Gavilon will also assume responsibility for certain risk management activities for the Company and will carry certain raw material and finished goods inventory rather than the Company. With the transition to Gavilon, the Company sold certain inventory to Gavilon in order to pay off the line of credit in September 2011.

At October 31, 2010, outstanding borrowings on the line of credit were $3.5 million. Amounts available under the line of credit were reduced by outstanding standby letters of credit. However, we had no outstanding standby letters of credit at October 31, 2010.

Other Credit Arrangements

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

In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, we and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities. In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years’ debt service on approximately $3.6 million in water revenue bonds, which will be returned to us if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As of October 31, 2011, there was a total of $3.1 million in outstanding water revenue bonds and we classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

In November 2007, we entered into a shared savings contract with Interstate Power and Light Company (“IPL”), our electrical service provider. Under the agreement, IPL is required to pay $1,850,000 to fund project costs for the purchase and installation of electrical equipment. In exchange, we are required to share a portion of the energy savings with IPL that may be derived from the decreased energy consumption from the new equipment. We are required to pay IPL approximately $30,000 for the first thirteen billing cycles, $140,000 at the end of the thirteenth billing cycle, and thereafter, approximately $30,000 for the remainder of the billing cycles. These amounts represent IPL’s portion of the shared savings. We also granted IPL a security interest in the electrical equipment to be installed on our site. The shared savings contract expires December 31, 2012.

In connection with the shared savings contract, IPL deposited $1,710,000 of the $1,850,000 in an escrow account on our behalf and we received the remaining $140,000 as cash proceeds. The escrow account expires at the same time as the shared savings contract or a termination by IPL of the escrow arrangement, at which time any remaining funds will be distributed to IPL. We earn interest at a rate of 4.2% on the funds escrowed and we pay a rate of interest of 1.5% on the funds deposited into escrow. Each month, a distribution from the escrow account is made to IPL to pay its portion of the shared savings under the shared savings contract.

To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 by a secured promissory note. Under the note we are required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balance of this loan at October 31, 2011 was $443,750.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

We may be exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a variable term note and a revolving term note. The specifics of these notes are discussed in greater detail in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and finished products ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol and corn price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and average ethanol price as of October 31, 2011, net of the forward and future contracts used to hedge our market risk for corn usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from October 31, 2011. As of October 31, 2011, none of our corn usage or our ethanol sales over the next 12 months were subject to fixed price or index contracts where a price has been established with an exchange. Other procurement and sales options including basis or index contracts without a price established on the exchange, for both corn and ethanol, are not included in this analysis. The results of this analysis, which may differ from actual results, are as follows:

	Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)	Unit of Measure	Hypothetical Adverse Change in Price as of 10/31/2011		Approximate Adverse Change to Income

Ethanol	53,400,000	Gallons	10	%	$	13,010,000
Corn	18,500,000	Bushels	10	%	$	12,025,000

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are included in this Annual Report on Form 10-K beginning at the “F” page noted:

	Page Reference

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of October 31, 2011 and 2010	F-2

Consolidated Statements of Operations for the fiscal years ended October 31, 2011, 2010 and 2009	F-4

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Consolidated Statements of Changes in Members’ Equity for the fiscal years ended October 31, 2011, 2010 and 2009	F-5

Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2011, 2010 and 2009	F-6

Notes to Consolidated Financial Statements	F-8

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain a system of “disclosure controls and procedures,” as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended.

Our Chief Executive Officer, Robert J. Ferguson, and our Chief Financial Officer, Lucas G. Schneider, have evaluated our disclosure controls and procedures as of October 31, 2011. Based upon their review, they have concluded that these controls and procedures are effective.

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

The Board of Directors and Members of Heron Lake BioEnergy, LLC:

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

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

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

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

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

Under the supervision of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In conducting the aforementioned evaluation, management concluded that the Company’s internal control over financial reporting was effective as of October 31, 2011.

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(c) Changes in Internal Controls Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fourth fiscal quarter ended October 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by reference to the following sections of the Company’s Proxy Statement for its 2012 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed (the “Proxy Statement”):

· Ownership of Units by Principal Holders and Management;

· Proposal 1: Election of Governors;

· Corporate Governance;

· Executive Officers and Executive Compensation;

· Certain Relationships and Related Person Transactions;

· Section 16(a) Beneficial Ownership Reporting Compliance; and

· Code of Ethics.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections of the Company’s Proxy Statement entitled “Executive Officers and Executive Compensation” and “Governor Compensation.”

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

The information required by this item is incorporated herein by reference to the section of the Company’s Proxy Statement entitled “Ownership of Units by Principal Holders and Management,” and is incorporated herein by reference to Part II, Item 5 entitled “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the sections of the Company’s Proxy Statement entitled “Certain Relationships and Related Person Transactions” and “Corporate Governance.”

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section of the Company’s Proxy Statement entitled “Relationship with Independent Accountants.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a) Financial Statements

	Page Reference

Audited Financial Statements

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of October 31, 2011 and 2010	F-2

Consolidated Statements of Operations for the fiscal years ended October 31, 2011, 2010 and 2009	F-4

Consolidated Statements of Changes in Members’ Equity for the fiscal years ended October 31, 2011, 2010 and 2009	F-5

Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2011, 2010 and 2009	F-6

Notes to Consolidated Financial Statements	F-8

(b) Exhibits

See “Exhibit Index” on the page following the Signature Page.

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SIGNATURES

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

Dated: January 30, 2012

	HERON LAKE BIOENERGY, LLC


	By:	/s/ Robert J. Ferguson
	Robert J. Ferguson, Chief Executive Officer
	(principal executive officer)

Each person whose signature appears below hereby constitutes and appoints Robert J. Ferguson and Lucas G. Schneider, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons in the capacities indicated on January 30, 2012.

/s/ Robert J. Ferguson		Chief Executive Officer and President
Robert J. Ferguson		(principal executive officer), Governor

/s/ Lucas G. Schneider		Chief Financial Officer (principal
Lucas G. Schneider		financial and accounting officer)

/s/ David J. Woestehoff		Governor
David J. Woestehoff

/s/ Doug Schmitz		Governor
Doug Schmitz

/s/ Michael S. Kunerth		Governor
Michael S. Kunerth

/s/ Kenton Johnson		Governor
Kenton Johnson

/s/ Nick Bowdish		Governor
Nick Bowdish

/s/ Steven H. Core		Governor
Steven H. Core

/s/ Milton J. McKeown		Governor
Milton J. McKeown

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HERON LAKE BIOENERGY, LLC

INDEX TO EXHIBITS TO FORM 10-K FOR FISCAL YEAR ENDED OCTOBER 31, 2011

Exhibit Number	Exhibit Title	Incorporated by Reference To:

3.1	First Amended and Restated Articles of Organization of Heron Lake BioEnergy, LLC	Exhibit 3.1 of the Company’s Registration Statement on Form 10 (File No. 000-51825) filed on August 22, 2008 (the “2008 Registration Statement”).
3.2	Member Control Agreement of Heron Lake BioEnergy, LLC, as amended through March 29, 2008	Exhibit 3.2 of the Company’s 2008 Registration Statement.
4.1	Form of Class A Unit Certificate	Exhibit 4.1 of the Company’s 2008 Registration Statement.
4.2	Unit Transfer Policy adopted November 5, 2008	Exhibit 4.1 of the Company’s Current Report on Form 8-K dated November 5, 2008.
10.1	Fourth Amended and Restated Loan Agreement dated October 1, 2007 by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.1 of the Company’s 2008 Registration Statement.
10.2	Third Supplement dated October 1, 2007 to Fourth Amended and Restated Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.2 of the Company’s 2008 Registration Statement.
10.3	Fourth Supplement dated October 1, 2007 to Fourth Amended and Restated Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.3 of the Company’s 2008 Registration Statement.
10.4	Term Note dated October 1, 2007 in principal amount of $59,583,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.4 of the Company’s 2008 Registration Statement.
10.5	Term Revolving Note dated October 1, 2007 in principal amount of $5,000,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.5 of the Company’s 2008 Registration Statement.
10.6	Personal Guaranty dated October 1, 2007 by Roland Fagen, guarantor, in favor of AgStar Financial Services, PCA	Exhibit 10.6 of the Company’s 2008 Registration Statement.
10.7	Fourth Amended and Restated Guaranty dated October 1, 2007 by Lakefield Farmers Elevator, LLC in favor of AgStar Financial Services, PCA	Exhibit 10.7 of the Company’s 2008 Registration Statement.
10.8	Fifth Supplement dated November 19, 2007 to Fourth Amended and Restated Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.8 of the Company’s 2008 Registration Statement.
10.9	Revolving Line of Credit Note dated November 19, 2007 in principal amount of $7,500,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Exhibit 10.9 of the Company’s 2008 Registration Statement.
10.10	Industrial Water Supply Development and Distribution Agreement dated October 27, 2003 among Heron Lake BioEnergy, LLC (f/k/a Generation II Ethanol, LLC), City of Heron Lake, Jackson County, and Minnesota Soybean Processors	Exhibit 10.10 of the Company’s 2008 Registration Statement.
10.11	Industrial Water Supply Treatment Agreement dated May 23, 2006 among Heron Lake BioEnergy, LLC, City of Heron Lake and County of Jackson	Exhibit 10.11 of the Company’s 2008 Registration Statement.
10.12	Standard Form of Agreement between Owner and Designer — Lump Sum dated September 28, 2005 by and between Fagen, Inc. and Heron Lake BioEnergy, LLC†	Exhibit 10.12 of Amendment No. 4 to the Company’s 2008 Registration Statement.
10.13	Distiller’s Grain Marketing Agreement dated October 5, 2005 by and between Heron Lake BioEnergy, LLC and Commodity Specialist Company as assigned to CHS Inc. as of August 17, 2007	Exhibit 10.13 of the Company’s 2008 Registration Statement.

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Exhibit Number	Exhibit Title	Incorporated by Reference To:
10.14	Ethanol Fuel Marketing Agreement dated August 7, 2006 by and between RPGM, Inc. and Heron Lake BioEnergy, LLC	Exhibit 10.14 of the Company’s 2008 Registration Statement.
10.15	Letter Agreement re: Environmental Compliance Support dated March 12, 2007 by and between Fagen Engineering, LLC Heron Lake BioEnergy, LLC	Exhibit 10. 15 of the Company’s 2008 Registration Statement.
10.16	Coal Loading, Transport, and Delivery Agreement effective as of April 1, 2007 by and between Tersteeg Transport Inc. and Heron Lake BioEnergy, LLC	Exhibit 10.16 of the Company’s 2008 Registration Statement.
10.17	Coal Transloading Agreement dated June 1, 2007 by and between Southern Minnesota Beet Sugar Cooperative and Heron Lake BioEnergy, LLC†	Exhibit 10.17 of the Company’s 2008 Registration Statement.
10.18	Master Coal Purchase and Sale Agreement dated June 1, 2007 by and between Northern Coal Transport Company and Heron Lake BioEnergy, LLC, including confirmation letter dated July 13, 2007†	Exhibit 10.18 of the Company’s 2008 Registration Statement.
10.19	Loan Agreement dated December 28, 2007 by and between Federated Rural Electric Association and Heron Lake BioEnergy, LLC	Exhibit 10.19 of the Company’s 2008 Registration Statement.
10.20	Secured Promissory Note issued December 28, 2007 by Heron Lake BioEnergy, LLC as borrower to Federated Rural Electric Association as lender in principal amount of $600,000	Exhibit 10.20 of the Company’s 2008 Registration Statement.
10.21	Security Agreement dated December 28, 2007 by Heron Lake BioEnergy, LLC in favor of Federated Rural Electric Association	Exhibit 10.21 of the Company’s 2008 Registration Statement.
10.22	Electric Service Agreement dated October 17, 2007 by and between Interstate Power and Light Company and Heron Lake BioEnergy, LLC	Exhibit 10.22 of the Company’s 2008 Registration Statement.
10.23	Shared Savings Contract dated November 16, 2007 by and between Interstate Power and Light Company and Heron Lake BioEnergy, LLC	Exhibit 10.23 of the Company’s 2008 Registration Statement.
10.24	Escrow Agreement dated November 16, 2007 by and between Heron Lake BioEnergy, LLC , Farmers State Bank of Hartland for the benefit of Interstate Power and Light Company	Exhibit 10.24 of the Company’s 2008 Registration Statement.
10.25	Employment Agreement dated February 1, 2008 by and between Heron Lake BioEnergy, LLC and Robert J. Ferguson *	Exhibit 10.25 of the Company’s 2008 Registration Statement.
10.26	Compliance Agreement effective January 23, 2007 by and between Heron Lake BioEnergy, LLC and the Minnesota Pollution Control Agency	Exhibit 10.28 to Amendment No. 1 to the Company’s 2008 Registration Statement.
10.27	Letter Agreement dated November 25, 2008 by and between Heron Lake BioEnergy, LLC, CFO Systems, LLC and Brett L. Frevert relating to the services of Brett L. Frevert *	Exhibit 10.1 to Current Report on Form 8-K dated November 26, 2008.
10.28	Ethanol Purchase and Marketing Agreement dated September 2, 2009 by and between Heron Lake BioEnergy, LLC and C&N Ethanol Marketing Corporation	Exhibit 10.1 to Current Report on Form 8-K dated September 2, 2009.
10.29	Amendment No. 4 to Fifth Supplement dated December 8, 2009 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.32 to Annual Report on Form 10-K for the year ended October 31, 2009.
10.30	Amendment No. 5 to Fifth Supplement to the Master Loan Agreement dated March 25, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.1 to Current Report on Form 8-K dated March 25, 2010
10.31	Amendment No. 6 to Fifth Supplement to the Master Loan Agreement dated May 27, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.2 to Current Report on Form 8-K dated March 25, 2010
10.32	Amended and Restated Fifth Supplement dated as of July 2, 2010 to the Master Loan Agreement by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.1 to Current Report on Form 8-K dated July 2, 2010

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Exhibit Number	Exhibit Title	Incorporated by Reference To:
10.33	Second Amended and Restated Revolving Line of Credit Note dated July 2, 2010 in the maximum principal amount of $6,750,000 by Heron Lake BioEnergy, LLC as borrower to AgStar Financial Services, PCA as lender	Exhibit 10.2 to Current Report on Form 8-K dated July 2, 2010
10.34	Forbearance Agreement dated July 2, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.3 to Current Report on Form 8-K dated July 2, 2010
10.35	Mutual Release and Settlement Agreement dated July 2, 2010 among Heron Lake BioEnergy, LLC, Fagen, Inc. and ICM, Inc. †	Exhibit 10.1 to Current Report on Form 8-K dated July 2, 2010
10.36	Subscription Agreement dated July 2, 2010 by Heron Lake BioEnergy, LLC and Project Viking, L.L.C.	Exhibit 10.1 to Current Report on Form 8-K dated July 2, 2010
10.37	First Amendment to Fifth Supplement to the Master Loan Agreement dated as of December 30, 2010 by and between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC	Exhibit 10.1 to Current Report on Form 8-K dated December 30, 2010
10.38	Third Amended and Restated Revolving Line of Credit Note dated December 30, 2010 in the maximum principal amount of $6,750,000 by Heron Lake BioEnergy, LLC as borrower to AgStar Financial Services, PCA as lender	Exhibit 10.2 to Current Report on Form 8-K dated December 30, 2010
10.39	First Amendment to Forbearance Agreement dated December 30, 2010 by and between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Exhibit 10.3 to Current Report on Form 8-K dated December 30, 2010
10.40	Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011 between AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC†	Attached hereto.
10.41	Amended and Restated Term Note dated September 1, 2011 in principal amount of $40,000,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Attached hereto.
10.42	Amended and Restated Term Revolving Note dated September 1, 2011 in principal amount of $8,008,689 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender	Attached hereto.
10.43	Fourth Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated September 1, 2011 between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Attached hereto.
10.44	Fifth Amended and Restated Guaranty dated September 1, 2011 by Lakefield Farmers Elevator, LLC in favor of AgStar Financial Services, PCA	Attached hereto.
10.45	Amended and Restated Guaranty dated September 1, 2011 by HLBE Pipeline Company, LLC in favor of AgStar Financial Services, PCA	Attached hereto.
10.46	Collateral Assignment dated September 1, 2011 between Heron Lake BioEnergy, LLC and AgStar Financial Services, PCA	Attached hereto.
10.47	Collateral Assignment dated September 1, 2011 between Lakefield Farmers Elevator, LLC and AgStar Financial Services, PCA	Attached hereto.

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Exhibit Number	Exhibit Title	Incorporated by Reference To:
10.48	Corn Supply Agreement dated effective as of September 1, 2011 between Heron Lake BioEnergy, LLC and Gavilon, LLC†	Attached hereto.
10.49	Ethanol and Distiller’s Grains Marketing Agreement dated effective as of September 1, 2011 between Heron Lake BioEnergy, LLC and Gavilon, LLC†	Attached hereto.
10.50	Master Netting, Setoff, Credit and Security Agreement dated effective as of September 1, 2011 between Heron Lake BioEnergy, LLC and Gavilon, LLC†	Attached hereto.
10.51	Corn Storage Agreement dated effective as of September 1, 2011 between Lakefield Farmers Elevator, LLC, Heron Lake BioEnergy, LLC and Gavilon, LLC	Attached hereto.
21.1	Subsidiaries of the Registrant	Attached hereto.
31.1	Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.	Attached hereto.
31.2	Certifications of Chief Financial Officer (principal financial officer) pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.	Attached hereto.
32	Certification pursuant to 18 U.S.C. § 1350.	Attached hereto.
101.1	The following materials from Heron Lake BioEnergy, LLC’s Annual Report on Form 10-K for the fiscal year ended October 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

* Indicates compensatory agreement.

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Governors

Heron Lake BioEnergy, LLC and Subsidiaries

Heron Lake, Minnesota

We have audited the accompanying consolidated balance sheets of Heron Lake BioEnergy, LLC and Subsidiaries as of October 31, 2011 and 2010, and the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the fiscal years in the three-year period ended October 31, 2011. Heron Lake BioEnergy, LLC and Subsidiaries’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heron Lake BioEnergy, LLC and Subsidiaries as of October 31, 2011 and 2010, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended October 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company previously incurred operating losses related to difficult market conditions and operating performance. The Company was previously out of compliance with its master loan agreement and had a lower level of working capital than was desired. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

	/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.

	Certified Public Accountants

Minneapolis, Minnesota

January 30, 2012

F-1

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

	October 31, 2011			October 31, 2010

ASSETS
Current Assets
Cash and equivalents	$	7,140,573		$	1,523,318
Restricted cash	367,012			572,224
Restricted certificates of deposit	650,000			400,000
Accounts receivable	1,378,220			5,017,229
Inventory	3,764,616			10,637,023
Prepaid expenses	937,521			104,519
Total current assets	14,237,942			18,254,313

Property and Equipment
Land and improvements	12,265,434			12,208,498
Plant buildings and equipment	94,509,719			94,480,582
Vehicles and other equipment	635,054			620,788
Office buildings and equipment	615,298			605,431
Construction in progress	4,132,965			—
	112,158,470			107,915,299
Less accumulated depreciation	(23,565,525		)	(18,111,652		)
	88,592,945			89,803,647

Other Assets
Restricted cash	59,574			395,982
Other intangible assets, net	415,276			451,643
Debt service deposits and other assets	828,187			634,992
Total other assets	1,303,037			1,482,617

Total Assets	$	104,133,924		$	109,540,577

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

	October 31, 2011			October 31, 2010

LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Checks written in excess of bank balance	$	—		$	913,492
Line of credit	—			3,500,000
Current maturities of long-term debt	4,572,613			50,830,571
Accounts payable:
Trade accounts payable	2,704,707			2,852,083
Trade accounts payable - related party	109,101			955,137
Accrued expenses	421,306			881,215
Lower of cost or market accrued expense	—			707
Derivative instruments	—			101,388
Total current liabilities	7,807,727			60,034,593

Long-Term Debt, net of current maturities	46,844,912			4,068,716

Commitments and Contingencies

Members’ Equity
Controllin g interest in equity:
37,208,074 and 30,208,074 Class A units outstanding at October 31, 2011 and October 31, 2010, respectively	49,508,123			45,437,268
Noncontrolling interest	(26,838		)	—
Total members’ equity	49,481,285			45,437,268

Total Liabilities and Members’ Equity	$	104,133,924		$	109,540,577

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

	Year Ended October 31, 2011			Year Ended October 31, 2010			Year Ended October 31, 2009

Revenues	$	164,120,375		$	110,624,758		$	88,304,596

Cost of Goods Sold
Cost of goods sold	155,571,814			102,786,513			85,448,407
Lower of cost or market adjustment	1,591,810			903,695			5,408,840
Total Cost of Goods Sold	157,163,624			103,690,208			90,857,247

Gross Profit (Loss)	6,956,751			6,934,550			(2,552,651		)

Operating Expenses	(3,613,465		)	(3,857,492		)	(4,515,476		)

Settlement Income	—			2,600,000			—

Operating Income (Loss)	3,343,286			5,677,058			(7,068,127		)

Other Income (Expense)
Interest income	37,078			43,179			78,320
Interest expense	(2,900,470		)	(4,048,634		)	(4,014,448		)
Write off of loan costs	—			—			(444,985		)
Other income	63,123			11,918			119,806
Total other expense, net	(2,800,269		)	(3,993,537		)	(4,261,307		)

Net Income (Loss)	543,017			1,683,521			(11,329,434		)

Net Loss Attributable to Noncontrolling Interest	(27,838		)	—			—

Net Income (Loss) Attributable to Heron Lake BioEnergy, LLC	$	570,855		$	1,683,521		$	(11,329,434	)

Weighted Average Units Outstanding - Basic and Diluted	33,391,636			28,141,942			27,104,625

Net Income (Loss) Per Unit - Basic and Diluted	$	0.02		$	0.06		$	(0.42	)

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

Balance - October 31, 2008	$	50,583,180

Net loss	(11,329,434		)

Balance - October 31, 2009	39,253,746

Capital Issuance — 3,103,449 Class A units, $1.45 per unit, July 2010	4,500,001

Net income	1,683,521

Balance - October 31, 2010	45,437,268

Capital Issuance — 7,000,000 Class A units, $0.50 per unit, May 2011	3,500,000

Capital Issuance for noncontrolling interest	1,000

Net loss attributable to noncontrolling interest	(27,838		)

Net income attributable to Heron Lake BioEnergy, LLC	570,855

Balance - October 31, 2011	$	49,481,285

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended October 31, 2011			Year Ended October 31, 2010			Year Ended October 31, 2009

Cash Flow From Operating Activities
Net income (loss)	$	543,017		$	1,683,521		$	(11,329,434	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	5,490,240			5,578,053			5,645,311
Amortization of loan costs included with interest expense	—			—			22,143
Write off of loan costs	—			—			444,985
Lower of cost or market adjustment	1,591,810			903,695			5,408,840
Unrealized losses on derivative instruments	—			193,590			—
Gain on disposal of assets	—			—			(38,301		)
Non-cash settlement income	—			(500,000		)	—
Change in operating assets and liabilities:
Restricted cash	205,212			(231,580		)	1,021,767
Accounts receivable	3,639,009			(577,528		)	(1,071,625		)
Inventory	6,857,746			(5,981,727		)	4,529,174
Derivative instruments	(107,271		)	(92,202		)	750,172
Prepaid expenses and other	(936,192		)	(59,135		)	406,505
Accounts payable	(993,412		)	621,970			(3,247,499		)
Accrued expenses	(454,026		)	314,735			53,771
Lower of cost or market accrued expense	(1,577,856		)	(2,055,662		)	(10,929,853		)
Net cash provided by (used in) operating activities	14,258,277			(202,270		)	(8,334,044		)

Cash Flows from Investing Activities
Proceeds from sale of assets	—			—			177,516
Payments for restricted certificates of deposit	(250,000		)	(400,000		)
Capital expenditures	(4,243,171		)	(119,047		)	(349,521		)
Payment for other intangibles	—			—			(59,835		)
Net cash used in investing activities	(4,493,171		)	(519,047		)	(231,840		)

Cash Flows from Financing Activities
Checks written in excess of bank balance	(913,492		)	913,492			—
Proceeds from (payments on) line of credit, net	(3,500,000		)	(1,500,000		)	5,000,000
Payments on long-term debt	(4,219,512		)	(5,100,700		)	(4,992,343		)
Proceeds from note payable	737,750
Debt service deposits	—			—			(26,850		)
Release of restricted cash	336,408			322,808			414,076
Issuance of member units	3,500,000			4,500,001			—
Cost of raising capital	(90,005		)	(75,040		)	—
Noncontrolling interest investment	1,000			—			—
Net cash provided by (used in) financing activities	(4,147,851		)	(939,439		)	394,883

Net Increase (Decrease) in cash and equivalents	5,617,255			(1,660,756		)	(8,171,001		)

Cash and Equivalents - Beginning of period	1,523,318			3,184,074			11,355,075

Cash and Equivalents - End of period	$	7,140,573		$	1,523,318		$	3,184,074

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended October 31, 2011		Year Ended October 31, 2010		Year Ended October 31, 2009

Supplemental Disclosure of Cash Flow Information
Interest expense paid	$	3,377,199	$	3,660,433	$	4,040,240

Supplemental Disclosure of Non-Cash Activities
Release of retainage payable as part of legal settlement	$	—	$	3,834,319	$	—
Fair value of equipment received as part of settlement income	$	—	$	500,000	$	—

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company owns and operates a 50 million gallon ethanol plant near Heron Lake, Minnesota with ethanol distribution throughout the continental United States. In addition, the Company produces and sells distillers grains with solubles as co-products of ethanol production. The Company was formed on April 12, 2001 to have an indefinite life. The Company converted the plant from being coal fuel to natural gas fuel in November 2011.

Principles of Consolidation

The financial statements include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiaries, Lakefield Farmers Elevator, LLC and HLBE Pipeline Company, LLC, collectively, the “Company.” HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (Agrinatural); the remaining 27% is included in the consolidated financial statements as a noncontrolling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Fiscal Reporting Period

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

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the carrying value and useful lives of property and equipment, analysis of impairment on long-lived assets, contingencies and valuation of forward purchase contract commitments and inventory. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Noncontrolling Interest

Amounts recorded as noncontrolling interest relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 10 years, with two renewal options for five year periods.

Revenue Recognition

Revenue from sales is recorded when title transfers to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed and determinable. The title transfers when the product is loaded into the railcar or truck, the customer takes ownership and assumes risk of loss.

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

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

Cash and Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash and equivalents.

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

Restricted Cash

The Company is periodically required to maintain cash balances at its broker related to derivative instrument positions, as part of a loan agreement.

Restricted Certificates of Deposit

The Company maintains restricted certificates of deposit as part of its grain dealer’s license.

Accounts Receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.

Accounts receivable are recorded at estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Accounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At October 31, 2011 and 2010, the Company was of the belief that such accounts would be collectable and thus an allowance was not considered necessary.

Inventory

Inventory consists of raw materials, work in process, finished goods, supplies, and other grain inventory. Raw materials are stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Work in process and finished goods, which consists of ethanol and distillers grains produced, if any, is stated at the lower of average cost or market. Other grain inventory, which consists of agricultural commodities, is valued at market value (net realizable value). Other grain inventory is readily convertible to cash because of its commodity characteristics, widely available markets and international pricing mechanisms. Other grain inventory is also freely traded, has quoted market prices, may be sold without significant further processing, and has predictable and insignificant disposal costs.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

Derivative Instruments

From time to time, the Company enters into derivative transactions to protect gross margins from potentially adverse effects of market and price volatility in future periods. In order to reduce the risks caused by market fluctuations, the Company hedges a portion of its anticipated corn and natural gas purchases, and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn and natural gas in the Company’s ethanol production activities and the related sales price of ethanol produced. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions.

The Company generally does not designate these derivative instruments as hedges for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value caused from marking these instruments to market, recognized in current period earnings or losses on a monthly basis. While the Company does not designate the derivative instruments that it enters into as hedging instruments because of the administrative costs associated with the related accounting, the Company believes that the derivative instruments represent an economic hedge.

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

The Company evaluates its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales.” Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Certain corn, ethanol and distillers grains contracts that meet the requirement of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements, and therefore, are not marked to market in our financial statements.

Other Intangibles

Other intangibles are stated at cost and include road improvements located near the plant in which the Company has a beneficial interest in but does not own the road. The Company amortizes the assets over the economic useful life of 15 years.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided over an estimated useful life by use of the straight-line deprecation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Construction in progress is comprised of costs related to the construction of the ethanol plant facilities. Interest is capitalized during the construction period. Depreciable useful lives are as follows:

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

The Company has construction in progress at October 31, 2011 of approximately $4,133,000 related to the construction of the natural gas equipment and connection to the plant. The construction was completed in fiscal 2012 related to the conversion from coal. The Company had approximately $500,000 remaining on construction in progress at October 31, 2011.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

Long-Lived Assets

The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition of construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

The Company’s ethanol production facilities, has an installed capacity of 50 million gallons per year. The carrying value of these facilities at October 31, 2011 was approximately $88.6 million. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facilities based on projected future cash flows from operations over the facilities’ estimated useful lives. Management has determined that the projected future undiscounted cash flows from operations of these facilities exceed their carrying value at October 31, 2011; therefore, no impairment loss was indicated or recognized. In determining the projected future undiscounted cash flows, the Company has made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity. Given the uncertainties in the ethanol industry, should management be required to adjust the carrying value of the facilities at some future point in time, the adjustment could be significant and could significantly impact the Company’s financial position and results of operations. No adjustment has been made to these financial statements for this uncertainty.

Deferred Loan Costs

Costs associated with the issuance of the debt discussed in Note 9 and 10 were recorded as deferred loan costs, net of accumulated amortization. Loan costs are amortized to operations over the term of the related debt using the effective interest method. During fiscal 2009, the Company expensed the remaining unamortized loan costs totaling approximately $445,000 associated with this debt when it was classified as current.

Deferred Offering Costs

The Company defers the costs incurred to raise equity financing until that financing occurs. At such time that the issuance of new equity occurs, these costs will be netted against the proceeds received.

Fair Value of Financial Instruments

On November 1, 2008, the Company adopted guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. On November 1, 2009, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).

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

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

· Level 2 includes:

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

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

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

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

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

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our balance sheets, the Company has elected not to record any other assets or liabilities at fair value. No events occurred during the years ended October 31, 2011 or 2010 that required adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

The carrying value of cash and equivalents, restricted cash, restricted certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. The fair value of long-term debt has been estimated using discounted cash flow analysis based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The fair value of outstanding debt will fluctuate with changes in applicable interest rates. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company’s debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. The Company believes the carrying amount of the revolving term loan and line of credit approximates the fair value.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

The Company estimates the fair value of debt based on the difference between the market interest rate and the stated interest rate of the debt. The carrying amount and the fair value of long-term debt are as follows:

	Carrying Amount		Fair Value

Long-term debt at October 31, 2011	$	51,417,525	$	51,417,525
Long-term debt at October 31, 2010	$	54,899,287	$	52,885,420

Income Taxes

The Company is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of the members. Therefore, no provision or liability for federal or state income taxes has been included in these financial statements. Differences between financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the alternative depreciation system (ADS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences. The Company’s tax year end is December 31. Primarily due to the partnership tax status, the Company does not have any significant tax uncertainties that would require disclosure. The Company recognizes and measures tax benefits when realization of the benefits is uncertain under a two-step approach. The first step is to determine whether the benefit meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Primarily due to the Company’s tax status as a partnership, the adoption of this guidance had no material impact on the Company’s financial condition or results of operations.

The Company files income tax returns in the U.S. federal and Minnesota state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2008.

Net Income (Loss) per Unit

Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income (loss) by the weighted average number of members’ units and members’ unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, for all periods presented, the calculations of the Company’s basic and diluted net income (loss) per unit are the same.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

Environmental Liabilities

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

Reclassifications

The Company made reclassifications to certain fees received in the Consolidated Statement of Operations for the 2010 and 2009 to conform to classifications for 2011. The Company also made reclassifications for certain restricted cash amounts to be included with restricted certificates of deposit in the Consolidated Balance Sheet as of October 31, 2010 to conform to classifications at October 31, 2011. These reclassifications had no effect on members’ equity or net income as previously presented. The change related to restricted certificates of deposit increased operating cash flows by $400,000 and increased cash used in financing activities.

2. GOING CONCERN

The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has previously disclosed losses related to operations related to difficult market conditions and operating performance. The Company has had instances of unwaived debt covenant violations and had been operating under forbearance agreements with AgStar Financial Services, PCA (“AgStar”). In addition, the Company’s working capital was at a lower level than desired. These conditions contributed to the long-term debt with AgStar being classified as current in previously filed financial statements. These factors and the continual volatile commodity prices raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has continued to make changes to operations of the plant, renegotiated with AgStar, and enhance working capital. To this end, the Company began converting the plant from a coal-fired ethanol plant to a natural gas plant in October 2011. This conversion was completed in fiscal 2012. The Company believes the conversion will reduce production and operating costs, reduce interest costs, and improve operating profitability. In May 2011, the Company raised an additional $3.5 million from Project Viking, LLC (“Project Viking”) to help finance the natural gas conversion and to improve working capital. The Company closed on approximately $707,000 of additional equity in November 2011.

In September 2011, the Company entered into a restructured loan agreement with AgStar that superseded and replaced past loan agreements with AgStar including the forbearance agreements. This restructured loan agreement extends the maturity date of the Company’s long-term debt, maintains and extends the existing available balance on the revolving portion of the long-term debt, and allowed the Company to reclassify the debt to long-term. As part of this restructured loan agreement, the Company repaid the revolving line of credit with AgStar in September 2011. The repayment of the revolving line of credit was done as part of the change in ethanol and distillers marketers to Gavilon, LLC (“Gavilon”) in September 2011 as described in Note 14. In addition to assuming responsibility for marketing the ethanol and distillers products for the Company, Gavilon will assist the Company with certain risk management activities.

While the Company believe these changes will improve the operating performance of the plant, provide additional working capital, and reduce the effects on our plant of volatility in the industry, it is not yet certain as to whether these efforts and changes will be successful.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

3. UNCERTAINTIES

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 75% - 85% of total revenues and corn costs average 65% - 75% of cost of goods sold.

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

4. FAIR VALUE MEASUREMENTS

The following table provides information on those assets and liabilities measured at fair value on a recurring basis.

	Fair Value as of			Fair Value Measurement Using
	October 31, 2010			Level 1			Level 2		Level 3

Commodity derivative instruments	$	(101,388	)	$	(101,388	)	$	—	$	—

The fair value of the derivative instruments is based on quoted market prices in an active market.

5. CONCENTRATIONS

The Company sells all of the ethanol and distiller grains produced to one customer under marketing agreements at October 31, 2011. Prior to the change in marketers as describe in Note 13, the Company sold all of its ethanol and distillers grain to two customers. At October 31, 2011 and 2010, these customers comprised nearly all of accounts receivable.

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HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

6. INVENTORY

Inventory consists of the following at October 31:

	2011		2010

Raw materials	$	593,761	$	5,995,564
Work in process	978,967		1,042,844
Finished goods	—		2,021,672
Supplies	840,756		826,213
Other grains	1,351,132		750,730
Totals	$	3,764,616	$	10,637,023

The Company recorded losses of approximately $15,000, $97,000 and $352,000 for the fiscal years ended October 31, 2011, 2010 and 2009 respectively, related to inventory, in addition to losses recorded on forward purchase contracts as noted in Note 14, where the market value was less than the cost basis, attributable primarily to decreases in market prices of corn and ethanol. The loss was recorded with the lower of cost or market adjustment in the statement of operations. In addition, the Company stored grain inventory for farmers. The value of these inventories owned by others is approximately $105,000 and $2,543,000 based on market prices at October 31, 2011 and 2010, respectively, and is not included in the amounts above.

7. DERIVATIVE INSTRUMENTS

As of October 31, 2011, the Company has no corn or ethanol derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the Consolidated Balance Sheet. As of October 31, 2010, the Company recorded a liability for derivative instruments of approximately $101,000 at fair value in the Consolidated Balance Sheet. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item and when the Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge. The Company does not enter into derivative transactions for trading purposes.

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

The following tables provide details regarding the gains and (losses) from the Company’s derivative instruments in Consolidated Statements of Operations, none of which are designated as hedging instruments:

	Statement of	Twelve Months Ended October 31,
	Operations location	2011			2010			2009
Corn contracts	Cost of goods sold	$	(432,000	)	$	(1,007,000	)	$	1,207,000
Ethanol contracts	Revenues	(24,000		)	(171,000		)	373,000
Totals		$	(456,000	)	$	(1,178,000	)	$	1,580,000

F-15

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

8. LINE OF CREDIT

In September 2011, the Company negotiated a new debt agreement with AgStar Financial Services, PCA (AgStar) as described in Note 9, that superseded past agreements including the forbearance agreements. As part of those agreements, the Company repaid the line of credit and the line was closed in September 2011. Interest accrued on borrowings at the greater of 6.0% or the one month LIBOR plus 3.25%, which totaled 3.51% at October 31, 2010. The Company paid a 0.25% commitment fee on the average daily unused portion of the line of credit. At October 31, 2010 outstanding borrowings on the line of credit were $3.5 million.

9. LONG-TERM DEBT

Long-term debt consists of the following:

	October 31		October 31
	2011		2010

Term note payable to lending institution, see terms below.	$	39,747,497	$	48,967,611

Revolving term note payable to lending institution, see terms below.	6,864,561		1,155,872

Balance forward	$	46,612,058	$	50,123,483

F-16

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

	October 31		October 31
	2011		2010
Balance from previous page	$	46,612,058	$	50,123,483

Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. The Company is required to make deposits over 24 months, which began in January 2007, for one years’ worth of debt service payments that are held on deposit to be applied with the final payments of the assessment.	2,653,090		2,837,720

Assessment payable as part of water treatment agreement, due in semi-annual installments of $25,692 with interest at 0.50%, enforceable by statutory lien, with the final payment due in 2016.	253,118		302,988

Assessment payable as part of water supply agreement, due in monthly installments of $4,126 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.	264,309		290,462

Note payable for equipment, with monthly payments of $2,371 including effective interest of 6.345%, due in April 2012, secured by equipment.	13,860		40,505

Note payable to electrical provider, with monthly payments of $29,775 including implicit interest of 1.50%, due in December 2013, secured by equipment and restricted cash.	439,590		785,379

Note payable to electrical company with monthly payments beginning in October 2009 of $6,250 with a 1% maintenance fee due each October, due September 2017. The electrical company is a member of the Company.	443,750		518,750

Note payable to financial institutions initially for the construction of the pipeline assets due initially in December 2011, extended until February 2012. The note is convertible into a term loan upon meeting certain conditions in February 2012 with a three year repayment period. Interest is at 5.75% and the note is secured by substantially all assets of Agrinatural, LLC and a debt guarantee by as described in Note 10.	737,750		—
Totals	51,417,525		54,899,287
Less amounts due within one year	4,572,613		50,830,571

Net long-term debt	$	46,844,912	$	4,068,716

F-17

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

At October 31, 2010 and during 2011, the Company was not in compliance with certain provisions of the AgStar loan agreements and therefore had classified the loans with them as current. Following changes made to the loan agreements with AgStar in September 2011, the Company reclassified the debt to long-term.

Term Note Payable

In September 2011 AgStar replaced and superseded the Company’s existing loan agreements, related loan documents and the amended forbearance agreements. The Company has a five-year term loan initially amounting to $40,000,000, comprised of two tranches of $20,000,000 each, with the first tranche bearing interest at a variable rate equal to the greater of LIBOR plus 3.50% or 5.0%, and the second tranche bearing interest at 5.75%. The Company must make equal monthly payments of principal and interest on the term loan based on a ten-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on the maturity date of September 1, 2016. In addition, the Company is required to make additional payments annually on debt for up to 25% of the excess cash flow, as defined by the agreement, up to $2 million per year. As part of the agreement, the premium above LIBOR on the loans may be reduced based on a financial ratio. The loan agreements are secured by substantially all business assets and are subject to various financial and non-financial covenants that limit distributions and debt and require minimum debt service coverage, net worth, and working capital requirements.

Prior to the changes in 2011, the Company was charged interest on the term note payable at LIBOR plus 3.25%. The Company had locked in an interest rate of 6.58% on $45 million of the note for three years ending in April 2011. The term note scheduled to mature in October 2012.

Revolving Term Note

The Company also obtained a five-year term revolving loan commitment in the amount of $8,008,689, under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016. Amounts borrowed by the Company under the term revolving loan and repaid or prepaid may be re-borrowed at any time prior to maturity date of the term revolving loan, provided that outstanding advances may not exceed the amount of the term revolving loan commitment. Amounts outstanding on the term revolving loan bear interest at a variable rate equal to the greater of a LIBOR rate plus 3.50% or 5.0%, payable monthly. The Company also pays an unused commitment fee on the unused portion of the term revolving loan commitment at the rate of 0.35% per annum, payable in arrears in quarterly installments during the term of the term revolving loan. Under the terms of the new agreement, the term revolving loan commitment is scheduled to decline by $500,000 annually, beginning on September 1, 2012 and each anniversary date thereafter. The maturity date of the term revolving loan is September 1, 2016. The Company does have a $600,000 outstanding standby letter of credit at October 31, 2011.

Prior to the changes in September 2011, the revolving term note had an interest rate of LIBOR plus 3.25%. The Company had accrued default interest of 2.0% from February 2010 to July 2010 because of covenant defaults. AgStar agreed in 2011 to waive 50% of the default interest during 2011. The revolving term note was scheduled to mature in October 2012.

Estimated maturities of long-term debt at October 31, 2011 are as follows:

2012	$	4,572,613
2013	3,745,574
2014	4,210,387
2015	4,563,146
2016	32,627,401
After 2016	1,698,404

Total long-term debt	$	51,417,525

F-18

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

10. MEMBERS’ EQUITY

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

In July 2010, the Company sold to Project Viking, L.L.C. (“Project Viking”), a related party, 3,103,449 of its Class A units at a price per unit of $1.45 for total gross proceeds to the Company of approximately $4.5 million as described in Note 13.

In 2010 the Company commenced a subscription rights offering to holders of its Class A units who are residents of the State of Minnesota initially for 4,700,000 Class A units for $1.45 per unit. In 2011, this offering was changed to offer 16,500,000 Class A units at a purchase price of $0.50 per unit. No eligible Class A unit holder could purchase more than 77.73% of the Units currently held by such unit holder as of August 30, 2011. In addition, purchasers of units were also required to deposit $.125 per unit into an escrow account that will be held to guarantee any potential debt of the Agrinatural. The offering period expired on October 15, 2011. The Company closed on the offering in November 2011 having sold 1,414,033 Class A units for approximately $707,000. The Company also collected approximately $177,000 related to the debt guarantee of the Agrinatural debt. The purchase price, percentage limitation and offering period were determined to comply with the terms of the May 2011 Subscription Agreement between the Company and Project Viking. At that time, Project Viking invested $3.5 million in the Company for 7,000,000 Class B units. These units sold to Project Viking were subsequently converted to Class A units. Project Viking agreed to guarantee up to $1 million of Agrinatural’s debt as part of its investment.

11. LEASES

The Company leases equipment, primarily rail cars, under operating leases through 2017. Equipment under operating lease primarily represents rail cars for which the rentals began in August 2007. Rent expense for fiscal 2011, 2010, and 2009 was approximately $1.9 million, $1.9 million, and $844,000, respectively.

At October 31, 2011, the Company had the following minimum future lease payments, which at inception had non-cancelable terms of more than one year:

2012	$	1,647,589
2013	1,562,988
2014	1,216,009
2015	833,280
2016	832,720
Thereafter	693,000

Total lease commitments	$	6,785,586

F-19

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

12. INCOME TAXES

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

	2011			2010

Consolidated financial statement basis of assets	$	104,133,924		$	109,540,577
Plus: Organization and start-up costs capitalized	1,952,135			2,181,759
Less: Accumulated tax depreciation and amortization greater than financial statement basis	(25,804,453		)	(20,379,880		)

Income tax basis of assets	$	80,281,606		$	91,342,456

	2011			2010

Consolidated financial statement basis of liabilities	$	54,652,639		$	64,103,305
Less: Accrued expenses	(421,306		)	(881,922		)
Less: Unrealized losses on derivatives	—			(101,388		)

Income tax basis of liabilities	$	54,231,333		$	63,119,995

13. RELATED PARTY TRANSACTIONS

As discussed in Note 10, pursuant to a subscription agreement, Project Viking invested $3.5 million in May 2011 in the Company for 7,000,000 Class B units, which were subsequently converted to Class A units.

In July 2010, the Company issued to Project Viking 3,103,449 Class A units at a price per unit of $1.45 for total gross proceeds to the Company of approximately $4.5 million. All proceeds from the sale of the units to Project Viking were used to reduce the principal balance of the Company’s revolving line of credit note with AgStar.

The Company purchased approximately $57,451,000, $43,233,000and $45,266,000 of corn from members in fiscal years 2011, 2010 and 2009, respectively.

Please refer to the section titled “Legal Proceedings” in Note 14 for information on the settlement of the arbitration proceedings between the Company and Fagen, Inc., a related party through its relationship with Project Viking. In addition, one of the conditions to the effectiveness of the Settlement Agreement was the release of Roland J. Fagen by AgStar from his obligations under his personal guaranty of $3.74 million of the Company’s indebtedness to AgStar under the Company’s master loan agreement. The effective date of the release of Mr. Fagen’s personal guaranty was July 2, 2010.

F-20

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

14. COMMITMENTS AND CONTINGENCIES

Water Agreements

In October 2003, the Company entered into an industrial water supply development and distribution agreement with the City of Heron Lake for 15 years. The Company has the exclusive rights to the first 600 gallons per minute of capacity that is available from the well, and provides for the Company, combined with Minnesota Soybean Processors (MnSP), to approve any other supply contracts that the City may enter into. In consideration, the Company will pay one half of the City’s water well bond payments of $735,000, plus a 5% administrative fee, totaling approximately $594,000, and operating costs, relative to the Company’s water usage, plus a 10% profit. These costs will be paid as water usage fees. The Company recorded an assessment of approximately $367,000 with long-term debt as described in Note 9. The Company pays operating and administrative expenses of approximately $12,000 per year.

In May 2006, the Company entered into a water treatment agreement with the City of Heron Lake and Jackson County for 30 years. The Company will pay for operating and maintenance costs of the plant in exchange for receiving treated water. In addition, the Company agreed to an assessment for a portion of the capital costs of the water treatment plant. The Company recorded assessments with long-term debt of $500,000 and $3,550,000 in fiscal 2007 and 2006, respectively, as described in Note 9. The Company paid operating and maintenance expenses of approximately $287,000, $327,000 and 370,000 in fiscal 2011, 2010 and 2009, respectively.

Marketing Agreements

The Company entered into a termination agreement with its previous marketers to terminate the marketing agreements the Company had with each, with termination dates of August 31, 2011. The Company assumed certain rail car leases with the termination of the ethanol marketing agreement and will pay a termination fee of $325,000 over the remaining term of the original contract, which is scheduled to end September 30, 2012.

F-21

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

Legal Proceedings

Permit Matters

The costs associated with obtaining and complying with permits and complying with environmental laws have increased the Company’s costs of construction, production and continued operation. In particular, the Company has incurred significant expense relating to its air-emission permit in four categories: (1) obtaining the air emissions permit from the Minnesota Pollution Control Agency (“MPCA”); (2) compliance with the air emissions permit and the terms of the Company’s compliance agreement with the MPCA; (3) the Company’s dispute under the design-build agreement with Fagen, Inc. relating to equipment failures, warranty claims and other claims regarding air emissions at its plant that was the subject of an arbitration action that was settled on July 2, 2010 as described below; and (4) a March 2008 notice of violation from the MPCA that was resolved in December 2010 though a stipulation agreement.

On December 16, 2010, the MPCA issued a permit to the Company that supersedes its previously granted air permit and the compliance agreement. The permit establishes the applicable limits for each type of emission generated by the Company’s ethanol plant. The permit also requires the Company to take additional actions relating to its plant and its operations within certain time frames.

On December 16, 2010, the Company entered into a stipulation agreement with the MPCA relating to the March 2008 notice of violation. Under the stipulation agreement, the Company agreed to pay a civil penalty of $66,000, of which $54,000 was paid within thirty days and up to $12,000 may be satisfied through the Company’s delivery of a building capture efficiency study.

While the Company’s air emissions permit issue was resolved with the December 16, 2010 issuance of a new air permit by the MPCA, the Company’s arbitration action against Fagen, Inc. has been settled, and the Company has addressed the notice of violation through a stipulation agreement, the Company anticipates future expense associated with compliance with its air permit and environmental laws. A violation of environmental laws, regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations and/or plant shutdown, any of which could have a material adverse effect on the Company’s operations.

Fagen Design-Build Dispute and Settlement

On September 28, 2005, the Company executed a Design-Build Agreement with Fagen, Inc. (“Fagen”) by which Fagen agreed to design and build a 50 million gallon per year coal-fired ethanol plant in Heron Lake, Minnesota, for a contract price of approximately $76,000,000. On September 18, 2009, the Company served and filed on Fagen a demand for arbitration and request for mediation relating to the Design-Build Agreement and the air emissions warranties under the Design-Build Agreement. In the demand for arbitration, the Company alleged various breaches of the Design-Build Agreement, negligence and negligent misrepresentation by Fagen. On January 4, 2010, Fagen requested to join ICM, Inc. (“ICM”) as a party to the arbitration action and on January 27, 2010, ICM, Inc. agreed to be joined.

On July 2, 2010, the Company, Fagen and ICM entered into a Mutual Release and Settlement Agreement (“Settlement Agreement”) relating to the arbitration commenced by the Company in September 2009. Although ICM joined in the arbitration action, no claims against ICM, or answers, defenses, counterclaims or cross-claims by ICM, had been filed as of the date the Settlement Agreement was entered into. Under the terms of the Settlement Agreement, Fagen made a one-time cash payment to the Company, and released its claims to other amounts it claimed were owed by the Company under the Design-Build Agreement. In the Settlement Agreement, each party provided the other with full releases of all claims in the arbitration, relating to the Company’s ethanol plant, or relating to the Design-Build Agreement, except for certain claims arising under the ICM license agreement, which license agreement continues in full force and effect following the Settlement Agreement. The effective date of the Settlement Agreement was July 2, 2010.

In furtherance of the Settlement Agreement, the Company, Fagen and ICM stipulated to the dismissal of the arbitration, along with their respective asserted and unasserted claims, with prejudice. The American Arbitration Association acknowledged the stipulation of dismissal with prejudice on July 27, 2010.

From the settlement, the Company recorded $2.6 million of settlement income from cash and noncash proceeds during July 31, 2010 representing reimbursement for incremental expenses incurred by the Company due to design issue of the plant. Also, the construction payable of approximately $3.8 million was extinguished during the quarter ended July 31, 2010, reducing current liabilities and fixed assets as this adjustment represented a price adjustment of the plant. In connection with the settlement and with the Company’s forbearance agreement with AgStar, the Company sold Class A units as described in Notes 10 and 13.

F-22

Table of Contents

HERON LAKE BIOENERGY, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

October 31, 2011 and 2010

Coal Contract Termination Dispute

Following conversion by the Company from coal to natural gas as its primary fuel, and specifically in late October 2011, the Company received correspondence from its coal supplier, Northern Coal Transportation Company, claiming that there was a “shortfall” in the Company’s coal purchases. The correspondence further claimed that the Company is indebted to Northern Coal for approximately $929,000 for this shortfall. The Company responded in December 2011 and contested both the claim that there was any shortfall in coal purchases, as well as the calculation of any claimed shortfall. In this response, the Company also sought documentary verification of the claim by Northern Coal. The Company has not received the requested information or documentary support from Northern Coal. In January 2012, the Company received additional correspondence from Northern Coal claiming the Company now owned approximately $1,800,000. The Company has not recorded an accrual for any possible settlement involved in this dispute.

Forward Contracts

The Company has natural gas agreements with a minimum commitment of approximately 1.9 million MMBTU per year until October 31, 2014.

The Company recorded a loss on corn purchase commitments of approximately $1,577,000, $807,000and 5,056,000 for the twelve months ended October 31, 2011, 2010 and 2009 respectively. The loss was recorded as a lower of cost or market adjustment on the Consolidated Statement of Operations. The amount of the loss was determined by applying a methodology similar to that used in the lower of cost or market evaluation with respect to inventory. Given the uncertainty of future ethanol prices, this loss may or may not be recovered, and further losses on the outstanding purchase commitments could be recorded in future periods.

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary quarterly results are as follows:

	First		Second		Third			Fourth
	Quarter		Quarter		Quarter			Quarter
Fiscal year ended October 31, 2011
Revenues	$	39,199,181	$	38,022,811	$	43,013,930		$	43,884,453
Gross profit (loss)	3,226,245		1,840,466		688,880			1,201,160
Operating income (loss)	2,530,477		1,071,699		(182,475		)	76,415
Net income (loss)	1,676,923		438,674		(724,737		)	(847,843		)
Basic and diluted earnings (loss) per unit	0.06		0.01		(0.02		)	(0.03		)

	First		Second			Third			Fourth
	Quarter		Quarter			Quarter			Quarter
Fiscal year ended October 31, 2010
Revenues	$	29,413,131	$	25,698,413		$	23,621,607		$	31,891,607
Gross profit (loss)	4,551,412		699,690			(822,069		)	2,505,517
Operating income (loss)	3,539,838		(342,423		)	934,978			1,544,666
Net income (loss)	2,618,162		(1,492,613		)	(173,026		)	730,998
Basic and diluted earnings (loss) per unit	0.10		(0.06		)	(0.01		)	0.03

	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter
Fiscal year ended October 31, 2009
Revenues	$	18,095,366		$	21,493,104		$	22,196,118		$	26,520,008
Gross profit (loss)	(3,792,335		)	(1,197,101		)	(1,088,284		)	3,525,069
Operating income (loss)	(4,800,853		)	(1,902,778		)	(2,720,450		)	2,355,954
Net income (loss)	(6,246,806		)	(2,777,933		)	(3,785,147		)	1,480,452
Basic and diluted earnings (loss) per unit	(0.23		)	(0.10		)	(0.14		)	0.05

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

F-23

Exhibit 10.40

CERTAIN INFORMATION INDICATED BY [ * * * ] HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.

FIFTH AMENDED AND RESTATED

MASTER LOAN AGREEMENT

by and among

HERON LAKE BIOENERGY, LLC

and

AGSTAR FINANCIAL SERVICES, PCA

dated

to be effective as of

September 1, 2011

TABLE OF CONTENTS

			Page

RECITALS			1

AGREEMENT			3

ARTICLE I.	DEFINITIONS AND ACCOUNTING MATTERS		3

Section 1.01.		Certain Defined Terms	3
Section 1.02.		Accounting Matters	12
Section 1.03.		Construction	13

ARTICLE II	AMOUNTS AND TERMS OF THE LOANS		13

Section 2.01.		Loans	13
Section 2.02.		Term Loan	13
Section 2.03.		Term Revolving Loan	14
Section 2.04.		Adjustments to Interest Rate	18
Section 2.05.		Default Interest	19
Section 2.06.		Late Charge	19
Section 2.07.		Changes in Law Rendering Certain LIBOR Rate Loans Unlawful	19
Section 2.08.		Payments and Computations	19
Section 2.09.		Maximum Amount Limitation	20
Section 2.10.		Lender Records	21
Section 2.11.		Loan Payments	21
Section 2.12.		Purchase of Equity Interests in AgStar Financial Services, PCA	21
Section 2.13.		Compensation	21
Section 2.14.		Funds Held Program	22
Section 2.15.		Underwriting/Participation/Facility Fees	23

ARTICLE III.	CONDITIONS PRECEDENT		23

Section 3.01.		Conditions Precedent to Preliminary Advances	23

ARTICLE IV.	REPRESENTATIONS AND WARRANTIES		26

Section 4.01		Representations and Warranties of the Borrower	26

ARTICLE V.	COVENANTS OF THE BORROWER		29

Section 5.01.		Affirmative Covenants	29
Section 5.02.		Negative Covenants	37

ARTICLE VI.	EVENTS OF DEFAULT AND REMEDIES		40

Section 6.01.		Events of Default	40
Section 6.02.		Remedies	43
Section 6.03.		Remedies Cumulative	44

ARTICLE VII.	MISCELLANEOUS		44

Section 7.01.		Amendments, etc.	44
Section 7.02.		Notices, etc.	44
Section 7.03.		No Waiver; Remedies	45
Section 7.04.		Costs, Expenses and Taxes	46
Section 7.05.		Right of Set-off	46
Section 7.06.		Severability of Provisions	46
Section 7.07.		Binding Effect; Successors and Assigns; Participations	46
Section 7.08.		Consent to Jurisdiction	47
Section 7.09.		Governing Law	47
Section 7.10.		Execution in Counterparts	47
Section 7.11.		Survival	48
Section 7.12.		WAIVER OF JURY TRIAL	48
Section 7.13.		Entire Agreement	48

LIST OF SCHEDULES AND EXHIBITS

Schedule 3.01(d)		Real Property
Schedule 4.01(a)		Description of Certain Transactions Related to the Borrower’s Stock
Schedule 4.01(c)		Governmental Approvals
Schedule 4.01(f)		Description of Certain Threatened Actions, etc.
Schedule 4.01(k)		Location of Inventory and Farm Products; Third Parties in Possession; Crops
Schedule 4.01(l)		Office Locations; Fictitious Names; Etc.
Schedule 4.01(p)		Intellectual Property
Schedule 4.01(t)		Environmental Compliance
Schedule 5.01(o)		Management
Schedule 5.02(a)		Description of Certain Liens, Lease Obligations, etc.
Schedule 5.02(k)		Transactions with Affiliates
Schedule 5.02(l)		Management Fees and Compensation

Exhibit A		Compliance Certificate

FIFTH AMENDED AND RESTATED

MASTER LOAN AGREEMENT

THIS FIFTH AMENDED AND RESTATED MASTER LOAN AGREEMENT (this “ Agreement ”), dated to be effective as of September 1, 2011, between AGSTAR FINANCIAL SERVICES, PCA, a United States corporation (“ Lender ”) and HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (“ Borrower ”).

RECITALS

A. Borrower is indebted to Lender under a Term Note dated October 1, 2007, in the original principal amount of $59,583,000.00 (“ Note One ”), a Term Revolving Note dated October 1, 2007, in the original principal amount of $5,000,000.00 (“ Note Two ”), and a Third Amended and Restated Revolving Line of Credit Note dated December 30, 2010, in the original principal amount of $6,750,000.00 (as the same has been modified from time to time, “ Note Three ”). As of August 31, 2011, the outstanding principal balance (plus accrued but unpaid interest, fees and costs) on Note One is $40,000,000.00 and on Note Two is $8,426,134.13. As a condition for the closing of the transactions contemplated under this Agreement, the outstanding principal balance (plus accrued but unpaid interest, fees and costs) on Note Three will be paid or otherwise satisfied in full.

B. Borrower’s obligations to the Lender are further evidenced by the Fourth Amended and Restated Master Loan Agreement dated as of October 1, 2007, as amended by that certain First Amendment to Fourth Amended and Restated Master Loan Agreement dated April 27, 2011 (together, the “ 2007 MLA ”); the Third Supplement to the Master Loan Agreement (Term Loan) dated as of October 1, 2007 (the “ Third Supplement ”); the Amended and Restated Fourth Supplement to the Master Loan Agreement (Term Revolving Loan) dated as of April 27, 2011 (the “ Fourth Supplement ”); and the Amended and Restated Fifth Supplement to the Master Loan Agreement dated December 30, 2010 (which document was erroneously captioned First Amendment to Fifth Supplement to the Master Loan Agreement), as amended by the First Amendment to Amended and Restated Fifth Supplement dated March 1, 2011, Amendment No. 2 to Amended and Restated Fifth Supplement dated April 27, 2011, Amendment No. 3 to Amended and Restated Fifth Supplement dated June 30, 2011, and Amendment No. 4 to Amended and Restated Fifth Supplement dated August 1, 2011 (collectively, as amended, the “ Fifth Supplement ”) between Borrower and Lender.

C. The above-described loans (the “ Loans ”) were made by Lender to Borrower for the purpose of constructing and operating an ethanol production facility near Heron Lake, Minnesota (the “ Project ”).

D. The Loans are secured by, among other things: (i) a Mortgage, Security Agreement and Assignment of Rents and Leases dated September 29, 2005, recorded in the Office of the County Recorder of Jackson County on September 30, 2005, as Instrument No. 244879, as amended and restated by that certain Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated November 20, 2006, recorded in the Office of the County Recorder of Jackson County on December 6, 2006 as Instrument No. 248498; as amended and restated by that certain Second Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated December 27, 2006, recorded in the Office of the County Recorder of Jackson County on December 27, 2006 as Instrument No. 248658, as amended and restated by that certain Third Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated May 18, 2007, recorded in the Office of the County Recorder of Jackson County on June 4, 2007 as Instrument No. A 250019 (collectively, as amended, the “ Mortgage ”) under which Lender was granted a lien in certain real property located in Jackson County, Minnesota, as described in the Mortgage (the “ Real Property ”); (ii) security interests in

all of the Personal Property assets of the Borrower (the “ Collateral ”) pursuant to the provisions of a Security Agreement dated September 29, 2005 (the “ Security Agreement ”); and (iii) collateral assignments of material contracts, deposit account control agreements, commodity account control agreements, and such other documents, instruments and agreements as required under the 2007 MLA as amended, modified and supplemented from time to time.

E. As the result of various defaults by the Borrower under the 2007 MLA and supplements described above, Borrower and Lender entered into a Forbearance Agreement dated as of July 2, 2010, a First Amendment to Forbearance Agreement dated December 31, 2010, a Second Amendment to Forbearance Agreement dated March 1, 2011, a Third Amendment to Forbearance Agreement dated April 27, 2011, a Fourth Amendment to Forbearance Agreement dated June 30, 2011, and a Fifth Amendment to Forbearance Agreement dated August 1, 2011 (collectively, as amended, the “ Forbearance Agreement ”), which provides for a forbearance by Lender of its remedies under the Loan Documents (as defined in the 2007 MLA) for a period which expires not later than September 1, 2011. In addition, the Forbearance Agreement sets forth various covenants, agreements and milestones for the Borrower during the forbearance period, including without limitation: (i) the continued periodic payment of principal and interest under the Loan Documents; (ii) the acceptance of additional capital investments by Borrower; (iii) the accrual, deferral, waiver of fifty percent (50%), and payment, of Default Interest (as defined in the Forbearance Agreement) on the outstanding principal balance of the Loans; (iv) the commencement of certain remediation projects at the Project; (v) the investment of certain amounts relating to the conversion of the Project from coal power to natural gas power; and (vi) the obligation for Borrower to raise additional equity or secure additional funding for its capital improvement and operational needs (collectively, the “ Modification Milestones ”).

F. To achieve part of the Modification Milestones, Borrower has: (i) entered into a subscription agreement with Project Viking on May 19, 2011, under which Project Viking purchased seven million class B units of Borrower for $3,500,000 in equity capital contributions (“ Project Viking ”), and (ii) proposed to enter into certain transactions with Gavilon, LLC (“ Gavilon ”), including agreements relating to ethanol and distillers grains marketing, corn supply, corn storage and the netting of payments under the foregoing agreements (together, and as more fully defined below, the “ Gavilon Agreements ”), which agreements provide for Gavilon to be granted a first priority security interest in certain of Borrower’s “Non-Fixed Assets” as defined in the Gavilon Agreement (the “ Gavilon Liens ”), which liens are proposed to be superior to Lender’s lien therein in accordance with the terms of such agreements but subject to the Intercreditor Agreement (as defined herein).

G. As a condition of granting its consent to Borrower’s continuing efforts relating to the Modification Milestones, the execution of the Gavilon Agreements, and the grant of the Gavilon Liens, Lender has required the execution and delivery of this Agreement, the Amended and Restated Term Note, the Amended and Restated Term Revolving Note, and the other Loan Documents and Related Documents described herein.

H. The execution and delivery of this Agreement, the Amended and Restated Term Note, the Amended and Restated Term Revolving Note, and the other Loan Documents and Related Documents described herein shall supersede and replace in their entirety the 2007 MLA, the Third Supplement, the Fourth Supplement, and the Fifth Supplement, Note One, Note Two, and Note Three, the Forbearance Agreement and all supplements, amendments, restatements and other modifications thereof, which shall hereafter be of no force or effect.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, intending to be legally bound hereby, and in consideration of Lender making one or more loans to the Borrower, Lender and the Borrower agree as follows:

ARTICLE I.

DEFINITIONS AND ACCOUNTING MATTERS

Section 1.01. Certain Defined Terms . As used in this Agreement and in the other Loan Documents, the following terms shall have the following meanings. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code, in effect in the State of Minnesota, as amended from time to time (the “ UCC ”). All references to dollar amounts shall mean amounts in lawful money of the United States of America. The terms “include”, “including” and similar terms are to be construed as if followed by the phrase “without being limited to”.

“ Advances ” means the Loans, Letters of Credit, or Protective Advances provided the Borrower pursuant to this Agreement.

“ Affiliate ” means, as to any Person, any other Person: (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (b) that directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of such Person; or (c) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term “control” means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall the Lender or any Bank be deemed an Affiliate of the Borrower or any of its Subsidiaries.

“ Agreement ” means this Fifth Amended and Restated Master Loan Agreement, as may be amended or modified from time to time, together with all exhibits and schedules attached hereto or thereto from time to time.

“ Allowed Distributions ” has the meaning set forth in Section 5.02(b).

“ Bankruptcy Code ” means Title 11 of the United States Code entitled “Bankruptcy,” as now or hereafter in effect, or any successor statute.

“ Borrower ” means Heron Lake BioEnergy, LLC, a Minnesota limited liability company.

“ Business Day ” means any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the laws of the State of Minnesota of, or are in fact closed in, the State of Minnesota and, if such day relates to any LIBOR Rate, means any such day on which dealings in dollar deposits are conducted by and between banks in the applicable offshore dollar interbank market.

“ Capital Expenditures ” means, for any period, the sum of all amounts that would, in accordance with GAAP, be included as additions to property, plant and equipment on a statement of cash flows for the Borrower during such period, with respect to: (a) the acquisition, construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other

fixed assets or leaseholds; or (b) other capital expenditures and other uses recorded as capital expenditures having substantially the same effect.

“ Change of Control ” means: (a) any “person” or “ group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than Project Viking, L.L.C. or its Affiliates, is, or becomes, the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of Capital Stock of the Borrower representing more than 50% of the voting power of the total outstanding Capital Stock of the Borrower; (b) any “person” or “group” (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) obtains the power (whether or not exercised) to elect a majority of the board of directors of the Borrower; or (c) the Borrower at any time ceases to own, directly or indirectly, 100% of the Capital Stock of any Subsidiary Guarantor. “Capital Stock” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.

“ Closing Date ” means September 1, 2011.

“ Code ” means the Internal Revenue Code, as amended, and the regulations and published interpretations thereunder.

“ Collateral ” means and includes, without limitation, all property and assets granted as collateral security for the Loans or Indebtedness, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, assignment of rents, deed of trust, assignment, pledge, account control agreement, chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise.

“ Commitment ” means the respective amounts committed to by Lender under the this Agreement and the Notes.

“ Compliance Certificate ” means a certificate of the Treasurer, or any other officer reasonably acceptable to the Lender, of the Borrower, substantially in the form attached hereto as Exhibit A, setting forth the calculations of current financial covenants and stating: (a) the Financial Statements are true and correct and, other than the unaudited interim financial statements, have been prepared in accordance with GAAP; (b) whether they have knowledge of the occurrence of any Event of Default under this Agreement, and if so, stating in reasonable detail the facts with respect thereto; and (c) reaffirm and ratify the representations and warranties, as of the date of the certificate, contained in this Agreement.

“ Contractor ” means and includes any person or entity, including the General Contractor and any Affiliate of the Borrower, engaged by Borrower to work on or to furnish materials or supplies for the Project, the Pipeline Project or the Shaw Remediation Project.

“ Current Portion of Long Term Debt ” means that portion of Funded Debt payable within one year from the date of such determination, determined in accordance with GAAP.

“ Debt ” means: (a) indebtedness for borrowed money or for the deferred purchase price of property or services; (b) obligations as lessee under leases which shall have been or should be, in

accordance with GAAP, recorded as capital leases; (c) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (a) or (b) above or (e) through (g) below; (d) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA; (e) indebtedness in respect of mandatory redemption or mandatory dividend rights on equity interests but excluding dividends payable solely in additional equity interests; (f) all obligations of a Person, contingent or otherwise, for the payment of money under any noncompete, consulting or similar agreement entered into with the seller of a company or its assets or any other similar arrangements providing for the deferred payment of the purchase price for an acquisition permitted hereby or an acquisition consummated prior to the date hereof; and (g) all obligations of a Person under any hedging agreement.

“ Default Rate ” means the lesser of: (a) the Maximum Rate; or (b) the rate per annum which shall from day-to-day be equal to two percent (2%) in excess of the then applicable rate of interest under any Note.

“ Distribution ” means any dividend, distribution, payment, or transfer of property to any member of the Borrower.

“ EBITDA ” means for any period, the total of the following each calculated without duplication for the Borrower for such period: (i) net income from operations; plus (ii) any provision for (or less any benefit from) income taxes included in determining such net income; plus (iii) Interest Expense deducted in determining such net income; plus (iv) amortization and depreciation expense deducted in determining such net income.

“ Environmental Laws ” means all laws and regulations relating to environmental, health, safety and land use matters applicable to any property..

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder.

“ ERISA Affiliate ” means any Person, trade or business that, together with the Borrower, is or was treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

“ Events of Default ” has the meaning specified in Section 6.01.

“ Excess Cash Flow ” means EBITDA, less the sum of: (i) required payments in respect of Funded Debt; (ii) Capital Expenditures and (iii) Allowed Distributions.

“ Extraordinary Items ” means items which are material and significantly different from the Borrower’s typical business activities, determined in accordance with GAAP.

“ Fixed Charge Coverage Ratio ” means the ratio of (EBITDA +/- Extraordinary Items) divided by the sum of Current Portion of Long Term Debt + Interest Expense + Distributions + Maintenance Capital Expenditures) measured on a consolidated basis.

“ Food Security Act ” means the Food Security Act of 1985, 7 U.S.C. §1631, as amended, and the regulations promulgated thereunder.

“ Funded Debt ” means the principal amount of all Debt of the Borrower having a final maturity of more than one year from the date of origin thereof (or which is renewable or extendible at the option of the obligor for a period or periods more than one year from the date of origin) excluding, however, the principal amount due under the Term Revolving Notes or any other line of credit used by Borrower for working capital purposes, all determined in accordance with GAAP for the period in question.

“ GAAP ” means generally accepted accounting principles of the United States of America, consistently applied.

“ Gavilon ” means Gavilon, LLC, a Delaware limited liability company, and its permitted Affiliates, subsidiaries and assigns.

“ Gavilon Agreements ” means the (a) Master Netting, Setoff, Credit and Security Agreement between Gavilon and Borrower, (b) Corn Supply Agreement between Gavilon and Borrower, (c) Corn Storage Agreement between Gavilon and Lakefield Farmers Elevator, LLC, a Minnesota limited liability company and a Subsidiary Guarantor, and (d) Ethanol and Distiller’s Grains Marketing Agreement between Gavilon and Borrower, each dated on or about the date of this Agreement, as the same may be extended, renewed, amended or otherwise modified from time to time.

“ General Contractor ” means Shaw Engineering, and its successors and assigns.

“ Governmental Authority ” means and includes any and all courts, boards, agencies, commissions, offices, or authorities of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city, or otherwise) whether now or hereafter in existence.

“ Guarantor(s) ” means the Subsidiary Guarantors, together with all other of the guarantors, sureties, and accommodation parties in connection with any Loan.

“ Guaranty ” and “ Guaranties ” shall mean those guaranties given by a Guarantor, pursuant to which the Guarantor shall guarantee the full and prompt payment and performance of the Borrower under the Notes and this Agreement.

“ HLBE — PC Investment ” shall have the meaning specified in Section 2.03(b).

“ HLBE — PC ” means HLBE Pipeline Company, LLC, a Minnesota limited liability company, a wholly owned subsidiary of Borrower.

“ Incentive Payments ” means any and all federal or state governmental subsidies, payments, transfers or other benefits, whether now or hereafter established, received, or scheduled to be received within thirty (30) days, by the Borrower.

“ Income Taxes ” means the applicable state, local or federal tax on the net income of the Borrower.

“ Intellectual Property ” has the meaning specified in Section 4.01(p).

“ Intercreditor Agreement ” means that certain Intercreditor Agreement of even date herewith between Gavilon and Lender, pursuant to which the parties have set forth their agreements relative to the Collateral described therein.

“ Interest Expense ” means for any period, the total interest expense of the Borrower calculated on a consolidated basis.

“ Interest Period ” means the period commencing on the first day of each calendar month and shall remain in effect until and including the last day of each calendar month. Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day or if such succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day, (b) any Interest Period which would otherwise extend beyond the Maturity Date shall end on the Maturity Date, and (c) no Interest Period shall have a duration of less than one (1) month except the first and last month.

“ Inventory ” means all of the Borrower’s inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located.

“ Law ” means, with respect to any Governmental Authority, any constitutional provision, law, statute, rule, regulation, ordinance, treaty, order, decree, judgment, decision, common law, holding injunction, Governmental Approval or requirement of such Governmental Authority. Unless the context clearly requires otherwise, the term “Law” shall include each of the foregoing (and each provision thereof) as in effect at the time in question, including any amendments, supplements, replacements, or other modifications thereto or thereof, and whether or not in effect as of the date of this Agreement.

“ Lender ” means AgStar Financial Services, PCA, and its successors and assigns.

“ Letter of Credit ” means any letter of credit issued by Lender pursuant to the terms of this Agreement.

“ Letter of Credit Liabilities ” means, at any time, the aggregate maximum amount available to be drawn under all outstanding Letters of Credit (in each case, determined without regard to whether any conditions to drawing could then be met) and all unreimbursed drawings under Letters of Credit.

“ LIBOR Rate ” means the One Month London Interbank Offered Rate (“ One Month LIBOR ”), rounded upward to the nearest ten thousandth of one percent, reported on the tenth day of the month immediately preceding the month for which interest is being calculated by the Wall Street Journal in its daily listing of money rates, defined therein as the average of interbank offered rates for dollar deposits in the London market. If One Month LIBOR is not reported on the tenth day of a month, the One Month LIBOR reported on the first Business Day preceding the tenth day of the month will be used. If this index is no longer available, Lender will select a new index which is based upon comparable information. For purposes of clarity, the parties hereto agree that it is their intention to utilize the One Month LIBOR rate described above for each one-month period with the applicable One Month LIBOR rate being reset for each successive one-month period as described above, including with respect to outstanding Advances.

“ Loan and Carrying Charges ” means all commitment fees to the Lender, brokerage fees, standby fees, interest charges, service fees, attorneys’ fees, Contractors’ fees, developers’ fees, funding fees, title insurance fees and charges, recording fees, registration taxes, real estate taxes, special assessments, insurance premiums, utility charges incurred by the Borrower in the construction of

the Project and issuance of the Notes, all costs incurred in acquisition of the Real Property and any other costs incurred in the development of the Project.

“ Loan Documents ” means this Agreement, the Notes, Letters of Credit, the Security Agreement, the Mortgage and all other agreements, documents, instruments, and certificates of the Borrower delivered to, or in favor of, the Lender under this Agreement or in connection herewith or therewith, including, without limitation, all agreements, documents, instruments, certificates and delivered in connection with the extension of Advances by the Lender.

“ Loan Obligations ” means all obligations, indebtedness, and liabilities of the Borrower to the Lender arising pursuant to any of the Loan Documents, whether now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, without limitation, the obligation of the Borrower to repay the Advances, interest on the Advances, and all fees, costs, and expenses (including attorneys’ fees and expenses) provided for in the Loan Documents.

“ Loan/Loans ” means and includes the Term Loan, the Term Revolving Loan and any other financial accommodations extended to the Borrower by the Lender pursuant to the terms of this Agreement and the Notes.

“ Long Term Debt ” means indebtedness that matures more than one year after the date of determination thereof.

“ Long Term Marketing Agreement ” means any contract, agreement or understanding of the Borrower having a term of one year or more after the date of determination thereof relating to the sale of any raw materials, inventory, products or by-products of the Borrower, including without limitation the Gavilon Agreements.

“ Maintenance Capital Expenditures ” means all Capital Expenditures made in the ordinary course of business to maintain existing business operations of the Borrower in any fiscal year, determined in accordance with GAAP. For the sake of clarity and the avoidance of doubt, all Capital Expenditures or investments made relating (i) to the Pipeline Project or HLBE-PC, (ii) to convert the Project to natural gas power, (iii) the Shaw Remediation Project, (iv) the corn oil separation/extraction system equipment or installation, and (v) any other Capital Expenditure for which specific lender approval is sought and granted, shall not be considered Maintenance Capital Expenditures.

“ Material Adverse Effect ” means any materially adverse impact on (a) the business, assets, operations, property, condition (financial or otherwise) of the Borrower or any Subsidiary taken as a whole, (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Lender hereunder or thereunder, (c) the ability of the Borrower to fully and timely perform any of its obligations under the Loan Documents or (d) the Collateral or the Security Interests in favor of the Lender on such Collateral or the perfection or priority of such Security Interests.

“ Material Contract ” means (i) any contract or any other agreement, written or oral, of any of the Borrower or its Subsidiaries involving monetary liability of or to any such person in an amount in excess of $500,000.00 per annum; and (ii) any other contract or agreement, written or oral, of any of the Borrower or any of its Subsidiaries the failure to comply with which could reasonably be expected to have a Material Adverse Effect; provided, however, that (x) any contract or agreement which is terminable by a party other than any of the Borrower or its Subsidiaries

without cause upon notice of 90 days or less, and (y) any contract or agreement for the sale and purchase of corn for delivery within 12 months, shall not be considered a Material Contract; provided, however, that the Gavilon Agreements shall for all purposes be deemed to be Material Contracts.

“ Materials of Environmental Concern ” means chemicals, pollutants, contaminants, wastes, toxic substances and hazardous substances, any toxic mold, radon gas or other naturally occurring toxic or hazardous substance or organism and any material that is regulated in any way, or for which liability is imposed, pursuant to an Environmental Law.

“ Maturity Date ” means September 1, 2016.

“ Maximum Rate ” means the maximum nonusurious interest rate, if any, at any time, or from time to time, that may be contracted for, taken, reserved, charged or received under applicable state or federal laws.

“ Monthly Payment Date ” means the first (1st) day of each calendar month.

“ Mortgage ” means that certain Fourth Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases of even date herewith, pursuant to which a mortgage interest shall be given by the Borrower to the Lender in the Real Property to secure payment to the Lender of the Loan Obligations.

“ Net Income ” means net income of the Borrower as determined in accordance with GAAP, after all operating expenses including salaries and bonuses.

“ Note/Notes ” means and includes the Term Note, the Term Revolving Note and any promissory notes executed and delivered to the Lender by the Borrower pursuant to the terms of this Agreement as the same may be amended, modified, supplemented, extended, replaced or restated from time to time.

“ Note Three ” shall have the meaning set forth in the recitals hereto.

“ Ordinary Trade Payable Dispute ” means trade accounts payable, in an aggregate amount not in excess of $50,000.00 with respect to the Borrower, with respect to which: (a) there exists a bona fide dispute between Borrower and the vendor; (b) the Borrower is contesting the same in good faith by appropriate proceedings; and (c) the Borrower has established appropriate reserves on its financial statements.

“ Outstanding Credit ” means, at any time of determination, the aggregate amount of Advances then outstanding on a Loan.

“ Outstanding Revolving Advance ” means the total Outstanding Credit under this Agreement and the Term Revolving Note.

“ Owner Equity Ratio ” means Tangible Net Worth divided by total assets, measured on a consolidated basis, and expressed as a percentage.

“ Participation Fee ” shall have the meaning specified in Section 2.15.

“ Person ” means any individual, corporation, business trust, association, company, partnership, joint venture, Governmental Authority, or other entity.

“ Personal Property ” means all buildings, structures, equipment, fixtures, improvements, building supplies and materials and personal property now or hereafter attached to, located in, placed in or necessary to the use of the improvements on the Real Property including, but without being limited to, all machinery, fixtures, equipment, furnishings, and appliances, as well as all renewals, replacements, additions, and substitutes thereof, and all products and proceeds thereof, and including without limitation all accounts, instruments, chattel paper, payment intangibles, other rights to payment, inventory, farm products, equipment, investment property, money, deposit accounts, instruments, insurance proceeds and general intangibles of the Borrower, whether now owned or hereafter acquired.

“ Pipeline Project Budget ” means the statement which identifies the sources and uses of monies in the amount of $3,148,604 for the construction of the Pipeline Project.

“ Pipeline Project ” means any and all buildings, structures, fixtures and other improvements made as part of the construction of a natural gas pipeline connecting Borrower’s ethanol production facility to the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota.

“ Plan ” means an employee pension benefit plan (as defined in Section 3(3) of ERISA) subject to Title IV of ERISA or Section 412 of the Code that is sponsored or maintained by the Borrower or any ERISA Affiliate, or in respect of which any Borrower or any ERISA Affiliate has any obligations to contribution or liability.

“ Program ” means the funds held program that Lender may offer, in its sole discretion and on such terms and conditions as Lender may establish from time to time, to permit the Borrower to make advance conditional payments on eligible loans.

“ Program Account ” means that account established by the Lender under the Program.

“ Project ” means any and all buildings, structures, fixtures, and other improvements made to the Real Property, including without limitation those made in conjunction with the Shaw Remediation Project or the Pipeline Project.

“ Protective Advances ” means all sums advanced for the purpose of payment of real estate taxes (including special payments in lieu of real estate taxes), personal property taxes (including special payments in lieu of personal property taxes), maintenance costs, insurance premiums, remediation costs, all other items (including capital items) deemed appropriate by the Lender to preserve and protect the Project, Real Property, or any other Collateral from forfeiture, casualty, loss, waste or diminution of value, and all other costs to otherwise prepare the Project, Real Property or Collateral for sale including the cost of any professional consultants or advisors deemed necessary or appropriate by the Lender, and the costs of sale.

“ Real Property ” means that real property located in the County of Jackson, State of Minnesota, owned by the Borrower, upon which the Project was constructed and which is described in Schedule 3.01(d).

“ Reimbursement Obligation ” means the obligation of the Borrowers to reimburse the Lender for any demand for payment or drawing under a Letter of Credit.

“ Related Documents ” means and includes without limitation all promissory notes, credit agreements, loan agreements, guaranties, security agreements, mortgages, deeds of trust, assignments and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

“ Request for Advance ” shall have the meaning specified in Section 2.03(f).

“ Revolving Advance ” means an advance under the Term Revolving Note.

“ SARA ” means the Superfund Amendment and Reauthorizations Act of 1986, as amended, and all regulations promulgated thereunder.

“ Security Agreement ” means and includes, without limitation, any agreements, promises, covenants, arrangements, understandings, or other agreements, whether created by law, contract, or otherwise, which evidence, govern, represent, or create a Security Interest, as the same has been and may hereafter be amended or otherwise modified.

“ Security Interest ” means and includes without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, assignment of rents, deed of trust, assignment, pledge, account control agreement, chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

“ Shaw Remediation Project ” means the engineering and mercury emission remediation project at the Project being conducted or to be conducted by the General Contractor to the extent the same is required or necessary following conversion of the Project from coal power to natural gas power.

“ Subordinated Debt ” means the following Debt: (i) tax increment financing; (ii) debt owed the State of Minnesota or its agencies; and (iii) debt owed Federated Rural Electric Association/USDA; and (iv) other Debt which has been approved by Lender in writing and subject to a subordination agreement acceptable to Lender in its sole discretion.

“ Subordination Agreement ” means a subordination agreement in a form and substance acceptable to the Lender, pursuant to which any Person, claiming a Security Interest in any portion of the Pipeline Project located on the Real Property, has agreed to subordinate such interest to the Security Interests of the Lender.

“ Subsidiary ” as to any Person, means any corporation or other entity in which more than 50% of all equity interests is owned directly or indirectly by such Person. Unless otherwise qualified herein, all references to a “Subsidiary” or “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.

“ Subsidiary Guarantors ” means collectively Lakefield Farmers Elevator, LLC, a Minnesota limited liability company, HLBE-PC, and any other Person which becomes a Subsidiary Guarantor as provided under Section 5.02(h).

“ Tangible Net Worth ” means the excess of total assets over total liabilities except Subordinated Debt, total assets and total liabilities each to be determined in accordance with GAAP consistent

with those applied in the preparation of the financial statements referred to in Section 5.01(c) for the Borrower, excluding, however, from the determination of total assets: (i) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles; (ii) treasury stock; (iii) securities which are not readily marketable; (iv) cash held in a sinking or other analogous fund established for the purpose of redemption, retirement or prepayment of capital stock or Debt; (v) any write-up in the book value of any asset resulting from a revaluation thereof subsequent to the Closing Date; (vi) amortized start-up costs; and (vii) any items not included in clauses (i) through (vi) above which are treated as intangibles in conformity with GAAP.

“ Tax Distributions ” has the meaning specified in Section 5.02(b).

“ Term Loan ” means any amortizing loan with a maturity of greater than one year provided by the Lender to the Borrower pursuant to the terms and conditions of this Agreement.

“ Term Loan Maturity Date ” means September 1, 2016.

“ Term Note ” means that certain Amended and Restated Term Note of even date herewith executed and delivered to the Lender by the Borrower in the amount of $40,000,000.00 and pursuant to the terms and conditions provided for in the Agreement.

“ Term Revolving Loan Commitment ” shall mean the following:

On the Closing Date	$	8,008,689.00
September 1, 2012	$	7,508,689.00
September 1, 2013	$	7,008,689.00
September 1, 2014	$	6,508,689.00
September 1, 2015	$	6,008,689.00

“ Term Revolving Loan ” means the revolving loan provided by the Lender to the Borrower pursuant to the terms and conditions of the Term Revolving Note and this Agreement.

“ Term Revolving Loan Maturity Date ” means September 1, 2016.

“ Term Revolving Loan Termination Date ” shall have the meaning specified in Section 2.03(a).

“ Term Revolving Note ” means that Amended and Restated Term Revolving Note of even date herewith, in the amount of $8,008,689.00 pursuant to the terms and conditions provided for herein.

“ Underwriting Fee ” shall have the meaning specified in Section 2.15.

“ Unused Commitment Fee ” shall have the meaning specified in Section 2.15.

“ Working Capital ” means current assets of the Borrower, including the available commitment under the Term Revolving Loan, less current liabilities of the Borrower.

Section 1.02. Accounting Matters . All accounting terms not specifically defined herein shall be construed in accordance with GAAP, except as otherwise stated herein. To enable the ready and consistent determination of compliance by the Borrower with its obligations under this Agreement, the

Borrower will not change the manner in which either the last day of its fiscal year or the last days of the first three fiscal quarters of its fiscal years is calculated.

Section 1.03. Construction . Wherever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender shall include each other gender where appropriate. The headings, captions or arrangements used in any of the Loan Documents are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of the Loan Documents, nor affect the meaning thereof.

ARTICLE II

AMOUNTS AND TERMS OF THE LOANS

Section 2.01. Loans . Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties set forth in this Agreement, the Lender has agreed to lend to Borrower the following amounts, for the purposes as further described below:

(b) Term Revolving Loan . Lender agree to lend to the Borrower, on the Closing Date, and from time to time thereafter on a revolving basis, an amount not to exceed $8,008,689.00, pursuant to the terms and conditions set forth in Section 2.03 and the Term Revolving Note.

Section 2.02. Term Loan .

(a) Term Loan . Lender agrees to lend to the Borrower and the Borrower agrees to borrow from the Lender a Term Loan in the amount of Forty Million and No/100 Dollars ($40,000,000.00) pursuant to the terms and conditions set forth in this Section 2.02 and the Term Note. The Term Loan shall be comprised of two tranches of Twenty Million and No/100 Dollars ($20,000,000.00) each, with the first tranche bearing interest at the variable rate set forth in Section 2.02(c)(i), and the second tranche bearing interest at the rate set forth in Section 2.02(c)(ii).

(b) Term Loan Term . The Term Loan term shall run for a period beginning on the Closing Date and ending on the Term Loan Maturity Date.

(i) Variable Rate . Subject to the provisions of Sections 2.04 and 2.09, Twenty Million and no/100 dollars ($20,000,000.00) of the Term Loan shall bear interest at a rate per annum equal to the greater of (A) LIBOR Rate plus three hundred fifty (350) basis points or (B) five percent (5.0%). The rate of interest due thereon shall initially be determined as of the Closing Date and shall thereafter be adjusted as and when LIBOR Rate changes. All such adjustments to the rate of interest shall be made and become effective as of the first day of the month following the date of any change in LIBOR Rate and shall remain in effect until and including the day immediately preceding the next such adjustment (each such day hereinafter being referred to as an “ Adjustment Date ”). All such adjustments to the rate of interest shall be made and become effective as of the first Adjustment Date following such change in the LIBOR Rate. All such adjustments to said rate shall be made and become effective as of the Adjustment Date, and said rate as adjusted shall remain in effect until and including the day immediately preceding the next Adjustment Date. Interest shall be computed on the basis of a year of three hundred sixty five (365) days, but charged for actual days principal is outstanding.

(ii) Fixed Rate . Subject to the provisions of Sections 2.04 and 2.09, Twenty Million and no/100 dollars ($20,000,000.00) of the Term Loan shall bear interest from the Closing Date and until the third (3 rd ) anniversary of the Closing Date at a fixed rate equal to five and three-quarters percent (5.75%) per annum. On the third (3 rd ) anniversary of the Closing Date, such interest rate will be adjusted, and on dates occurring at successive intervals of three years each thereafter during the remaining term of the Term Loan. The adjusted interest rate will be calculated by adding 225 basis points to the then current index. The index for adjustments is the Lender’s cost of funds for three-year adjustable rate products. Lender’s cost of funds is the rate determined by the Lender to represent the Lender’s direct and indirect cost of acquiring funds with a term equal to the applicable interest period and interest rate product selected by the Borrower. Interest shall be computed on the basis of a year of three hundred sixty five (365) days, but charged for actual days principal is outstanding.

(d) Term Loan Payments . Beginning on first Monthly Payment Date following the Closing Date and on each Monthly Payment Date thereafter until the Term Loan Maturity Date, the Borrower shall make equal monthly payments of principal and accrued interest in such amounts as will be required to fully amortize the entire outstanding principal of the Term Loan, over a period not to exceed ten (10) years from the Closing Date. The amount of said monthly payments shall be recalculated and, if necessary, adjusted to account for changes in the effective rate of interest hereunder and to maintain said ten (10) year amortization. The entire unpaid principal balance and accrued and unpaid interest on the Term Loan is due and payable in full on the Term Loan Maturity Date.

(e) Excess Cash Flow Sweep . In addition to all other payments of principal and interest required hereunder and under the Term Note, the Borrower shall remit to Lender, beginning with the first fiscal year end following the Closing Date and continuing throughout the term of the Term Loan, an amount equal to 25% of the Borrower’s Excess Cash Flow for the immediately preceding fiscal year (the “ Excess Cash Flow Payment ”), which shall be calculated based upon the immediately preceding fiscal year end audited financial statements of the Borrower, on or before 90 days after the end of each fiscal year, and which shall be paid on or before 120 days after the end of the fiscal year for which the payment is calculated. Total Excess Cash Flow Payments required hereunder shall not exceed Two Million and No/100 Dollars ($2,000,000.00) for any fiscal year. All Excess Cash Flow Payments shall be applied to the reduction of the outstanding principal balance of the Term Loan. No Excess Cash Flow Payments shall be required for a fiscal year where Borrower’s Owner’s Equity Ratio is greater than 50% as calculated at the end of the fiscal year for which the Excess Cash Flow Payment is being calculated.

(f) Prepayment of Term Loan . The Borrower may, by notice to the Lender, prepay the outstanding amount of the Term Loan in whole or in part with accrued interest to the date of such prepayment on the amount prepaid, without penalty or premium, except as otherwise provided in this Agreement. Any prepayment does not otherwise affect Borrower’s obligations to pay any fees due hereunder. The Term Loan is subject to mandatory prepayment, at the option of the Lender, as set forth herein.

Section 2.03. Term Revolving Loan .

(a) Term Revolving Loan . On the terms and conditions set forth herein, Lender agrees to make one or more advances to the Borrower, during the period beginning on the Closing Date and ending on the Business Day immediately preceding the Term Revolving Loan Maturity Date (the “ Term Revolving Loan Termination Date ”), in an aggregate principal amount outstanding at any one time not to exceed Term Revolving Loan Commitment. The Term Revolving Loan Commitment shall expire at 12:00 noon Central time on the Term Revolving Loan Maturity Date. Term Revolving Loan amounts borrowed and repaid or prepaid may be reborrowed at any time prior to and including the Term

Revolving Loan Termination Date provided, however, that at no time shall the sum of the Outstanding Revolving Advances exceed the Term Revolving Loan Commitment. The Borrower shall, without penalty or premium and within five (5) days following each anniversary date of the Closing Date, prepay the Outstanding Revolving Advances in the amount, if any, by which the Outstanding Credit on such date exceeds the Term Revolving Loan Commitment then in effect, together with accrued interest thereon to the date of such prepayment.

(b) Purpose . Revolving Advances under the Term Revolving Loan may be used for working capital, cash and inventory management purposes of the Borrower, including closing costs and fees associated with the Term Revolving Loan. In addition to the foregoing, Borrower may use the proceeds of one or more Revolving Advances for Pipeline Project work being completed on the Real Property, for the Shaw Remediation Project, to convert the Project to natural gas power, to make capital expenditure relating to the corn oil separation/extraction system equipment or installation thereof, and to make equity investments in, and to acquire all of the limited liability company membership interest in HLBE — PC (the “ HLBE — PC Investment ”). The Borrower agrees that the proceeds of the Term Revolving Loan are to be used only for the purposes set forth in this Section 2.03(b).

(d) Interest Rate . Subject to the provisions of Sections 2.04 and 2.09, the Term Revolving Loan shall bear interest at a rate per annum equal to the greater of (A) LIBOR Rate plus three hundred fifty (350) basis points or (B) five percent (5.0%). The rate of interest due thereon shall initially be determined as of the Closing Date and shall thereafter be adjusted as and when LIBOR Rate changes. All such adjustments to the rate of interest shall be made and become effective as of the first day of the month following the date of any change in LIBOR Rate and shall remain in effect until and including the day immediately preceding the next such adjustment (each such day hereinafter being referred to as an “ Adjustment Date ”). All such adjustments to the rate of interest shall be made and become effective as of the first Adjustment Date following such change in the LIBOR Rate. All such adjustments to said rate shall be made and become effective as of the Adjustment Date, and said rate as adjusted shall remain in effect until and including the day immediately preceding the next Adjustment Date. Interest shall be computed on the basis of a year of three hundred sixty five (365) days, but charged for actual days principal is outstanding.

(e) Repayment of the Term Revolving Loan . The Borrower will pay interest on the Term Revolving Loan on the first (1st) day of each month, commencing on the first (1st) Monthly Payment Date following the date on which the first Advance is made on the Term Revolving Loan, and continuing on each Monthly Payment Date thereafter until the Term Revolving Loan Maturity Date. On the Term Revolving Loan Maturity Date, the amount of the then unpaid principal balance of the Term Revolving Loan and any and all other amounts due and owing hereunder or under any other Loan Document relating to the Term Revolving Loan shall be due and payable. If any Payment Date is not a Business Day, then the principal installment then due shall be paid on the next Business Day and shall continue to accrue interest until paid.

(f) Making the Advances .

(i) Revolving Advances . Each Revolving Advance shall be made, on notice from the Borrower (a “ Request for Advance” ) to the Lender delivered before 12:00 Noon (Minneapolis, Minnesota time) on a Business Day which is at least three (3) Business Days prior to the date of such Revolving Advance specifying the amount of such Revolving Advance, provided that, no Revolving Advance shall be made while an Event of Default exists or if the interest rate for such LIBOR Rate Loan

would exceed the Maximum Rate. Any Request for Advance applicable to a Revolving Advance received after 12:00 Noon (Minneapolis, Minnesota time) shall be deemed to have been received and be effective on the next Business Day. The amount so requested from the Lender shall, subject to the terms and conditions of this Agreement, be made available to the Borrower by: (i) depositing the same, in same day funds, in an account of the Borrower; or (ii) wire transferring such funds to a Person or Persons designated by the Borrower in writing.

(ii) Requests for Advances Irrevocable . Each Request for Advance shall be irrevocable and binding on the Borrower and the Borrower shall indemnify the Lender against any loss or expense it may incur as a result of any failure to borrow any Advance after a Request for Advance is made (including any failure resulting from the failure to fulfill on or before the date specified for such Advance the applicable conditions set forth herein, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund such Advance) when such Advance, as a result of such failure, is not made on such date.

(iii) Minimum Amounts . Each Revolving Advance shall be in a minimum amount equal to $50,000.00.

(iv) Unused Commitment Fee . In addition to the fees payable hereunder, Borrower agrees to pay to the Lender an Unused Commitment Fee on the average daily unused portion of such Lender’s commitment under the Term Revolving Loan at the rate of 0.35% per annum, payable in arrears in quarterly installments payable on the first (1st) day of each calendar quarter during the term of the Term Revolving Loan.

(v) Conditions Precedent to All Advances . The Lender’s obligation to make each Advance under the Term Revolving Note shall be subject to the terms, conditions and covenants set forth herein, including, without limitation, the following further conditions precedent:

(A) Representations and Warranties . The representations and warranties set forth herein are true and correct in all material respects as of the date of the request for any Advance, except as disclosed in writing to the Lender, to the same extent and with the same effect as if made at and as of the date thereof except as disclosed in writing to the Lender;

(B) No Defaults . No Event of Default has occurred and is continuing; and

(C) Government Action . No license, permit, permission or authority necessary for the construction or operation of the Project has been revoked or challenged by or before any Governmental Authority.

(g) Letters of Credit .

(i) Commitment to Issue . The Borrower may request Revolving Advances by the Lender, and the Lender, subject to the terms and conditions of this Agreement, may, in its sole discretion, issue letters of credit for any Borrower’s account; provided, however, that:

(A) the aggregate amount of outstanding Letter of Credit Liabilities shall not at any time exceed $3,000,000.00;

(B) the maturity or expiry date of each Letter of Credit shall be no later than the Maturity Date; and

(C) the sum of the outstanding Letters of Credit plus the Outstanding Revolving Advances shall not at any time exceed the available Term Revolving Loan Commitment.

(ii) Letter of Credit Request Procedure . The Borrower shall give the Lender irrevocable prior notice (effective upon receipt) on or before 3:00 P.M. (Minneapolis, Minnesota time) on the Business Day three Business Days prior to the date of the requested issuance of a Letter of Credit specifying the requested amount, expiry date and issuance date of each Letter of Credit to be issued and the nature of the transactions to be supported thereby. Any such notice received after 3:00 P.M. (Minneapolis, Minnesota time) on a Business Day shall be deemed to have been received and be effective on the next Business Day. Each Letter of Credit shall have an expiration date that occurs on or before the Term Revolving Loan Maturity Date, shall be payable in U.S. dollars, must be satisfactory in form and substance to the Lender, and shall be issued pursuant to such documentation as the Lender may require, including, without limitation, the Lender’s standard form letter of credit request and reimbursement agreement.

(iii) Letter of Credit Fees . The Borrower shall pay to the Lender for (A) all fees, costs, and expenses of the Lender arising in connection with any Letter of Credit, including the Lender’s customary fees for amendments, transfers, and drawings on Letters of Credit, and (B) on the date of the issuance of the Letter of Credit, and at the anniversary date of issuance of such Letter of Credit, an issuance fee equal to two and one-half (2.5%) percent, on an annualized basis, of the maximum amount available to be drawn under the Letter of Credit.

(iv) Funding of Drawings . Upon receipt from the beneficiary of any Letter of Credit of any demand for payment or other drawing under such Letter of Credit, the Lender shall promptly notify the Borrower as to the amount to be paid as a result of such demand or drawing and the respective payment date. Any notice pursuant to the forgoing sentence shall specify the amount to be paid as a result of such demand or drawing and the respective payment date.

(v) Reimbursements . After receipt of the notice delivered pursuant to clause (iv) of this subsection with respect to a Letter of Credit, the Borrower shall be irrevocably and unconditionally obligated to reimburse the Lender for any amounts paid by the Lender upon any demand for payment or drawing under the applicable Letter of Credit, without presentment, demand, protest, or other formalities of any kind other than the notice required by clause (iv) of this subsection. Such reimbursement shall occur no later than 3:00 P.M. (Minneapolis, Minnesota time) on the date of payment under the applicable Letter of Credit if the notice under clause (iv) of this subsection is received by 2:00 P.M. (Minneapolis, Minnesota time) on such date or by 11:00 A.M. (Minneapolis, Minnesota time) on the next Business Day, if such notice is received after 2:00 P.M. (Minneapolis, Minnesota time). All payments on the Reimbursement Obligations (including any interest earned thereon) shall be made to the Lender for the account of the Lender in U.S. dollars and in immediately available funds, without set-off, deduction, or counterclaim.

(vi) Reimbursement Obligations Absolute . The Reimbursement Obligations of the Borrower under this Agreement are absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of the Loan Documents under all circumstances whatsoever and the Borrower hereby waives any defense to the payment of the Reimbursement Obligations based on any circumstance whatsoever, including, without limitation, in any case, the following circumstances: (A) any lack of validity or enforceability of any Letter of Credit or any other Loan Document; (B) any amendment or waiver of or any consent to departure from any Loan Document;

(C) the existence of any claim, set-off, counterclaim, defense, or other rights which any Borrower or any other Person may have at any time against any beneficiary of any Letter of Credit, the Lender or any other Person, whether in connection with any Loan Document or any unrelated transaction; (D) any statement, draft, or other documentation presented under any Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (E) payment by the Lender under any Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; or (F) any other circumstance whatsoever, whether or not similar to any of the foregoing; provided that Reimbursement Obligations with respect to a Letter of Credit may be subject to avoidance by a Borrower if the Borrower proves in a final non-appealable judgment that it was damaged and that such damage arose directly from the Lender’s willful misconduct or gross negligence in determining whether the documentation presented under the Letter of Credit in question complied with the terms thereof.

(vii) Lender Responsibility . Borrower assumes all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Lender, nor any of its respective officers or directors shall have any responsibility or liability to the Borrower or any other Person for: (A) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up any Letter of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit, or the failure of any Person to note the amount of any instrument on any Letter of Credit, each of which requirements, if contained in any Letter of Credit itself, it is agreed may be waived by the Lender; (B) errors, omissions, interruptions, or delays in transmission or delivery of any messages; (C) the validity, sufficiency, or genuineness of any draft or other document, or any endorsement(s) thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent, or forged or any statement therein is untrue or inaccurate in any respect; (D) the payment by the Lender to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit; or (E) any other circumstance whatsoever in making or failing to make any payment under a Letter of Credit. The Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary.

Section 2.04. Adjustments to Interest Rate . Notwithstanding any other provision of this Agreement, the Notes, or the Related Documents, the rate of interest under any Loan which bears interest on a variable rate, shall be adjusted according to the following schedule should the Owner’s Equity Ratio of the Borrower, measured on a consolidated basis, achieve the levels set forth below:

Owner’s		Equity Interest Rate

Less than 49.99%		Applicable LIBOR Rate plus 350 basis points

50.00%—59.99%		Applicable LIBOR Rate plus 325 basis points

Greater Than 60.00%		Applicable LIBOR Rate plus 300 basis points

Upon delivery of the monthly financial statements and the Compliance Certificate pursuant to Section 5.01(c)(iii) for each month that corresponds with each month end, the rate of interest for any month shall automatically be adjusted in accordance with the Owner’s Equity Ratio set forth therein and the rates set forth above. Such automatic adjustment to the rate of interest shall take effect as of the first Business Day of the month following the month in which the Lender received the related Compliance Certificate. The term “Adjustment Date” shall mean each such Business Day when such rates, margins or fees change

pursuant to the immediately prior sentence or the next following sentence. If the Borrower fails to deliver such Compliance Certificate which so sets forth the Owner’s Equity Ratio within the period of time required by Section 5.01(c)(iii) hereof or if any Event of Default occurs, the rate of interest shall automatically be adjusted to a rate equal to the applicable LIBOR Rate plus 375 basis points, such automatic adjustments: (a) to take effect as of the first Business Day after the last day on which the Borrower were required to deliver the applicable Compliance Certificate in accordance with Section 5.01(c)(iii) hereof or in the case of an Event of Default, on the date the written notice is given to the Borrower; and (b) to remain in effect until subsequently adjusted in accordance herewith upon the delivery of such Compliance Certificate or, in the case of an Event of Default, when such Event of Default has been cured to the satisfaction of the Lender.

Section 2.05. Default Interest . In addition to the rights and remedies set forth above and notwithstanding any Note: (i) if the Borrower fails to make any payment to Lender when due (including, without limitation, any purchase of equity of Lender when required), then at Lender’s option in each instance, such obligation or payment shall bear interest from the date due to the date paid at 2% per annum in excess of the rate of interest that would otherwise be applicable to such obligation or payment; (ii) upon the occurrence and during the continuance of an Event of Default beyond any applicable cure period, if any, at Lender’s option in each instance, the unpaid balances of the Loans shall bear interest form the date of the Event of Default or such later date as Lender shall elect at 2% per annum in excess of the rate(s) of interest that would otherwise be in effect on the Loans under the terms of the applicable Note; (iii) after the maturity of any Loan, whether by reason of acceleration or otherwise, the unpaid principal balance of the Loan (including without limitation, principal, interest, fees and expenses) shall automatically bear interest at 2% per annum in excess of the rate of interest that would otherwise be in effect on the Loan under the terms of the applicable Note. Interest payable at the Default Rate shall be payable from time to time on demand or, if not sooner demanded, on the last day of each calendar month.

Section 2.06. Late Charge . If any payment of principal or interest due under this Agreement or any Note is not paid within ten (10) days of the due date thereof, the Borrower shall, in addition to such amount, pay a late charge equal to five percent (5%) of the amount of such payment.

Section 2.07. Changes in Law Rendering Certain LIBOR Rate Loans Unlawful . In the event that any change in any applicable law (including the adoption of any new applicable law) or any change in the interpretation of any applicable law by any judicial, governmental or other regulatory body charged with the interpretation, implementation or administration thereof, should make it (or in the good-faith judgment of the Lender should raise a substantial question as to whether it is) unlawful for the Lender to make, maintain or fund LIBOR Rate Loans, then: (a) the Lender shall promptly notify each of the other parties hereto; and (b) the obligation of the Lender to make LIBOR rate loans of such type shall, upon the effectiveness of such event, be suspended for the duration of such unlawfulness. During the period of any suspension, Lender shall make loans to Borrower that are deemed lawful and that as closely as possible reflect the terms of this Agreement.

Section 2.08. Payments and Computations .

(a) Method of Payment . Except as otherwise expressly provided herein, all payments of principal, interest, and other amounts to be made by the Borrower under the Loan Documents shall be made to the Lender in U.S. dollars and in immediately available funds, without set-off, deduction, or counterclaim, not later than 2:00 P.M. (Minneapolis, Minnesota time) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Borrower shall, at the time of making each such payment, specify to the Lender the sums payable under the Loan Documents to which such payment is to be applied and in the event that the Borrower fail to so specify or if an Event of Default exists, the Lender

may apply such payment and any proceeds of any Collateral to the Loan Obligations in such order and manner as it may elect in its sole discretion.

(b) Application of Funds . Lender may apply all payments received by it to the Loan Obligations in such order and manner as Lender may elect in its sole discretion; provided that any payments received from any Guarantor or from any disposition of any collateral provided by such Guarantor shall only be applied against obligations guaranteed by such Guarantor.

(c) Payments on a Non-Business Day . Whenever any payment under any Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and fees, as the case may be.

(d) Proceeds of Collateral . All proceeds received by the Lender from the sale or other liquidation of the Collateral when an Event of Default exists shall first be applied as payment of the accrued and unpaid fees and expenses of the Lender hereunder, including, without limitation, under Section 7.04 and then to all other unpaid or unreimbursed Loan Obligations (including reasonable attorneys’ fees and expenses) owing to the Lender and then any remaining amount of such proceeds shall be applied to the unpaid amounts of Loan Obligations, until all the Loan Obligations have been paid and satisfied in full or cash collateralized. After all the Loan Obligations (including without limitation, all contingent Loan Obligations) have been paid and satisfied in full, all Commitments terminated and all other obligations of the Lender to the Borrower otherwise satisfied, any proceeds of Collateral shall be delivered to the Person entitled thereto as directed by the Borrower or as otherwise determined by applicable law or applicable court order.

(e) Computations . Except as expressly provided otherwise herein, all computations of interest and fees shall be made on the basis of actual number of days lapsed over a year of 365 or 366 days, as appropriate. Interest shall accrue from and include the date of borrowing, but exclude the date of payment.

Section 2.09. Maximum Amount Limitation . Anything in this Agreement, any Note, or the other Loan Documents to the contrary notwithstanding, Borrower shall not be required to pay unearned interest on any Note or any of the Loan Obligations, or ever be required to pay interest on any Note or any of the Loan Obligations at a rate in excess of the Maximum Rate, if any. If the effective rate of interest which would otherwise be payable under this Agreement, any Note or any of the other Loan Documents would exceed the Maximum Rate, if any, then the rate of interest which would otherwise be contracted for, charged, or received under this Agreement, any Note or any of the other Loan Documents shall be reduced to the Maximum Rate, if any. If any unearned interest or discount or property that is deemed to constitute interest (including, without limitation, to the extent that any of the fees payable by Borrower for the Loan Obligations to the Lender under this Agreement, any Note, or any of the other Loan Documents are deemed to constitute interest) is contracted for, charged, or received in excess of the Maximum Rate, if any, then such interest in excess of the Maximum Rate shall be deemed a mistake and canceled, shall not be collected or collectible, and if paid nonetheless, shall, at the option of the holder of such Note, be either refunded to the Borrower, or credited on the principal of such Note. It is further agreed that, without limitation of the foregoing and to the extent permitted by applicable law, all calculations of the rate of interest or discount contracted for, charged or received by the Lender under its Note, or under any of the Loan Documents, that are made for the purpose of determining whether such rate exceeds the Maximum Rate applicable to the Lender, if any, shall be made, to the extent permitted by applicable laws (now or hereafter enacted), by amortizing, prorating and spreading during the period of the full terms of the Advances evidenced by the Notes, and any renewals thereof all interest at any time contracted for, charged or received by Lender in connection therewith. This Section 2.09 shall control every other

provision of all agreements among the parties to this Agreement pertaining to the transactions contemplated by or contained in the Loan Documents, and the terms of this Section 2.09 shall be deemed to be incorporated in every Loan Document and communication related thereto.

Section 2.10. Lender Records . All advances and all payments or prepayments made thereunder on account of principal or interest may be evidenced by the Lender in accordance with its usual practice in an account or accounts evidencing such advances and all payments or prepayments thereunder from time to time and the amounts of principal and interest payable and paid from time to time thereunder; in any legal action or proceeding in respect of the Notes, the entries made in such account or accounts shall be prima facie evidence of the existence and amounts of all advances and all payments or prepayments made thereunder on account of principal or interest. Lender shall provide monthly statements of such entries to Borrower for the purpose of confirming the accuracy of such entries.

Section 2.11. Loan Payments . During the continuance of an Event of Default, the Lender may deduct any obligations due or any other amounts due and payable by the Borrower under the Loan Documents from any accounts maintained with the Lender.

Section 2.12. Purchase of Equity Interests in AgStar Financial Services, PCA . In addition to (and not in lieu of) the other amounts payable by Borrower under this Agreement, Borrower shall purchase $1,000.00 of equity interests in AgStar Financial Services, PCA. The purchase price for the equity interests shall be payable in full on or prior to the date hereof. Such purchases of equity interests shall comply with AgStar Financial Services, PCA’s respective by-laws and capital plans applicable to borrowers generally. Borrower hereby acknowledges receipt of the following information and materials pertaining to AgStar Financial Services, PCA prior to the execution of this Agreement: (i) copies of the by-laws of AgStar Financial Services, PCA; (ii) a written description of the terms and conditions under which the equity interests are issued; (iii) a copy of the most recent annual reports of AgStar Financial Services, PCA; and (iv) if more recent than the latest annual reports, the latest quarterly reports of AgStar Financial Services, PCA. AgStar Financial Services, PCA shall possess a statutory security interest in its equity interests. AgStar Financial Services, PCA reserves the right to sell participations on a non-patronage basis. Borrower acknowledges and agrees that: (a) only the portions of the Loans provided to Borrower by AgStar Financial Services, PCA are entitled to patronage distributions in accordance with the bylaws of AgStar Financial Services, PCA and its practices and procedures; and (b) any patronage or similar payments to which Borrower is entitled as a result of its ownership of the equity interests in AgStar Financial Services, PCA will not be based on any of the Loans not belonging to AgStar Financial Services, PCA or in which AgStar Financial Services, PCA has granted a participation interest at any time.

Section 2.13. Compensation . Upon the request of the Lender, the Borrower shall pay to the Lender such amount or amounts as shall be sufficient (in the reasonable opinion of the Lender) to compensate it for any loss, cost, or expense (excluding loss of anticipated profits incurred by it) as a result of: (i) any payment, prepayment, or conversion of a LIBOR rate loan for any reason on a date other than the last day of the Interest Period for such Loan; or (ii) any failure by the Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Section 3.01 to be satisfied) to borrow, extend, or prepay a LIBOR rate loan on the date for such borrowing, extension, or prepayment specified in the relevant notice of borrowing, extension or prepayment under this Agreement. Such indemnification may include any amount equal to the excess, if any, of: (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or extended, for the period from the date of such prepayment or of such failure to borrower, convert or extend to the last day of the applicable Interest Period (or in the case of a failure to borrow, convert or extend, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such loan as provided for herein; over (b) the amount of interest (as reasonably determined by

the Lender) which would have accrued to the Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank LIBOR market. The covenants of the Borrower set forth in this Section 2.13 shall survive the repayment of the Loans and other obligations under the Loan Documents hereunder.

Section 2.14. Funds Held Program . Lender, in its sole discretion, may offer a funds held program (the “ Program ”) to permit the Borrower to make advance conditional payments on designated loans, on such terms and conditions as the Lender may establish from time to time. Lender reserves the right, in its discretion, to amend or terminate the Program at any time upon notice to Borrower. The following terms and conditions apply to all Program accounts in connection with loans from Lender:

(a) Advance Payments . Subject to Lender’s rights to direct the application of payments, an advance payment made to be applied to any amounts due and owing to the Lender on the Loan Obligations in the future, or used for any other purpose allowed by the Program, will be in a designated Program account as of the date received. If a special prepayment of principal is desired, Borrower must so specify when an advance payment is made.

(b) Program Interest . Interest will accrue on funds in the Program account at such times and at such rates determined by Lender. Lender may change the interest rate or accrual period from time to time without notice. The Program may provide for different interest rates for different categories of loans.

(c) Application of Funds . Funds in the Program account for a designated loan will be automatically applied by Lender on the Quarterly Payment Date toward payment of the installment or related charges when the loan installment or other related charge becomes due. Any accrued interest in the Program account will be applied first to the installment or related charges. If the funds in the Program account are insufficient to pay the entire installment or related charges, Borrower shall pay the difference by the Quarterly Payment Date. Funds received after a loan installment or related charges have been billed will be applied to the installment or related charges due. Funds received in excess of the billed installment amount or related charges will be placed in the Program account unless otherwise designated as a special principal payment by Borrower or designated for another purpose allowed by the Program.

(d) Withdrawal of Funds . Lender may, in its sole discretion, permit Borrower to withdraw funds from the Program account in accordance with Lender’s Program.

(e) Limitations . Lender, in its sole discretion, may restrict the availability of any funds in the Borrower’s Program account.

(f) Lender Options . The Lender may, in its sole discretion, apply funds from the Program account without notice to Borrowers for the following reasons:

(i) Protective Advance . If the Borrower fails to pay when due any amounts Borrower is required to pay pursuant to the Loan Documents, Lender may apply funds in the Program account to pay such amounts.

(ii) Account Ceiling . If at any time the Program account balance exceeds the unpaid balance on the designated loan, Lender may apply the funds in the Program account to pay off the loan. Any excess funds will be returned to Borrower.

(iii) Transfer of Security . If Borrower sells, assigns, or transfers any interest in any collateral for the loan, Lender may apply the funds in the Program account to the remaining loan balance.

(iv) Termination . In the event the Lender, in its sole discretion, terminates the Program, Lender may apply all funds in the Program account to the remaining loan balance effective on the termination date.

(g) No Program Account Insurance . Neither the advance payments nor the accrued interest in a Program account are insured by a governmental agency or instrumentality.

(h) Liquidation of Lender . If Lender is placed in liquidation, Borrower shall be sent by the receiver such notices as required by the Farm Credit Administration regulations then in effect. Such regulations currently provide for advance notice from the receiver that funds in the Program account will be applied to the loan and that funds in the Program account will not earn interest after the receiver is appointed.

Section 2.15. Underwriting/Participation/Facility Fees . The Borrower has paid to the Lender the Underwriting Fee of $120,000.00 and all other costs, expenses, fees, etc. required hereunder, including those provided for in Section 7.04.

ARTICLE III.

CONDITIONS PRECEDENT

Section 3.01. Conditions Precedent to Preliminary Advances . The effectiveness of this Agreement and obligations of the Lender to make any Advance, are subject to the conditions precedent that the Lender shall have received the following, in form and substance satisfactory to the Lender:

(a) this Agreement, duly executed by the Borrower and the Lender;

(b) the Amended and Restated Term Note, duly executed by the Borrower;

(d) the Fourth Amended and Restated Mortgage, fully executed and notarized, to secure the Loans encumbering on a first Lien basis the fee interest and/or leasehold interest of the Borrower in the Real Property and the fixtures thereon described in Schedule 3.01(d);

(e) amendments and restatements of each Subsidiary Guaranty, duly executed by each Subsidiary Guarantor;

(f) payment and satisfaction in full of all liabilities and obligations owing to Lender under Note Three;

(g) the Gavilon Agreements, fully executed by all parties thereto;

(h) collateral assignments of the Gavilon Agreements, duly executed by the Borrower and consented to by Gavilon;

(i) the Intercreditor Agreement duly executed by Gavilon, Lender and acknowledged by Borrower;

(j) to the extent not previously delivered to the Lender, copies and collateral assignments of all other Material Contracts, duly executed by the Borrower and pursuant to which the Borrower shall have assigned to the Lender all of the Borrower’s right, title and interest in and to each such contracts, and which assignment shall have been consented to and certified in writing by the other party(ies) to each such contract;

(k) copies of UCC, tax and judgment lien search reports listing all financing statements and other encumbrances which name the Borrower (under its present name and any previous name) and which are filed in the jurisdictions in which the Borrower is located, organized or maintains collateral, together with copies of such financing statements (none of which shall cover the collateral purported to be covered by the Security Agreement);

(l) evidence that all other actions necessary or, in the opinion of the Lender, desirable to enable the Lender to perfect and protect the security interests created by the Security Agreement have been taken;

(m) to the extent not previously delivered to the Lender, an ALTA mortgagee title insurance policy issued by a title insurance company acceptable to Lender, with respect to the Real Property, assuring the Lender that the Mortgage creates a valid and enforceable encumbrance on the Real Property, free and clear of all defects and encumbrances except Permitted Liens and containing: (i) a comprehensive endorsement (ALTA form 9); (ii) a zoning endorsement (ALTA form 3.1) specifying an ethanol production facility as a permitted use for all of the parcels included in the Real Property; and (iii) such endorsements as the Lender shall reasonably require. All such title insurance policies shall be in form and substance reasonably satisfactory to the Lender and shall provide for affirmative insurance and such reinsurance as the Lender may reasonably request, all of the foregoing in form and substance reasonably satisfactory to the Lender;

(n) to the extent not previously delivered to the Lender, Maps or plats of the Real Property certified to the Lender and the title insurance company issuing the policy referred to in subsection 3.01(j) (the “ Title Insurance Company ”) in a manner reasonably satisfactory to each of the Lender and the Title Insurance Company, dated a date reasonably satisfactory to each of the Lender and the Title Insurance Company by an independent professional licensed land surveyor, which maps or plats and the surveys on which they are based shall be sufficient to delete any standard printed survey exception contained in the applicable title policy and be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such maps, plats or surveys the following: (i) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines; (ii) the lines of streets abutting the sites and width thereof; (iii) all access and other easements appurtenant to the sites necessary to use the sites; (iv) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting the site, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (v) any encroachments on any adjoining property by the building structures and improvements on the sites; and (vi) if the site is described as being on a filed map, a legend relating the survey to said map;

(o) to the extent not previously delivered to the Lender, Evidence as to: (i) whether any portion of the Real Property is in an area designated by the Federal Emergency Management Agency

as having special flood or mud slide hazards (a “Flood Hazard Property”); and (ii) if any portion of the Real Property is a Flood Hazard Property: (a) whether the community in which such Real Property is located is participating in the National Flood Insurance Program; (b) the Borrower’s written acknowledgment of receipt of written notification from the Lender (1) as to the fact that such Real Property is a Flood Hazard Property and (2) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program; and (c) copies of insurance policies or certificates of insurance of the Borrower evidencing flood insurance satisfactory to the Lender and naming the Lender as sole loss payee on behalf of the Lender;

(p) to the extent not previously delivered to the Lender, Evidence reasonably satisfactory to the Lender that the Real Property and the contemplated use of the Real Property, are in compliance in all material respects with all applicable Laws including without limitation health and Environmental Laws, including, but not limited to all concentrated animal feedlot operations rules and regulations, erosion control ordinances, storm drainage control laws, doing business and/or licensing laws, zoning laws (the evidence submitted as to zoning should include the zoning designation made for the Real Property, the permitted uses of the Real Property under such zoning designation and zoning requirements as to parking, lot size, ingress, egress and building setbacks) and laws regarding access and facilities for disabled persons including, but not limited to, the Federal Architectural Barriers Act, the Fair Housing Amendments Act of 1988, the Rehabilitation Act of 1973 and the Americans with Disabilities Act of 1990;

(q) certificates of the secretary of the Borrower and each Subsidiary Guarantor together with true and correct copies of the following: (i) its Articles of Organization, including all amendments thereto, certified by the Office of the Secretary of State of the state of its incorporation and dated within 30 days prior to the date hereof; (ii) its/their Operating Agreements, including all amendments thereto; (iii) its/their resolutions of the Board of Governors authorizing the execution, delivery and performance of this Agreement, the other Loan Documents, and all documentation executed and delivered in connection therewith to which the it/they are a party; (iv) certificates of the appropriate government officials of the state of organization as to its/their existence and good standing, and certificates of the appropriate government officials in each state where each corporate Borrower and Guarantor does business and where failure to qualify as a foreign corporation would have a material adverse effect on the business and financial condition of the Borrower and Guarantor, as to their good standing and due qualification to do business in such state, each dated within 30 days prior to the date hereof; and (v) the names of the officers authorized to sign this Agreement and the other Loan Documents to be executed by it/them, together with a sample of the true signature of each such officer;

(r) legal opinion of Lindquist & Vennum P.L.L.P., legal counsel for the Borrower, in a form and substance reasonably requested by the Lender;

(s) evidence the Facility Fee due pursuant to Section 2.15 and the costs and expenses (including, without limitation, attorney’s fees) referred to in Section 7.04, to the extent incurred and invoiced, shall have been paid in full;

(t) The results of the Lender’s inspection of the Collateral, and the Lender’s receipt of an appraisal of the Collateral acceptable to Lender in its sole discretion;

(u) to the extent not previously delivered to the Lender, a Deposit Account Control Agreement for all deposit accounts kept and maintained by the Borrower or any of its Subsidiaries;

(v) to the extent not previously delivered to the Lender, evidence that the insurance required by this Agreement and the Mortgage has been obtained by the Borrower;

(w) An assignment of the Borrower’s business interruption insurance policy, duly executed by the Borrower and pursuant to which the Borrower shall have assigned to the Lender all of the Borrower’s right, title and interest in and to it’s business interruption insurance policy, and which assignment shall have been consented to and certified in writing by the other party(ies) to the insurance policy; and

(x) Fully executed copies of quit claim deeds from Roxy M. Schmidt and Robert L. Schmidt and Heron Lake BioEnergy, LLC, as requested by the Title Company.

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES

Section 4.01 Representations and Warranties of the Borrower . The Borrower and each of its Subsidiaries represent and warrant as follows:

(a) Borrower . The Borrower and each of its Subsidiaries are limited liability companies duly organized and validly existing and in good standing under the laws of the State of Minnesota and are qualified to do business in all jurisdictions in which the nature of their businesses make such qualification necessary and where failure to so qualify would have a Material Adverse Effect on their respective financial conditions or operations. The Borrower and each of its Subsidiaries have the power and authority to own and operate their assets and to carry on their business and to execute, deliver, and perform their respective obligations under the Loan Documents to which they may become a party. There are no outstanding subscriptions, options, warrants, calls, or rights (including preemptive rights) to acquire, and no outstanding securities or instruments convertible into, membership interests (units) of the Borrower or any of its Subsidiaries, except for those transactions set forth on Schedule 4.01(a).

(b) The Loan Documents . The execution, delivery and performance by the Borrower and the Subsidiary Guarantor of the Loan Documents are within their respective powers, have been duly authorized by all necessary action, do not contravene: (i) the articles or organization or operating agreements of either the Borrower or the Subsidiary Guarantor; or (ii) any law or any contractual restriction binding on or affecting the Borrower or the Subsidiary Guarantor, and do not result in or require the creation of any lien, security interest or other charge or encumbrance (other than pursuant to the terms thereof) upon or with respect to any of their respective properties.

(c) Governmental Approvals . Except for (i) the outstanding permits identified on Schedule 4.01(c); and (ii) the registration of the Borrower’s Class A Units pursuant to Section 12(g) of the Securities Exchange Act of 1934 and regulations promulgated thereunder relating thereto, no consent, permission, authorization, order or license of any Governmental Authority or of any party to any agreement to which any of the Borrower or any of its Subsidiaries is a party or by which they or any of their respective property may be bound or affected, is necessary in connection with the Project, acquisition or other activity being financed by this Agreement, the execution, delivery, performance or enforcement of the Loan Documents or the creation and perfection of the liens and security interest granted thereby, except as such have been obtained and are in full force and effect or which are required in connection with the exercise of remedies hereunder.

(d) Enforceability . This Agreement is, and each other Loan Document to which the Borrower or the Subsidiary Guarantor is a party when delivered will be, legal, valid and binding obligations of the Borrower or the Subsidiary Guarantor enforceable against the Borrower or the Subsidiary Guarantor in accordance with their respective terms, except as may be limited by applicable

bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditor’s rights generally and by general principles of equity.

(e) Financial Condition and Operations . The balance sheets of the Borrower on a consolidated basis with each of its Subsidiaries, as of October 31, 2010, and the related statements of income and, with respect to the period ended October 31, 2010, the related statement of cash flow of the Borrower for the fiscal period then ended, copies of which have been furnished to the Lender, fairly present in all material respects the financial condition of the Borrower as at such date and the results of the operations of the Borrower for the period ended on such dates, all in accordance with GAAP, except for unaudited statements, consistently applied, and since October 31, 2010, there has been no material adverse change in such condition or operations, or the outstanding licenses, permits and consents identified on Schedule 4.01(c).

(f) Litigation . Except as described on Schedule 4.01(f), there is no pending or threatened action or proceeding affecting the Borrower or any of its Subsidiaries or the transactions contemplated hereby before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of the Borrower. As of the Closing Date, there are no outstanding judgments against the Borrower or any of its Subsidiaries.

(g) Use of Proceeds of Advances, etc . (i) No proceeds of the Loans will be used to acquire any security in any transaction which is subject to Sections 13 and 14 of the Securities Exchange Act of 1934 (provided, however, that this provision shall not prohibit Borrower from investing in certain value added cooperatives for the purposes of carrying out their overall business operations); (ii) the Borrower and any of its Subsidiaries are not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System); and (iii) no proceeds of the Loans will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock.

(h) Liens . There is no lien, security interest or other charge or encumbrance, and no other type of preferential arrangement, upon or with respect to any of the properties or income of the Borrower or any of its Subsidiaries, which secures Debt of any Person, except as permitted by Section 5.02(a) and liens created by the Loan Documents.

(i) Taxes . Each of the Borrower and its Subsidiaries have filed or caused to be filed all federal, state and local tax returns that are required to be filed and have paid all other taxes, assessments, and governmental charges or levies upon it and its property, income, profits and assets which are due and payable, except where the payment of such tax, assessment, government charge or levy is being contested in good faith and by appropriate proceedings and adequate reserves in compliance with GAAP have been set aside on the Borrower’s or such Subsidiary’s books therefore.

(j) Solvency . As of and from and after the date of this Agreement, the Borrower: (i) owns and will own assets the fair saleable value of which are: (a) greater than the total amount of liabilities (including contingent liabilities); and (b) greater than the amount that will be required to pay the probable liabilities of its then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to it; (ii) has capital that is not unreasonably small in relation to its business as presently conducted or any contemplated or undertaken transaction; and (iii) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due.

(k) Location of Inventory and Farm Products; Third Parties in Possession; Crops . The inventory and farm products pledged as collateral under the Security Agreement are located at the places (or, as applicable, jurisdictions) specified in Schedule 4.01(k), except to the extent any such inventory and farm products are in transit. Schedule 4.01(k) correctly identifies, as of the date hereof, the landlords or mortgagees, if any, of each of its locations identified in Schedule 4.01(k). Except for the Persons identified on Schedule 4.01(k), no Person other than the Borrower or its Subsidiaries and the Lender has possession of any of the Collateral. Except as described in above, none of its Collateral has been located in any location within the past four months other than as set forth on Schedule 4.01(k).

(l) Office Locations; Fictitious Names; Predecessor Companies; Tax I.D. Number . Each of the Borrower’s and the Subsidiary Guarantor’s chief places of business, chief executive offices, and jurisdiction of organization is located at the place identified on Schedule 4.01(l). Within the last four months neither the Borrower or any of its Subsidiaries has had any other chief place of business, chief executive office, or jurisdiction of organization. Schedule 4.01 (l) also sets forth all other places where the Borrower and the Subsidiary Guarantor keep their books and records and all other locations where the Borrower and the Subsidiary Guarantor have a place of business. Neither the Borrower or the Subsidiary Guarantor does business nor has the Borrower or the Subsidiary Guarantor done business during the past five (5) years under any trade-name or fictitious business name except as disclosed on Schedule 4.01(l). Schedule 4.01(l) sets forth an accurate list of all names of all predecessor companies of the Borrower and the Subsidiary Guarantor including the names of any entities it acquired (by stock purchase, asset purchase, merger or otherwise) and the chief place of business and chief executive office of each such predecessor company. For purposes of the foregoing, a “predecessor company” shall mean any Person whose assets or equity interests are acquired by the Borrower or any of its Subsidiaries or who was merged with or into the Borrower or any of its Subsidiaries within the last four months prior to the date hereof. The Borrower’s and the Subsidiary Guarantor’s United States Federal Income Tax I.D. Numbers and state organizational identification numbers are identified on Schedule 4.01(l).

(m) Title to Properties . Each of the Borrower and its Subsidiaries have such title or leasehold interest in and to the real property owned or leased by them as is necessary or desirable to the conduct of their business and valid and legal title or leasehold interest in and to all of their Personal Property, including those reflected on the financial statements of the Borrower and its Subsidiaries previously delivered to Lender, except those which have been disposed of by the Borrower or its Subsidiaries subsequent to the date of such delivered financial statements which dispositions have been in the ordinary course of business or as otherwise expressly permitted hereunder.

(n) Disclosure . All factual information furnished by or on behalf of the Borrower or its Subsidiaries in writing to the Lender (including, without limitation, all factual information contained in the Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information hereafter furnished by or on behalf of the Borrower or its Subsidiaries to the Lender, will be true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information not misleading in any material respect at such time in light of the circumstances under which such information was provided.

(o) Operation of Business . The outstanding licenses, permits and consents identified on Schedule 4.01(c) and the registration of Borrower’s Class A Units under Section 12(g) of the Securities Exchange Act of 1934, the Borrower and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto, necessary to conduct their businesses substantially as now conducted and will obtain all such licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto necessary to conduct its business as presently proposed to be conducted except those that the failure to so possess could not reasonably be expected to

have a Material Adverse Effect, and the Borrower and its Subsidiaries are not in violation of any valid rights of others with respect to any of the foregoing except violations that could not reasonably be expected to have such a Material Adverse Effect.

(p) Intellectual Property . The Borrower and each of its Subsidiaries owns, or has the legal right to use, all patents, trademarks, tradenames, copyrights, technology, know-how and processes (the “ Intellectual Property ”) necessary for them to conduct their businesses as currently conducted except for those the failure to own or have such legal right to use could not reasonably be expected to have a Material Adverse Effect. As of the Closing Date, set forth in Schedule 4.01(p) is a list of all Intellectual Property registered with the United States Copyright Office or the United States Patent and Trademark Office and owned by the Borrower and each of its Subsidiaries or that the Borrower and its Subsidiaries have the right to use. Except as provided in Schedule 4.01(p), no claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower or any of its Subsidiaries know of any such claim, and, to the knowledge of the Borrower and its Subsidiaries, the use of such Intellectual Property by the Borrower or its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

(q) Employee Benefit Plans . Each of the Borrower and its Subsidiaries are in compliance in all material respects with the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder, the failure to comply with which could have a Material Adverse Effect on the Borrower or any of its Subsidiaries.

(r) Investment Company Act . The Borrower and its Subsidiaries are not required to be registered as an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

(s) Compliance with Laws . Each of the Borrower and its Subsidiaries are in compliance in all material respects with all laws, rules, regulations, ordinances, codes, orders, and the like, the failure to comply with which could have a Material Adverse Effect.

(t) Environmental Compliance . Borrower and each of its Subsidiaries, except as set forth in Schedule 4.01(t), are in material compliance with all applicable Environmental Laws.

(u) Material Change . Except as previously disclosed in writing to the Lender, each of the Borrower and its Subsidiaries have performed all of their material obligations, other than those obligations for which performance is not yet due, under all Material Contracts and, to the best knowledge of the Borrower or its Subsidiaries, each other party thereto is in compliance with each such Material Contract. Each such Material Contract is in full force and effect in accordance with the terms thereof. Each of the Borrower and its Subsidiaries has made available a true and complete copy of each such Material Contract for inspection by Lender.

ARTICLE V.

COVENANTS OF THE BORROWER

Section 5.01. Affirmative Covenants . So long as any Loan Obligations remain unpaid or the Lender shall have any commitment hereunder, the Borrower and each Subsidiary (but expressly excluding Agrinatural Gas, LLC) will, unless the Lender shall otherwise consent in advance in writing:

(a) Compliance with Laws, etc . Comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, (i) all applicable zoning and land use laws; (ii) all employee benefit and Environmental Laws, and (iii) paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent contested in good faith.

(b) Visitation Rights; Field Examination . At any reasonable time and from time to time, permit the Lender or representatives, to (i) examine and make copies of and abstracts from the records and books of account of the Borrower and each of its Subsidiaries, and (ii) enter onto the property of the Borrower and each of its Subsidiaries to conduct unannounced field examinations and collateral inspections, with such frequency as Lender in its sole discretion may deem appropriate, and (iii) discuss the affairs, finances, and accounts of the Borrower and each of its Subsidiaries with any of Borrower’s and its Subsidiaries officers or directors. Borrower and any of its Subsidiaries consent to and authorize Lender to enter onto the property of Borrower or any of its Subsidiaries for purposes of conducting the examinations, inspections and discussions provided above. Upon and during the occurrence of an Event of Default or in the event that there are deemed by the Lender to be any material inconsistencies and/or material noncompliance with respect to any financial or other reporting on the part of the Borrower or any of its Subsidiaries, any and all visits and inspections deemed necessary or desirable on account of such Event of Default, inconsistency and/or noncompliance shall be at the expense of the Borrower. In addition to the foregoing, at any reasonable time and from time to time, the Borrower and its Subsidiaries also shall permit the Lender or representatives thereof, at the expense of the Lender, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower or its Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower or its Subsidiaries with any of their respective officers or directors.

(i) As soon as available, but in no event later than 120 days after the end of each fiscal year of the Borrower occurring during the term hereof, annual consolidated financial statements of the Borrower, prepared in accordance with GAAP and in a format that demonstrates any accounting or formatting change that may be required by the various jurisdictions in which the business of the Borrower is conducted (to the extent not inconsistent with GAAP). Such financial statements shall: (i) be audited by independent certified public accountants selected by the Borrower and reasonably acceptable to Lender; (ii) be accompanied by a report of such accountants containing a certified opinion, without qualification, thereon reasonably acceptable to Lender; (iii) be prepared in reasonable detail, and in comparative form; and (iv) include a balance sheet, a statement of income, a statement of stockholders’, members’ or partner’s equity, a statement of cash flows, and all notes and schedules relating thereto and any management letter;

(ii) Beginning with the first (1st) month following the Closing Date, as soon as available and in any event within 30 days after the end of each month, consolidated balance sheets of the Borrower prepared in accordance with GAAP as of the end of such month and consolidated statement of income of the Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such month, certified by an authorized officer of the Borrower;

(iii) As soon as available but in no event later than 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower occurring during the term hereof, unaudited quarterly consolidated financial statements of the Borrower, in each case prepared in accordance with GAAP consistently applied (except for the omission of footnotes and for the effect of normal year-end audit adjustments) and in a format that demonstrates any accounting or formatting change that may be required by various jurisdictions in which the business of the Borrower is conducted

(to the extent not inconsistent with GAAP). Each of such financial statements shall (i) be prepared in reasonable detail and in comparative form, including a comparison of actual performance to the budget for such quarter and year-to-date, delivered to Lender under Subsection 5.01(c)(vi) below, and (ii) include a balance sheet, a statement of income for such quarter and for the period year-to-date, and such other quarterly statements as Lender may specifically request which quarterly statements shall include any and all supplements thereto. Such quarterly statements shall be certified by an authorized officer of the Borrower, and be accompanied by a Compliance Certificate which: (a) states that no Event of Default, and no event or condition that but for the passage of time, the giving of notice or both would constitute an Event of Default, has occurred or is in existence; and (b) shows in detail satisfactory to the Lender the calculation of, and the Borrower’ compliance with, each of the covenants contained in Sections 5.01(d), 5.01(e), 5.01(f), and 5.01(g);

(iv) promptly upon the Lender’s request therefor, copies of all reports and notices which the Borrower or any of its Subsidiaries files under ERISA with the Internal Revenue Service or the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or which the Borrower or any its Subsidiary receives from such Corporation;

(v) notwithstanding the foregoing Section 5.01(c)(iv), provide to Lender within 30 days after it becomes aware of the occurrence of any Reportable Event (as defined in Section 4043 of ERISA) applicable to the Borrower or any of its Subsidiaries, a statement describing such Reportable Event and the actions it proposes to take in response to such Reportable Event;

(vi) by November 1 of each fiscal year of the Borrower, an annual (with monthly break out) operating and capital assets budget of the Borrower for the immediately succeeding fiscal year containing, among other things, pro forma financial statements and forecasts for all planned lines of business;

(vii) as soon as available but in any event not more than 30 days after the end of each month, production reports for the immediately preceding calendar month setting forth corn inputs, ethanol output, DDGS output, natural gas usage and CO2 output, together with such additional production information as reasonably requested by Lender;

(viii) promptly, upon the occurrence of an Event of Default or an event or condition that but for the passage of time or the giving of notice or both would constitute an Event of Default, notice of such Event of Default or event;

(ix) promptly after the receipt thereof, a copy of any management letters or written reports submitted to the Borrower by its independent certified public accountants with respect to the business, financial condition or operation of the Borrower;

(x) promptly after the receipt thereof, a copy of any notice of default under any Long-Term Marketing Agreement;

(xi) furnish to the Lender, promptly after transmittal or filing thereof by the Borrower, copies of all proxy statements, notices and reports as it shall send to its members and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission), and promptly after the receipt thereof by the Borrower, copies of all management letters or similar documents submitted to the Borrower by independent certified public accountants in connection with each annual and any interim audit of the accounts of the Borrower or of the Borrower and any of its Subsidiaries.

(xii) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its respective Subsidiaries as the Lender may from time to time reasonably request;

(xiii) promptly after the commencement thereof, notice of the commencement of all actions, suits, or proceedings before any court, arbitrator, or government department, commission, board, bureau, agency, or instrumentality affecting the Borrower or any of its Subsidiaries which, if determined adversely, could have a Material Adverse Effect;

(xiv) without limiting the provisions of Section 5.01(c)(xiii) above, promptly after receipt thereof, notice of the receipt of all pleadings, orders, complaints, indictments, or any other communication alleging a condition that may require the Borrower or any of its Subsidiaries to undertake or to contribute to a cleanup or other response under all laws relating to environmental protection, or which seek penalties, damages, injunctive relief, or criminal sanctions related to alleged violations of such laws, or which claim personal injury or property damage to any person as a result of environmental factors or conditions;

(xv) promptly after filing, receipt or becoming aware thereof, copies of any filings or communications sent to and notices or other communications received by the Borrower or any of its Subsidiaries from any Governmental Authority, including, without limitation, the Securities and Exchange Commission, the FCC, the PUC, or any other state utility commission relating to any material noncompliance by the Borrower or any of its Subsidiaries with any laws or with respect to any matter or proceeding the effect of which, if adversely determined, could have a Material Adverse Effect;

(xvi) promptly after becoming aware thereof, notice of any matter which has had or could have a Material Adverse Effect

(xvii) promptly upon the Lender’s request, but not less than 10 days after such request, copies of all reports, invoices, notices, and other documents and information regarding the Gavilon Agreements and transactions contemplated thereunder, as Lender may from time to time request.

(d) Working Capital . Maintain Working Capital of at least $5.0 million, measured quarterly on a consolidated basis.

(e) Tangible Net Worth . Maintain Tangible Net Worth (including a credit for non-cash related impairment charges relating to coal power conversion) in an amount not less than $40,000,000.00, measured quarterly on a consolidated basis.

(f) Owner Equity Ratio . Maintain an Owner Equity Ratio (including a credit for non-cash related impairment charges relating to coal power conversion) of at least 40%, measured quarterly on a consolidated basis.

(g) Fixed Charge Coverage Ratio . On September 30, 2011 (measured for the prior eleven (11) months) and continually thereafter until October 30, 2012, maintain a Fixed Charge Coverage Ratio of not less than 1.00 to 1.00 (for purposes of the foregoing calculation of the Fixed Charge Coverage Ratio, Extraordinary Items shall include charges relating to impairment charges relating to coal power conversion and termination of contracts for changes in Long Term Marketing Agreements and coal power conversion, and transfer of inventory and corn positions to Gavilon pursuant to the Gavilon Agreements and shall be considered credits back to EBITDA in the calculation of the Fixed Charge

Coverage Ratio); and on October 31, 2012 and continually thereafter, maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00, measured annually on a consolidated basis.

(h) Liens . There shall be no lien, security interest or other charge or encumbrance, and no other type of preferential arrangement, upon or with respect to any of the properties or income of the Borrower or any of its Subsidiaries, which secures Debt of any Person, except for the security interests of the Security Agreement or except as identified on Section 5.02(a).

(i) Landlord and Mortgagee Waivers . Obtain and furnish to the Lender as soon as available, waivers, acknowledgments and consents, duly executed by each: (i) real property owner, landlord and mortgagee having an interest in any of the premises owned or leased by the Borrower or any Subsidiary Guarantor or in which any Collateral is located or to be located (and if no Collateral is located at a parcel of property not owned or leased by a Borrower or any of its Subsidiaries, no such waivers, acknowledgments or consents will be required); and (ii) each third party holding any Collateral, all in form and substance acceptable to the Lender, except as otherwise agreed to by the Lender.

(j) Insurance . Maintain insurance with financially sound and reputable insurance companies in such amounts and covering such risks as are usually carried by entities engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and any of its Subsidiaries operate, and make such increases in the type of amount or coverage as Lender may reasonably request, provided that in any event the Borrower will maintain and cause each of its Subsidiaries to maintain workers’ compensation insurance, property insurance and comprehensive general liability insurance reasonably satisfactory to the Lender. All such policies insuring any collateral for the Borrower’s obligations to Lender shall have lender or mortgagee loss payable clauses or endorsements in form and substance acceptable to Lender. Each insurance policy covering Collateral shall be in compliance with the requirements of the Security Agreement.

(k) Property and Insurance Maintenance . Maintain and preserve all of its property and each and every part and parcel thereof that is necessary to or useful in the proper conduct of its business in good repair, working order, and condition, ordinary wear and tear excepted, and in material compliance with all applicable laws, and make all alterations, replacements, and improvements thereto as may from time to time be necessary in order to ensure that its properties remain in good working order and condition and compliance. The Borrower and each of its Subsidiaries agree that upon the occurrence and continuing existence of an Event of Default, at Lender’s request, which request may not be made more than once a year, the Borrower and each of its Subsidiaries will furnish to Lender a report on the condition of the Borrower’s and any of its Subsidiaries’ property prepared by a professional engineer satisfactory to Lender.

(l) Keeping Books and Records . Maintain and cause each of its Subsidiaries to, maintain proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities.

(m) Food Security Act Compliance . If the Borrower or any of its Subsidiaries acquire any Collateral which may have constituted farm products in the possession of the seller or supplier thereof, such Borrower or Subsidiary shall, at its own expense, use its commercially reasonable efforts to take such steps to insure that all Liens (except the liens granted pursuant hereto) in such acquired Collateral are terminated or released, including, without limitation, in the case of such farm products produced in a state which has established a Central Filing System (as defined in the Food Security Act), registering with the Secretary of State of such state (or such other party or office designated by such state) and otherwise take such reasonable actions necessary, as prescribed by the Food Security Act, to purchase farm products free of liens (except the liens granted pursuant hereto); provided, however, that such

Borrower or any of its Subsidiaries may contest and need not obtain the release or termination of any lien asserted by any creditor of any seller of such farm products, so long as it shall be contesting the same by proper proceedings and maintain appropriate accruals and reserves therefor in accordance with GAAP. Upon the Lender’s request made, the Borrower and each of its Subsidiaries agree to forward to the Lender promptly after receipt copies of all notices of liens and master lists of Effective Financing Statements delivered to the Borrower and its Subsidiaries pursuant to the Food Security Act, which notices and/or lists pertain to any of the Collateral. Upon the Lender’s request, the Borrower and each of its Subsidiaries agree to provide the Lender with the names of Persons who supply the Borrower and its Subsidiaries with such farm products and such other information as the Lender may reasonably request with respect to such Persons.

(n) Warehouse Receipts . If any warehouse receipt or receipts in the nature of a warehouse receipt is issued in respect of any portion of the Collateral, then the Borrower and its Subsidiaries: (i) will not permit such warehouse receipt or receipts in the nature thereof to be “negotiable” as such term is used in Article 7 of the Uniform Commercial Code; and (ii) will deliver all such receipts to the Lender (or a Person designated by the Lender) within five (5) days of the Lender’s request and from time to time thereafter. If no Event of Default exists, the Lender agrees to deliver to such Borrower or Subsidiary any receipt so held by the Lender upon such Borrower’s request in connection with such sale or other disposition of the underlying inventory, if such disposition is in ordinary course of the Borrower’s or Subsidiary’s business.

(o) Management of Borrower . Management of the Borrower shall be maintained as set forth on Schedule 5.01(o) hereto, unless otherwise approved in Lender’s reasonable discretion.

(p) Compliance with Other Agreements . Perform in all material respects all obligations and abide in all material respects by all covenants and agreements contained in the: (i) the Long Term Marketing Agreements; (ii) the Gavilon Agreements, and (iii) all other Material Contracts, while in force.

(q) Additional Assurances . Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, financing statements, control agreements, instruments, documents and other agreements as Lender or its counsel may reasonably request to evidence and secure the Loans and to perfect all Security Interest. Without limiting the generality of the foregoing, Borrower agrees that it will: (i) cooperate with Lender in correcting the legal description for the Real Property; (ii) provide Lender with an “as built” ALTA survey of the Real Property, based on the new legal description of the same, in a form and substance requested by the Lender; (iii) cooperate with the Lender to ensure that all encumbrances affecting the Real Property, based on the new legal description of the same, are removed or excepted to the reasonable satisfaction of the Lender; and (iv) cooperate to ensure that Lender’s Mortgage constitutes a first priority mortgage lien on the Real Property, as described in the updated legal description.

(r) Bank Accounts. Each bank account of the Borrower shall at all times be (i) held as Collateral to secure the repayment and/or performance of the Loan Obligations, (ii) held at a financial institution approved by the Lender, which approval shall not be unreasonably withheld and (iii) subject to a perfected control agreement in favor of the Lender, with all rights and remedies in respect thereto as set forth in the Loan Documents. The Borrower shall not open a new bank account or any other account at a financial institution without the prior written consent of the Lender, which approval will not be unreasonably withheld.

(s) Environmental Matters .

(i) The Borrower shall (a) comply in all material respects with, and ensure compliance in all material respects by any and all occupants and operators of the Project with, all Environmental Laws, (b) keep the Project free of any Debt imposed pursuant to any Environmental Law, and (c) pay or cause to be paid when due and payable by the Borrower any and all costs in connection with any Environmental Laws, including the cost of identifying the nature and extent of the presence of any Materials of Environmental Concern in, on or about the Project or on any real property owned or leased by the Borrower, and the cost of delineation, management, remediation, removal, treatment and disposal of any such Materials of Environmental Concern.

(ii) The Borrower shall not use or allow the Project to generate, manufacture, refine, produce, treat, store, handle, dispose of, transfer, process or transport Materials of Environmental Concern other than in compliance in all material respects with Environmental Laws.

(t) Maintenance of Existence . Preserve, renew and keep in full force and effect its limited liability company existence and good standing in the State of Minnesota and take all actions to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business.

(u) Construction of the Natural Gas Pipeline . Borrower shall, and shall cause all of its Subsidiaries and Affiliates to:

(i) diligently proceed with, and complete construction of, the Pipeline Project in accordance with plans and specifications and Pipeline Project Budget provided to the Lender, and in accordance with all applicable laws and ordinances;

(ii) use commercially reasonable best efforts to require all Contractors to comply with all rules, regulations, ordinances and laws relating to work on the Pipeline Project;

(iii) obtain the Lender’s prior written approval of any change in the timeline or plans and specifications for the Pipeline Project or to the Pipeline Project Budget, which might materially adversely affect the value of the Lender’s Security Interests in the Collateral, and has a cost of $25,000.00 or greater. The Lender will have a reasonable time to evaluate any requests for its approval of any changes referred to in this subsection. The Lender may approve or disapprove changes in its discretion, reasonably exercised;

(iv) comply with and keep in effect all necessary permits and approvals obtained from any Governmental Authority relating to the lawful construction of the Pipeline Project; and comply with all applicable laws, regulations, orders, and requirements of any Governmental Authority, judicial, or legal authorities having jurisdiction over the Real Property or Pipeline Project, and with all recorded restrictions affecting the Real Property;

(v) furnish to the Lender from time to time on request by the Lender, in a form acceptable to the Lender, correct lists of all Contractors and subcontractors employed in connection with construction of the Pipeline Project and true and correct copies of all executed contracts and subcontracts. The Lender may contact any Contractor or subcontractor to verify any facts disclosed in the lists, Borrower must consent to, or obtain the consent to, the disclosure of such information by the Contractors and subcontractors to Lender or its agents upon Lender’s request, and Borrower must assist Lender or its agents in obtaining such information upon Lender’s request;

(vi) provide the Lender and its representatives with access to the Real Property and the Pipeline Project at any reasonable time and upon reasonable notice to enter the Real Property and inspect the work or construction and all materials, plans, specifications, and other matters relating to the construction. The Lender will also have the right to, at any reasonable time and upon reasonable notice, examine, copy, and audit the books, records, accounting data, and other documents relating to the Real Property or construction of the Pipeline Project;

(vii) pay and discharge all claims and liens for labor done and materials and services furnished in connection with the construction of the Pipeline Project. The Borrower and its Subsidiaries and Affiliates shall have the right to contest in good faith any claim or lien, provided that it does so diligently and without prejudice to the Lender or Lender’s Security Interests in the Collateral. Upon the Lender’s request, the Borrower will, or will cause its Subsidiaries or Affiliates to, promptly provide a bond, cash deposit, or other security reasonably satisfactory to the Lender to protect the Lender’s interest and Security Interests in the Collateral should the contest be unsuccessful;

(viii) maintain in force until completion of the Pipeline Project builder’s risk insurance in such amounts, form, risk coverage, deductibles, insurer, loss payable and cancellation provisions as are usual, customary and reasonable for project of the nature and scope of the Pipeline Project;

(ix) take such actions as are reasonable and necessary to bring about the timely completion of the Pipeline Project, and resolve all disputes arising during the work of construction thereof in a manner which will allow work to proceed expeditiously. With respect to such disputes, the Borrower, and its Subsidiaries and Affiliates will have the right to contest in good faith claims resulting in disputes, provided that it does so diligently and without prejudice to the Lender or Lender’s Security Interests in the Collateral. Upon the Lender’s request, the Borrower will, or will cause its Subsidiaries or Affiliates to, promptly provide a bond, cash deposit, or other security reasonably satisfactory to the Lender to protect the Lender’s interest and Security Interests in the Collateral should the contest be unsuccessful;

(x) pay the Lender’s out of pocket costs and expenses incurred in connection in the exercise of any of its rights or remedies under this Agreement, including but not limited to legal fees and disbursements, and reasonable fees and costs for services which are not customarily performed by the Lender’s salaried employees and are not specifically covered by the fees charged to originate the Loans, if any. The provision of this paragraph will survive the termination of this Agreement and the repayment of the Loans;

(xi) keep true and correct financial books and records on a cash basis for the construction of the Pipeline Project and maintain adequate reserves for all contingencies. If required by the Lender, submit to the Lender at such times as it requires (which will in no event be more often than monthly) a statement which accurately shows the application of all funds expended to date for construction of the Pipeline Project and the source of those funds as well as an estimate of the funds needed to complete the Pipeline Project and the source of those funds. The Borrower will promptly supply the Lender with all financial statements and other information concerning its affairs and the affairs of its Subsidiaries and Affiliates, as the Lender may reasonably request, and promptly notify the Lender of any material adverse change in its or their financial condition or in the physical condition of the Property or Pipeline Project;

(xii) comply with the requirements of any commitment or agreement entered into with any Governmental Authority to assist the construction or financing of the Project, the Real

Property or the Pipeline Project and with the terms of all applicable laws, regulations, and requirements governing such assistance;

(xiii) indemnify and hold the Lender harmless from and against all liabilities, claims, damages, reasonable costs, and reasonable expenses (including but not limited to reasonable legal fees and disbursements) relating to or in connection with any third party claims, lawsuits, or actions arising out of or resulting from any defective workmanship or materials occurring in the construction of the Pipeline Project. Upon demand by the Lender, defend any action or proceeding brought against the Lender alleging any defective workmanship or materials, or the Lender may elect to conduct its own defense at the reasonable expense of the Borrower or its Subsidiaries or Affiliates. The provisions of this paragraph will survive the termination of this Agreement and the repayment of the Loans; and

(xiv) obtain and deliver to the Lender copies of all necessary permits, licenses, approvals, and material contracts relating to the Project or the Pipeline Project.

(v) Shaw Remediation Project . Diligently proceed with and complete conversion of the Project to natural gas power, pending regulatory approvals and as necessary complete the Shaw Remediation Project pursuant to the budgets and timelines previously disclosed to the Lender.

Section 5.02. Negative Covenants . So long as any of the Loan Obligations remain unpaid or the Lender shall have any commitment hereunder, the Borrower will not, without the prior written consent of the Lender:

(a) Liens, etc . Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, in each case to secure any Debt (as defined below) of any Person, other than:

(i) those described on Schedule 5.02(a) hereto and renewals and extensions on the same or substantially the same terms and conditions and at no increase in the debt or obligation; or

(ii) liens or security interests which are subject to an intercreditor agreement in form and substance acceptable to Lender in Lender’s sole discretion; or

(iii) the liens or security interests of the Security Agreement; or

(iv) liens (other than liens relating to environmental liabilities or ERISA) for taxes, assessments, or other governmental charges that are not more than 30 days overdue or, if the execution thereof is stayed, which are being contested in good faith by appropriate proceedings diligently pursued and for which adequate reserves have been established; or

(v) liens of warehousemen, carriers, landlords, mechanics, materialmen, or other similar statutory or common law liens securing obligations that are not yet due and are incurred in the ordinary course of business or, if the execution thereof is stayed, which are being contested in good faith by appropriate proceedings diligently pursued and for which adequate reserves have been established in accordance with GAAP; or

(vi) liens resulting from good faith deposits to secure payments of workmen’s compensation unemployment insurance, or other social security programs or to secure the performance of

tenders, leases, statutory obligations, surety, customs and appeal bonds, bids or contracts (other than for payment of Debt); or

(vii) any attachment or judgment lien not constituting an Event of Default; or

(viii) liens arising from filing UCC financing statements regarding leases not prohibited by this Agreement; or

(ix) customary offset rights of brokers and deposit banks arising under the terms of securities account agreements and deposit agreements; or

(x) any real estate easements and easements, covenants and encumbrances that customarily do not affect the marketable title to real estate or materially impair its use; or

(xi) purchase money security interests in equipment and vehicles, not to exceed $25,000.00 for any single purchase; or

(xii) liens arising under the Gavilon Agreements; or

(xiii) liens arising out of the completion of the Pipeline Project or against the assets of Agrinatural Gas, LLC, which do not impair the Collateral or the Real Property and which do not or would not reasonably have a Material Adverse Effect.

(b) Distributions, etc . Declare or pay any dividends, purchase or otherwise acquire for value any of its membership interests (units) now or hereafter outstanding, or make any distribution of assets to its stockholders, members or general partners as such, or permit any of its Subsidiaries to purchase or otherwise acquire for value any stock, membership interest or partnership interest of the Borrower, provided, however, the Borrower and its Subsidiaries may: (i) declare and pay dividends and distributions payable in membership interests (units); (ii) purchase or otherwise acquire shares of the membership interests (units) of the Borrower or its Subsidiaries with the proceeds received from the issuance of new membership interests (units); (iii) so long as the Borrower first provides such supporting documentation as the Lender may request with respect to any fiscal year of the Borrower, the Borrower may pay aggregate cash dividends/distributions, during such fiscal year in an amount not to exceed the amount necessary for the members of the Borrower to pay their Income Taxes on such member’s allocable share of the taxable income of the Borrower for such taxable year or fiscal year, as applicable (“ Tax Distributions ”); (iv) pay redemptions, dividends or distributions in an amount not to exceed, in the aggregate, 40% of the Borrower’s immediately preceding fiscal year’s Net Income including Incentive Payments (except to the extent such Incentive Payments would not otherwise be classified as Net Income according to GAAP) (“ Allowed Distributions ”); (v) pay dividends or distributions which are immediately reinvested in the Borrower (“ Reinvestment Distributions ”) provided, however, that immediately prior to the proposed payment of any such dividends or distributions, or after giving effect thereto, no Event of Default shall exist; and (vi) complete the transactions reflected on Schedule 4.01(a); or

(c) Capital Expenditures . Make any investment in fixed assets in the aggregate amount of $500,000.00 during any fiscal year during the term of this Agreement, excluding investments for (i) the completion of the Pipeline Project, (ii) conversion of the Project to natural gas power and (iii) installation of a corn oil extraction/separation system at the Project in accordance with the budgets, timelines and approvals previously provided to or by the Lender; or

(d) Consolidation, Merger, Dissolution, Etc . Directly or indirectly, merge or consolidate with any other Person, permit any other Person to merge into or with or consolidate with the Borrower or any of its Subsidiaries, or permit any other Change of Control to occur; or

(e) Indebtedness, etc . Create, incur, assume or suffer to exist any Debt or other indebtedness, liabilities or obligations, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several, except: (i) the liabilities of the Borrower to the Lender hereunder; (ii) trade accounts payable and accrued liabilities (other than Debt) arising in the ordinary course of the Borrower’s or any of its Subsidiaries business; (iii) Subordinated Debt; (iv) the liabilities of the Borrower or its Subsidiaries described on Schedule 5.02(a); and (v) under the Gavilon Agreements, Long Term Marketing Agreements or other Material Contracts; or

(f) Organization; Name; Chief Executive Office . Change its state of organization, name or the location of its chief executive office without the prior written consent of the Lender, except that the principal office shall be moved to the plant site when construction of the administration office is substantially complete; or

(g) Loans, Guaranties, etc . Make any loans or advances to (whether in cash, in-kind, or otherwise) any Person, or directly or indirectly guaranty or otherwise assure a creditor against loss in respect of any indebtedness, obligations or liabilities (contingent or otherwise) of any Person; or

(h) Subsidiaries; Affiliates . Form or otherwise acquire any Subsidiary or affiliated business (except for Agrinatural Gas, LLC), or acquire the assets of or acquire any equity or ownership interest in any Person, unless such Subsidiary, affiliate or Person executes and delivers to the Lender: (i) a guaranty of all of the Loan Obligations, in form and substance acceptable to the Lender in its sole discretion; (ii) security agreements in form substantially similar to the Security Agreement; and (iii) such other documents and amendments to this Agreement and the other Loan Documents as the Lender shall reasonably require; or

(i) Transfer of Assets . Sell, lease, assign, transfer, or otherwise voluntarily dispose of any of its assets, or permit any of its Subsidiaries to sell, lease, assign, transfer, or otherwise voluntarily dispose of any of its assets except: (i) dispositions of inventory in the ordinary course of business; (ii) dispositions required under the Gavilon Agreements; and (iii) dispositions of: (a) obsolete or worn out equipment; (b) equipment or real property not necessary for the operation of its business; or (c) equipment or real property which is replaced with property of equivalent or greater value as the property which is disposed; or

(j) Lines of Business . Engage in any line or lines of business activity other than the production of ethanol and DDGS and any activities incidental or reasonably related thereto; or

(k) Transactions with Affiliates . Directly or indirectly enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate, Subsidiary, director, officer or employee of the Borrower, except (i) transactions listed on Schedule 5.02(k), (ii) transactions in the ordinary course of and pursuant to the reasonable requirements of the business of the Borrower or any of its Subsidiaries and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arm’s length transaction with a Person or entity that is not an Affiliate of the Borrower, (iii) payment of compensation to directors, officers and employees in the ordinary course of business for services actually rendered in their capacities as directors, officers and employees, provided such compensation is reasonable and comparable with compensation paid by companies of like nature and similarly situated, (iv) the formation and capital investment in HLBE

Pipeline Company, LLC, a Minnesota limited liability company; and (v) transactions with Agrinatural Gas, LLC, a Delaware limited liability company, which are fully disclosed to Lender and are no less favorable to the Borrower or any of its Subsidiaries than would be obtained in a comparable arm’s length transaction with a Person or entity that is not an Affiliate of the Borrower. Notwithstanding the foregoing, upon the election of Lender, no payments may be made with respect to any items set forth in clauses (i) and (ii) of the preceding sentence upon the occurrence and during the continuation of an Event of Default, except for the payments for corn otherwise in compliance with this Section 5.02(k); or

(l) Management Fees and Compensation . Directly or indirectly pay any management, consulting or other similar fees to any person, except (i) for fees and compensation listed on Schedule 5.02(l), and (ii) for legal or consulting fees paid to persons or entities that are not Affiliates of the Borrower or its Subsidiaries for services actually rendered and in amounts typically paid by entities engaged in the Borrower’s or such Subsidiary’s business; or

(m) Material Control or Management . (i) there should be any change in the chief executive officer of the Borrower, unless within 90 days of such event a person reasonably acceptable to Lender is appointed to such position, or (ii) the Borrower shall fail at any time to hold, legally or beneficially, 100% of the equity of each of the Subsidiary Guarantors; or

(n) Material Contracts . Change, alter or amend any of its Material Contracts including the Gavilon Agreements or other Long Term Marketing Agreements. No accounts receivable under any Material Contract, Gavilon Agreement or any other Long Term Marketing Agreement shall at any time remain unpaid for more than 15 days after the invoice date thereunder.

ARTICLE VI.

EVENTS OF DEFAULT AND REMEDIES

Section 6.01. Events of Default . Each of the following events shall be an “Event of Default”:

(a) The Borrower shall fail to pay any installment of principal or interest, fees, expenses, charges or other amounts payable hereunder or under the other Loan Documents or to make any deposit of funds required under this Agreement when due; or

(b) Any representation or warranty made by the Borrower, or any of its officers or directors under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made; or

(c) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Sections 5.01(d), (e), (f) or (g) or take any action as prohibited by Section 5.02; or

(d) The Borrower shall fail to deliver the financial statements or Compliance Certificate under Section 5.01(c) within 5 days of the date due; or

(e) The Borrower shall fail to perform or observe any term, covenant or agreement contained in any Loan Document (other than those listed in clauses (a) through (d) of this Section 6.01) on its part to be performed or observed (other than the covenants to pay the Loan Obligations) and any such failure shall remain unremedied for ten (10) days after written notice thereof shall have been given to the Borrower by the Lender, provided, however, that no Event of Default shall be deemed to exist if, within said ten (10) day period, Borrower have commenced appropriate action to remedy such failure and shall diligently and continuously pursue such action until such cure is completed, unless such cure is or cannot be completed within thirty (30) days after written notice shall have been given; or

(f) The Borrower shall fail to pay any indebtedness in an amount in excess of $50,000.00 (either in any individual case or in the aggregate) excluding indebtedness evidenced by the Notes and excluding Ordinary Trade Payable Disputes, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness; or any other default under any agreement or instrument relating to any such indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such indebtedness (excluding Ordinary Trade Payable Disputes); or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof (excluding Ordinary Trade Payable Disputes); or

(g) The Borrower shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property, and, in the case of any such proceeding instituted against it (but not instituted by it) either such proceeding shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property) shall occur; or the Borrower shall take any corporate action to authorize any of the actions set forth above in this subsection; or

(h) Any one or more judgment(s) or order(s) for the payment of money in excess of $50,000.00 in the aggregate shall be rendered against the Borrower and either: (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or

(i) Any provision of any Loan Document shall for any reason cease to be valid and binding on the Borrower or the Borrower shall so state in writing, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditor’s rights generally and by general principles of equity; or

(j) The Mortgage or the Security Agreement shall for any reason, except to the extent permitted by the terms thereof, cease to create a valid lien, encumbrance or security interest in any of the property purported to be covered thereby; or

(k) Any termination prior to its stated expiration date, change, or other amendment to any Material Contract, including the Gavilon Agreements, unless the same is/are replaced by similar agreement(s) reasonably acceptable to the Lender, within thirty (30) days of such change, amendment or termination; or

(l) A Change of Control shall occur; or

(m) The Pipeline Project or the Shaw Remediation Project is halted or abandoned prior to completion for any period of thirty (30) consecutive days for any cause which is not beyond the reasonable control of the Borrower, its Contractors and subcontractors, as applicable, and which would result in a Material Adverse Effect; or

(n) The Pipeline Project or the Shaw Remediation Project shall be delayed for any reason and for such period that, in the reasonable judgment of the Lender, the Pipeline Project or the Shaw Remediation Project will not be completed and would result in a Material Adverse Effect. If such delay is curable and if Borrower has not been given a notice of a similar breach within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower cures the failure within thirty (30) days, which shall include advancing the progress of the Pipeline Project or the Shaw Remediation Project to the point that, in the reasonable judgment of the Lender, the Pipeline Project or the Shaw Remediation Project will be completed;

(o) Any event, change or condition not referred to elsewhere in this Section 6.01 should occur which results in a Material Adverse Effect; or

(p) Any guarantee, suretyship, subordination agreement, maintenance agreement, or other agreement furnished in connection with the Borrower’s obligations hereunder and under any Note shall, at any time, cease to be in full force and effect, or shall be revoked or declared null and void, or the validity or enforceability thereof shall be contested by the guarantor, surety or other maker thereof, or any Subsidiary Guarantor shall deny any liability or obligations thereunder or under any Subsidiary Guaranty, or shall fail to perform its obligations thereunder, or any representation or warranty set forth therein shall be breached, or the Subsidiary Guarantor shall breach or be in default under the terms of any other agreement with Lender (including any loan agreement or security agreement); or

(q) The loss, suspension or revocation of, or failure to renew, any franchise, license, certificate, permit, authorization, approval or the like now held or hereafter acquired by the Borrower or any of its Subsidiaries, if such loss, suspension, revocation or failure to renew results in a Material Adverse Effect or (ii) any regulatory or Governmental Authority replaces the management of the Borrower or any of its Subsidiaries or assumes control over the Borrower or such Subsidiary; or

(r) The Borrower or any of its Subsidiaries should breach or be in default under a Material Contract in any material respect if, with respect to such breach, such breach has or could reasonably be expected to have a Material Adverse Effect , including any material breach or default, or any termination shall have occurred, or any other event which would permit any party other than the Borrower or its Subsidiaries to cause a termination, or any Material Contract shall have ceased for any reason to be in full force and effect prior to its stated or optional expiration date, if, with respect to the foregoing, such event has or could reasonably be expected to have a Material Adverse Effect; or

(s) The Borrower or any of its Subsidiaries should terminate, change, amend or restate, without the Lender’s prior consent any Material Contract and such termination, change, amendment or restatement which results in a Material Adverse Effect; or

(t) The issuance of any order, judgment or decree which has the affect of revoking or suspending the Air Quality Emissions permit for the Project; or

(u) Borrower or any Subsidiary or Affiliate of the Borrower dissolves, suspends, or discontinues doing business which results in a Material Adverse Effect; or

(v) The occurrence of a default or event of default however defined under any of the Gavilon Agreements or any other Long Term Marketing Agreement, which has or could reasonably be expected to have a Material Adverse Effect.

Section 6.02. Remedies . Upon the occurrence of an Event of Default and at any time while such Event of Default is continuing, the Lender:

(a) may accelerate the due date of the unpaid principal balance of the Notes, all accrued but unpaid interest thereon and all other amounts payable under this Agreement making such amounts immediately due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith immediately due and payable, without presentment, notice of intent to accelerate or notice of acceleration, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower and its Subsidiaries; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to any of the Borrower or any of its Subsidiaries under the Bankruptcy Code, the Notes, all such interest and all such amounts shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower and its Subsidiaries;

(b) may withhold any one or more Advances in its discretion, and terminate the Lender’s obligations, if any, under this Agreement to make any Advances whereupon the commitment and obligations of the Lender to extend credit or to make Advances hereunder shall terminate, and no disbursement of Loan funds by the Lender will cure any default of the Borrower, unless the Lender agrees otherwise in writing;

(c) may, by notice to the Borrower and its Subsidiaries, obtain the appointment of a receiver to take possession of all Collateral of the Borrower and its Subsidiaries, including, but not limited to all Personal Property, including all fixtures and equipment leased, occupied or used by any of the Borrower and its Subsidiaries. Borrower and each of its Subsidiaries hereby irrevocably consent to the appointment of such receiver and agree to cooperate and assist any such receiver as reasonably requested to facilitate the transfer of possession of the Collateral to such receiver and to provide such receiver access to all books, records, information and documents as requested by such receiver;

(d) in its discretion, enter the Real Property and take any and all actions necessary in its judgment to complete construction of the Project or the Pipeline Project, including but not limited to making changes in plans and specifications therefore, work or materials, and entering into, modifying, or terminating any contractual arrangements, subject to the Lender’s right at any time to discontinue any work without liability. If the Lender elects to complete the Project or the Pipeline Project, it will not assume any liability to the Borrower or any other person therefore or for the manner or quality of construction thereof, and the Borrower expressly waives any such liability. The Borrower irrevocably appoints the Lender as its attorney in fact, with full power of substitution, to complete the Project and/or the Pipeline Project in the Borrower’s name, or the Lender may elect to complete construction in its own name. In any event, all sums expended by the Lender in completing construction will be considered to have been disbursed to the Borrower and will be secured by the Mortgage and any other instruments or documents securing the Loans, and any such sums that cause the principal amount of the Loans to exceed the face amount of the Notes will be considered to be an additional loan to the Borrower bearing interest at the rate provided in the Notes and will be secured by the Mortgage and any other instrument or documents securing the Loans. The Lender will not have any obligation under the plans and specifications prepared for the Project or the Pipeline Project, any studies, data, and drawings with respect thereto prepared by or for Borrower, or the contracts and agreements relating to the Plans and Specifications, or the aforesaid studies, data, and drawings, or to the construction of the Project or the Pipeline Project unless it expressly hereafter agrees in writing. The Lender will have the right to exercise any rights of the

Borrower under those contracts and agreements or with respect to such plans and specifications, studies, data, and drawings upon any default by the Borrower under this Agreement, and shall have such other rights and remedies with respect thereto as are afforded a secured creditor under applicable law; and

(e) may, by notice to the Borrower, require the Borrower to pledge to the Lender as security for the Loan Obligations an amount in immediately available funds equal to the then outstanding Letter of Credit Liabilities, such funds to be held in an interest bearing cash collateral account at the Lender without any right of withdrawal by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any of its Subsidiaries under the Federal Bankruptcy Code, the Borrower shall, without notice, pledge to the Lender as security for the Loan Obligations an amount in immediately available funds equal to the then outstanding Letter of Credit Liabilities, such funds to be held in such an interest bearing cash collateral account at the Lender; and

(f) may exercise all rights to notify or instruct any Commodity Intermediary under any Commodity Account Control Agreement or Bank under any Deposit Account Control Agreement;

(g) may apply any funds held by Lender in a Program Account toward the outstanding Loan Obligations of the Borrower; and

(h) may exercise any other rights and remedies afforded to the Lender under the Loan Documents or by applicable law or equity.

Section 6.03. Remedies Cumulative . Each and every power or remedy herein specifically given shall be in addition to every other power or remedy, existing or implied, given now or hereafter existing at law or in equity, and each and every power and remedy herein specifically given or otherwise so existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lender, and the exercise or the beginning of the exercise of one power or remedy shall not be deemed a waiver of the right to exercise at the same time or thereafter any other power or remedy. No delay or omission of Lender in the exercise of any right or power accruing hereunder shall impair any such right or power or be construed to be a waiver of any default or acquiescence therein.

ARTICLE VII.

MISCELLANEOUS

Section 7.01. Amendments, etc . No amendment or waiver of any provision of any Loan Document to which the Borrower and its Subsidiaries are a party, nor any consent to any departure by the Borrower and its Subsidiaries therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Lender and the Borrower, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

Section 7.02. Notices, etc . All notices and other communications provided for under any Loan Document shall be in writing and mailed, faxed, or delivered at the addresses set forth below, or at such other address as such party may specify by written notice to the other parties hereto:

	If to the Borrower:	Heron Lake BioEnergy, LLC
		91246 390th Avenue
		P.O. Box 198
		Heron Lake, MN 56137-0198
		Telephone: (507) 793-0077
		Fax: (507) 793-0078
		Attention: President

	With a copy to:	Lindquist & Vennum P.L.L.P.
		4200 IDS Center
		80 South Eighth Street
		Minneapolis, MN 55402-2205
		Telephone: (612) 371-3211
		Fax: (612) 371-3207
		Attn. Michael Weaver

	If to the Lender:	AgStar Financial Services, PCA
		1921 Premier Drive
		P.O. Box 4249 Mankato, MN 56002-4249
		Telephone: (507) 386-4242
		Facsimile: (507) 344-5088
		Attention: Mark Schmidt

	With copy to:	Phillip L. Kunkel
		Gray Plant Mooty
		1010 West St. Germain, Suite 600
		St. Cloud, MN 56301
		Facsimile: (320) 252-4482

All such notices and communications shall have been duly given and shall be effective: (a) when delivered; (b) when transmitted via facsimile to the number set forth above; (c) the Business Day following the day on which the same has been delivered prepaid (or pursuant to an invoice arrangement) to a reputable national overnight air courier service; or (d) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid. Any confirmation sent by the Lender to the Borrower of any borrowing under this Agreement shall, in the absence of manifest error, be conclusive and binding for all purposes

Section 7.03. No Waiver; Remedies, Etc .

(a) No failure on the part of the Lender to exercise, and no delay in exercising, any right under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Loan Document preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law.

(b) Notwithstanding Section 7.03(a), the execution and delivery of this Agreement, the Amended and Restated Term Note, the Amended and Restated Term Revolving Note, and the other Loan Documents and Related Documents described herein shall supersede and replace in their entirety the 2007 MLA, the Third Supplement, the Fourth Supplement, and the Fifth Supplement, Note One, Note Two, and Note Three, the Forbearance Agreement and all supplements, amendments, restatements and other modifications thereof, which shall hereafter be of no force or effect.

Section 7.04. Costs, Expenses and Taxes .

(a) The Borrower agrees to pay on demand all costs and expenses in connection with the preparation, execution, delivery, filing, recording and administration of the Loan Documents and the other documents to be delivered under the Loan Documents, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Lender (who may be in-house counsel), and local counsel who may be retained by said counsel, with respect thereto and with respect to advising the Lender as to its respective rights and responsibilities under the Loan Documents, and all costs and expenses (including reasonable counsel fees and expenses) for the Lender in connection with the filing of the Financing Statements and the enforcement of the Loan Documents and the other documents to be delivered under the Loan Documents, including Protective Advances and including, without limitation, all such costs and expenses associated with defending, protecting or enforcing the Loan documents, whether in the context of any bankruptcy proceedings or otherwise. In addition, the Borrower agrees to pay on demand the expenses described in Section 5.01(b). In addition, the Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of the Loan Documents and the other documents to be delivered under the Loan Documents, and agrees to save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees.

(b) If, due to payments made by the Borrower due to acceleration of the maturity of the Advances pursuant to Section 6.01 or due to any other reason, the Lender receives payments of principal of any Loan other than on the last day of an Interest Period relating thereto, the Borrower shall pay to the Lender on demand any amounts required to compensate the Lender for any additional losses, costs or expenses which it may incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund or maintain such Loan.

Section 7.05. Right of Set-off . The Lender is hereby authorized at any time and from time to time after an Event of Default, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower and each of its Subsidiaries against any and all of the Loan Obligations, irrespective of whether or not the Lender shall have made any demand under such Loan Document and although deposits, indebtedness or such obligations may be unmatured or contingent. The Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have.

Section 7.06. Severability of Provisions . Any provision of this Agreement or of any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof or affecting the validity or unenforceability of such provision in any other jurisdiction.

Section 7.07. Binding Effect; Successors and Assigns; Participations .

(a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign or otherwise transfer its rights hereunder or any interest herein without the prior written consent of

the Lenders. Upon the request of Borrower, Lender shall provide copies of all invoices for costs and expenses to be reimbursed by Borrower under this Agreement or under any of the Loan Documents.

(b) Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loans, and Borrower hereby waives any rights to privacy it may have with respect to such matters; provided, however, that any information received by any such purchaser or potential purchaser under this provision which concerns the personal, financial or other affairs of the Borrower shall be received and kept by the purchaser or potential purchaser in full confidence and will not be revealed to any other persons, firms or organizations nor used for any purpose whatsoever other than for determining whether or not to participate in the Loans and in accord with the rights of Lender if a participation interest is acquired. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interest. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest arising out of or by virtue of the participation and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loans irrespective of the failure or insolvency of any holder of any interests in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Section 7.08. Consent to Jurisdiction .

(a) The Borrower hereby irrevocably submits to the jurisdiction of any Minnesota state court or federal court over any action or proceeding arising out of or relating to this Agreement, the Note and any instrument, agreement or document related hereto or thereto, and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Minnesota state court or federal court. The Borrower hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. The Borrower irrevocably consents to the service of copies of the summons and complaint and any other process which may be served in any such action or proceeding by the mailing of copies of such process to Borrower at its address specified in Section 7.02. The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

(b) Nothing in this Section 7.08 shall affect the right of the Lender to serve legal process in any other manner permitted by law or affect the right of the Lender to bring any action or proceeding against the Borrower or its property in the courts of other jurisdictions.

Section 7.09. Governing Law . THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF MINNESOTA.

Section 7.10. Execution in Counterparts . This Agreement may be executed in any number of counterparts and on facsimile or electronic counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same agreement.

Section 7.11. Survival . All covenants, agreements, representations and warranties made by the Borrower in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Advances and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that Lender may have had notice or knowledge of any Event of Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as any Loan Obligations are outstanding and unpaid and so long as the Lender has any unexpired commitments under this Agreement or the Loan Documents. The expense reimbursement, additional cost, capital adequacy and indemnification provisions of this Agreement shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loan Obligations or the termination of this Agreement or any provision hereof.

Section 7.12. WAIVER OF JURY TRIAL . THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT TO WHICH IT IS A PARTY OR ANY INSTRUMENT OR DOCUMENT DELIVERED THEREUNDER.

Section 7.13. Entire Agreement . THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO OR THERETO.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT, AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF THE DATE FIRST ABOVE STATED.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers and duly authorized, as of the date first above written.

[SIGNATURE PAGE ON FOLLOWING PAGE]

SIGNATURE PAGE TO:

FIFTH AMENDED AND RESTATED MASTER LOAN AGREEMENT

by and among

HERON LAKE BIOENERGY, LLC

and

AGSTAR FINANCIAL SERVICES, PCA

Dated to be effective as of September 1, 2011

BORROWER:

HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company

/s/ Robert J. Ferguson
By Robert J. Ferguson
Its President


LENDER:

AGSTAR FINANCIAL SERVICES, PCA
a United States instrumentality


/s/ Mark Schmidt
By Mark Schmidt
Its Vice President

EXHIBIT A

COMPLIANCE CERTIFICATE

TO: AGSTAR FINANCIAL SERVICES, PCA (the “ Lender ”)

Pursuant to that certain Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011, by and between HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (the “ Borrower ”), and the Lender, and any amendments thereto and extensions thereof (the “ Loan Agreement ”), the undersigned hereby represents, warrants and certifies to the Lender as follows:

1. The financial statement(s) attached hereto are complete and correct in all material respects and fairly present the financial condition of the Borrower as of the date of said financial statement(s) and the result of its business operations for the period covered thereby;

2. Repeats and reaffirms to the Lender each and all of the representations and warranties made by the Borrower in the Loan Agreement and the agreements referred to therein or related thereto, and represents and warrants to the Lender that each and all of said warranties and representations are true and correct as of the date hereof except as set forth in Schedule 1 to this Compliance Certificate;

3. No Event of Default (as that term is defined in the Loan Agreement), and no event which with the giving of notice or the passage of time or both would constitute an Event of Default, has occurred and is continuing as of the date hereof;

4. All the calculations set forth below are made pursuant to the terms of the Loan Agreement and are true and accurate as of the date of the attached financial statements:

1.		Section 5.01(d) — Working Capital .
		(tested quarterly)

(a)	Current Assets	$
(b)	Available Commitment on the Term Revolving Loan	$
(c)	Total Current Assets (line (a) plus line (b)	$
(d)	Current Liabilities	$

Line (c) less line (d)		$

In Compliance

Yes o

No o

2.		Section 5.01(e) — Tangible Net Worth .
		(tested quarterly)

(a)	Required Tangible Net Worth	$	40,000,000.00

(b)	Actual Tangible Net Worth

	(1) Total Assets	$
	(2) Less Intangible Assets (per definition)	$
	(3) Total Tangible Assets	$

	(4) Total Liabilities		$
	(5) Tangible Net Worth		$
	(line (4) minus line (5))

In Compliance

Yes o

No o

3.		Section 5.01(f) — Owner Equity Ratio
		(tested quarterly)

(a)	Tangible Net Worth	$
(b)	Total Assets	$
(c)	Owner Equity Ratio
	(ratio of line (a) to (b)), expressed as a percentage	%

	Required Ratio of 40%

In Compliance

Yes o

No o

4.		Section 5.01(g) — Fixed Charge Ratio
		(tested annually)

(a)	EBITDA	$
(b)	(+/-)Extraordinary Items	$
(c)	Numerator (sum of lines (a) and (b))	$

(d)	Current Portion of Long Term Debt	$
(e)	Interest Expense	$
(f)	Dividends	$
(g)	Maintenance Capital Expenditures	$
(h)	Denominator (sum of lines (d) through (g))	$

Ratio of line (c) to (h)		to 1.00

Required Ratio of 1.0 to 1.0 or 1.20 to 1.00 per covenant

In Compliance

Yes o

No o

IN WITNESS WHEREOF, the undersigned has signed and delivered this Certificate to the Lender as of the day of , .

BORROWER:

HERON LAKE BIOENERGY, LLC
a Minnesota limited liability company


By
	Its

Schedule 3.01(d)

Real Property

TRACT A

Parcel A

Part of the SW¼ of Sec. 16, T104N, R37W, Jackson County, Minnesota, lying Southerly of the Southerly right of way line of the Union Pacific Railroad, described as follows:

Beginning at an existing iron monument at the SE corner of the SW¼ of said Sec. 16; thence South 89°57’49” West, along the South line of said SW¼, a distance of 1031.09 feet; thence North 00°37’05” East, parallel with the West line of said SW¼, a distance of 275.02 feet; thence South 89°57’49” West, parallel with the South line of said SW¼, a distance of 1600.10 feet, to a point on the West line of said SW¼; thence North 00°37’05” East, along the West line of said SW¼, a distance of 593.98 feet; thence South 89°22’55” East a distance of 412.00 feet; thence North 00°37’05” East, parallel with the West line of said SW¼, a distance of 400.00 feet; thence North 89°22’55” West a distance of 412.00 feet, to a point on the West line of said SW¼; thence North 00°37’05” East, along the West line of said SW¼, a distance of 103.50 feet, to a point on the Southerly right of way line of the Union Pacific Railroad; thence North 76°38’53” East, along the Southerly right of way line of said Union Pacific Railroad, a distance of 2706.70 feet, to a point on the East line of said SW¼; thence South 00°29’31” West, along the East line of said SW¼, a distance of 1995.89 feet, to the point of beginning,

EXCEPTING a part of the S½ SW¼ of Sec. 16, T104N, R37W, Jackson County, Minnesota, described as follows: Commencing at an existing iron monument at the SE corner of the SW¼ of said Sec. 16; thence South 89°57’49” West, bearing based on Jackson County Coordinate System, along the South line of said SW¼ of said Sec. 16, a distance of 1048.26 feet, to the point of beginning; thence continuing South 89°57’49” West, along said South line, a distance of 503.33 feet; thence North 00°02’11” West a distance of 275.00 feet; thence North 89°57’49” East, parallel with the South line of said SW¼, a distance of 246.59 feet; thence North 00°02’11” West a distance of 74.71 feet; thence North 89°57’49” East, parallel with the South line of said SW¼, a distance of 256.74 feet; thence South 00°02’11” East a distance of 349.71 feet, to the point of beginning.

Parcel B

Part of the SE¼ of Sec. 16, T104N, R37W, Jackson County, Minnesota, described as follows:

Beginning at an existing iron monument at the SW corner of the SE¼ of said Sec. 16; thence North 00°29’31” East, bearing based on Jackson County Coordinate System, along the West line of the SE¼ of said Sec. 16, a distance of 1995.89 feet, to a point on the Southerly right of way line of the Union Pacific Railroad; thence North 76°38’53” East, along the Southerly right of way line of said Union Pacific Railroad, a distance of 2701.22 feet, to a point on the East line of the SE¼; thence South 00°18’29” West, along the East line of said SE¼ a distance of 1799.88 feet; thence South 89°57’40” West, parallel with the South line of said SE¼, a distance of 593.49 feet; thence South 61°26’20” West a distance of 545.54 feet; thence South 01°19’30” West, a distance of 557.71 feet, to a point on the South line of said SE¼; thence South 89°57’40” West, along the South line of said SE¼, a distance of 1575.92 feet, to the point of beginning.

Schedule 4.01(a)

Description of Certain Transactions Related to the Borrowers’ Stock

· Up to 225,000 Class A Units (in aggregate) were issued in August 2007, at the price of $.80 per unit, pursuant to five-year options granted to the Borrower’s Board of Governors (including estate of deceased former Governor).

· 3,750,000 Class A Units were issued to Project Viking, L.L.C., in exchange for 3,750,000 Class B Units, pursuant to a subscription and exchange agreement were entered into with Project Viking, L.L.C., an affiliate of Roland Fagen, in May 2007.

· 3,103,449 Class A Units were issued to Project Viking, L.L.C. in consideration of capital contribution of $4,500,001.05, pursuant to subscription agreement dated July 2, 2010.

· 7,000,000 Class B Units were issued to Project Viking, L.L.C. in consideration of capital contribution of $3,500,000.00, pursuant to subscription agreement dated May 19, 2011.

· 7,000,000 Class A Units were issued to Project Viking, L.L.C., in exchange for 7,000,000 Class B Units, pursuant to the First Amended and Restated Articles of Organization and Member Control Agreement the Borrower, as amended by members on August 30, 2011.

· The Borrower has issued at no charge to eligible holders of its Class A Units non-transferable subscription rights to purchase up to an aggregate of 16,500,000 of its Class A Units.

· to be eligible, holders must be a resident of the State of Minnesota;

· Project Viking, L.L.C. is not eligible;

· The subscription rights entitle each eligible holder to subscribe for .7773 of a Class A Unit for each Class A Unit held of record by such holder at the close of business on August 30, 2011, subject to adjustment to eliminate rights to subscriber for fractional Units, at a purchase price of $.50 per Unit.

· There is no minimum offering amount, and there is no minimum purchase required.

· The offering of subscription rights is made pursuant to Confidential Disclosure Statement dated August 30, 2011; the offering expires on October 15, 2011, unless extended by the Borrower with the consent of Project Viking, L.L.C.

Schedule 4.01(c)

Governmental Approvals

· Requirements of Borrower under the Stipulation Agreement entered into by and between The Minnesota Pollution Control Agency (“MPCA”) and Borrower as Regulated Party with an effective date of December 16, 2010, as amended by Amendment No. 1 executed by Borrower on August 16, 2011, including

· Completion of the Fugitive Dust Emissions Recapture Study (awaiting final report from consultant) and submission of the study and report to MPCA

· Submission of NPDES Stormwater Permit Application to renew Borrower’s existing NPDES permit authorizing storm water discharge from Stormwater Pond 001

· Deliverables associated with anticipated September 15 th ZLD (Zero Liquid Discharge) conversion including ZLD Contingency Plan (submitted and awaiting approval by MPCA).

· Permits required for ZLD conversion.

· The anticipated minor amendment to Air Emissions Permit #06300025-004 issued to Borrower dated December 16, 2010 to allow for initial conversion of Project to Natural Gas Power.

· Any major modification to Air Emissions Permit #06300025-004 that is required following completion of initial conversion of Project to Natural Gas Power.

· Facility fencing as determined by air emission modeling no later than Dec. 16, 2012 unless Borrower applies for and is approved for extension.

· Installation of stack extensions for emergency generators originally required to be installed in June 2011 but suspension provided by MPCA upon Borrower’s request based on regulation that may deem generators as exempt (request under review by MPCA).

· All Governmental Approvals required for or relating to the Pipeline Project or Agrinatural Gas, LLC.

Schedule 4.01(f)

Description of Certain Threatened Actions, etc.

1. Any action or proceeding relating to the outstanding Governmental Approvals listed on Schedule 4.01(c).

Schedule 4.01(k)

Location of Inventory and Farm Products; Third Parties in Possession; Crops

1. See Schedule 4.01 (l) below (which locations are incorporated herein by reference).

2. Borrower and Subsidiary Guarantors maintain various accounts with lenders/financial institutions that are subject to account control agreements in favor of Lender.

3. Borrower and Subsidiary Guarantor LFE leases certain real property from Union Pacific Railroad Company with respect to the acquisition of the elevator facilities located at (Lakefield Facility): 105 Main Street, Lakefield, Minnesota 56150 and (Wilder Facility): Highway 60, Wilder, Minnesota 56101, as further described in the purchase agreement for the facilities between Subsidiary Guarantor LFE and seller of such property.

4. Borrower and Subsidiary Guarantor LFE maintain petroleum, soybeans, corn and other inventory at the Real Property, on the leased real property referenced above and on the real property and improvements owned by Subsidiary Guarantor LFE.

5. Pursuant to the Gavilon Agreements (as defined in this Agreement), Gavilon, LLC will own, possess, and/or have a security interest in the Joint Collateral as defined in the Intercreditor Agreement.

6. Any inventory or other property of Agrinatural Gas, LLC.

7. Any equipment or personal property described in Schedule 5.02(a).

Schedule 4.01(l)

Office Locations; Fictitious Names; Etc.

Locations:

Lakefield Facility: 105 Main Street, Lakefield, Minnesota 56150

Wilder Facility: Highway 60, Wilder, Minnesota 56101

Heron Lake: 91246 390th Avenue, PO Box 198, Heron Lake, Minnesota 56137-0198 (Jackson County)

Jurisdiction of Organization:

Minnesota

Other Names:

Heron Lake BioEnergy, LLC, f.k.a. Generation II Ethanol, LLC

Heron Lake BioEnergy (assumed name)

Lakefield Farmers Elevator

Income Tax Numbers:

Heron Lake BioEnergy - FEIN: 41-2002393; MN TID: 5537084

Lakefield Farmers Elevator, LLC — FEIN: 20-2990455; MN TID: 7995842

MN State Charter Numbers:

Heron Lake BioEnergy, LLC: 22013-LLC

Lakefield Farmers Elevator, LLC: 1398208-2

Schedule 4.01(p)

Intellectual Property

Tradenames: Heron Lake BioEnergy; Generation II Ethanol; Lakefield Farmers Elevator; HLBE Pipeline Company; HLBE-PC

Domain Names used in the ordinary course of business.

Borrower entered into a License Agreement with ICM, Inc. dated September 28, 2005, under which Borrower may use certain proprietary technology and information of ICM in the operation of the Project. There may be one or more patents issued to or licensed by ICM in conjunction with ICM’s intellectual property licensed by Borrower under the ICM License Agreement.

Borrower has entered into a [ * * * ] with [ * * * ] dated August 19, 2011, under which [ * * * ] will deliver [ * * * ] equipment to the Project and provide a Technology Service Program over a 3-year term, during which term Borrower will use the [ * * * ] equipment [ * * * ], and at the end of which term Borrower will have the right to buy the equipment. [ * * * ] is the owner or authorized user of any intellectual property rights embodied or represented in the [ * * * ] equipment, provided Borrower shall not acquire any right whatsoever to any such intellectual property rights, and provided further that [ * * * ] have asserted certain patent rights as to claimed [ * * * ] technology against various manufacturers and users of [ * * * ] technology including [ * * * ]. There may be one or more patents issued to or licensed by [ * * * ] in conjunction with the [ * * * ] equipment to be used at the Project.

Borrower makes no representation or warranty to Lender and gives no opinion to Lender on whether use of the [ * * * ] equipment infringes upon any rights of [ * * * ] or as to the outcome of the [ * * * ] or as to any rights or remedies [ * * * ] may assert against Borrower.

Information on Intellectual Property of or related to Agrinatural Gas, LLC or the Pipeline Project is not included on Schedule 4.01(l).

Schedule 4.01(t)

Environmental Compliance

The environmental conditions identified on the Limited Phase II Assessment for the Lakefield elevator facility located at 105 and 11 Main Street, Lakefield, Minnesota 56150, a copy of which has been delivered previously to Lender and is incorporated herein by reference, and any potential remediation measures identified in said Assessment that may be required to be addressed at the Lakefield elevator facility.

The Environmental Laws implicated by the items identified on Schedule 4.01(c).

The Environmental Laws relating to or affecting Agrinatural Gas, LLC or the Pipeline Project.

Schedule 5.01(o)

Management

Our business and affairs are managed by or under the direction of a 9-person Board of Governors. Governors are elected or appointed in accordance with Borrower’s Member Control Agreement. Our Board of Governors may fill any vacancies created in accordance with Borrower’s Member Control Agreement by the affirmative vote of a majority of the elected members of the Board of Governors serving at the time of the vacancy.

Officers of the Borrower including its Chief Executive Office and Chief Financial Officer are elected or appointed by the Board of Governors in accordance with Borrower’s Member Control Agreement.

Management information regarding Agrinatural Gas, LLC is not included on Schedule 5.01(o).

Schedule 5.02(a)

Description of Certain Liens, Lease Obligations, etc.

1. All liens, security interests, or other charges or encumbrances described in Section 5.02(a)(i)-(xiii) of the Master Loan Agreement.

2. Borrower leases a copy machine and is subject to a lease agreement.

3. Borrower has entered into a secured loan arrangement with the Federated Rural Electric Ass’n/USDA in the approximate principal amount of $600,000.00. Borrower’s obligations under the loan arrangement are secured by a security interest in certain assets of Borrower described on Exhibit A to UCC Financing Statement Amendment file # 20071941449 with Borrower as debtor.

4. Borrower has entered into a secured loan arrangement with Alliant Energy in the approximate principal amount of $140,000.00. Borrower’s obligations under the loan arrangement are secured by a security interest in One Resco 7.5 MVA substation transformer 69 KV 12.47/7.2 as described in UCC Financing Statement file # 200719421768 with Borrower as debtor.

5. Malloy Electric provides Borrower with consignment inventory pursuant to consignment agreement between Borrower as consignee and Malloy Electric as consignor dated July 18, 2007, as such consignment inventory is described in UCC Financing Statement file #200813525005 with Borrower as debtor.

6. Borrower has entered into a secured equipment transaction with Diesel Machinery, Inc. in respect of a Komatsu WA250-6 Wheel Loader serial A76088, and Borrower’s obligations under the equipment transaction are secured by a security interest in the foregoing equipment, as further described in UCC Financing Statement file #200915635005 with Borrower as debtor and Kamtsu Financial Limited Partnership as secured party (total assignee of assignor S/P).

7. The Borrower leases rail cars in the ordinary course of business to conduct its operations.

8. The Borrower expects to incur and record liabilities for derivative instruments relating to commodity futures positions in current and future periods.

9. Assessment payable as part of water treatment agreement in the amount of $3,550,000.00 as of October 31, 2006.

10. Borrower has entered into a [ * * * ] Agreement with [ * * * ] dated August 19, 2011, under which [ * * * ] will deliver [ * * * ] equipment and provide a Technology Service Program over a 3-year term, Borrower will pay a monthly fee of $52,000 per month over the 3-year term, and at the end of which term Borrower will have the right to buy the equipment for $1.00.

Schedule 5.02(k)

Transactions with Affiliates

1. Purchase of corn from any governor, officer or their affiliate, provided said purchase is in accordance with Borrower’s Member Control Agreement.

2. The transactions referenced in Schedule 4.01(a).

3. Transactions between Borrower and its subsidiaries pursuant to or in accordance with their respective member control agreements.

4. The Borrower has procured a software package from a vendor in conjunction with an Affiliate in order to maximize economic efficiencies associated with the procurement.

5. Transaction with Federated Electric to construct and operate a sub-station.

6. Permitted transactions with Agrinatural Gas, LLC.

7. Permitted transactions with HLBE Pipeline Company, LLC.

Schedule 5.02(l)

Management Fees and Compensation

Borrower has and may in the future retain the services of Jeremy Wilhelm as management consultant.

Exhibit 10.41

AMENDED AND RESTATED

TERM N OTE

$40,000,000.00

September 1, 2011

1. FOR VALUE RECEIVED, HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (the “ Borrower ”), hereby promises to pay to the order of AGSTAR FINANCIAL SERVICES, PCA , an United States corporation (the “ Lender ”), the principal sum of Forty Million and No/100ths ($40,000,000.00) Dollars (the “ Term Loan ”), with interest thereon from the Closing Date until fully paid, pursuant to that certain Fifth Amended and Restated Master Loan Agreement of even date herewith, by and between the Lender and the Borrower (as it may be amended, modified, supplemented, extended or restated from time to time, the “MLA” ), in lawful money of the United States and immediately available funds. This Amended and Restated Term Note (the “ Note ”) is issued pursuant to the terms and provisions of the MLA and is entitled to all of the benefits provided for herein and therein. All capitalized terms used and not defined herein shall have the meanings assigned to them in the MLA.

2. The outstanding principal balance of this Note shall bear interest as follows:

(a) Variable Rate . Subject to the provisions of Sections 2.04 and 2.09 of the MLA, Twenty Million and no/100 dollars ($20,000,000.00) of the Term Loan shall bear interest at a rate per annum equal to the greater of (A) LIBOR Rate plus three hundred fifty (350) basis points or (B) five percent (5.0%). The rate of interest due thereon shall initially be determined as of the Closing Date and shall thereafter be adjusted as and when LIBOR Rate changes. All such adjustments to the rate of interest shall be made and become effective as of the first day of the month following the date of any change in LIBOR Rate and shall remain in effect until and including the day immediately preceding the next such adjustment (each such day hereinafter being referred to as an “ Adjustment Date ”). All such adjustments to the rate of interest shall be made and become effective as of the first Adjustment Date following such change in the LIBOR Rate. All such adjustments to said rate shall be made and become effective as of the Adjustment Date, and said rate as adjusted shall remain in effect until and including the day immediately preceding the next Adjustment Date. Interest shall be computed on the basis of a year of three hundred sixty five (365) days, but charged for actual days principal is outstanding.

(b) Fixed Rate. Subject to the provisions of Sections 2.04 and 2.09, Twenty Million and no/100 dollars ($20,000,000.00) of the Term Loan shall bear interest from the Closing Date and until the third (3rd) anniversary of the Closing Date at a fixed rate equal to five and three-quarters percent (5.75%) per annum. On the third (3rd) anniversary of the Closing Date, such interest rate will be adjusted, and on dates occurring at successive intervals of three years each thereafter during the remaining term of the Term Loan. The adjusted interest rate will be calculated by adding 2.25 percentage points (“ Margin ”) to the then current index. The index for adjustments is the Lender’s cost of funds for three-year adjustable rate products. Lender’s cost of funds is the rate determined by the Lender to represent the Lender’s direct and indirect cost of acquiring funds with a term equal to the applicable interest period and interest rate product selected by the Borrower. Interest shall be computed on the basis of a year of three hundred sixty five (365) days, but charged for actual days principal is outstanding.

3. “ LIBOR Rate ” means the One Month London Interbank Offered Rate (“ One Month LIBOR ”), rounded upward to the nearest ten thousandth of one percent, reported on the tenth day of the month immediately preceding the month for which interest is being calculated by the Wall Street Journal in its daily listing of money rates, defined therein as the average of interbank offered rates for dollar deposits in the London market. If One Month LIBOR is not reported on the tenth day of a month, the One Month LIBOR reported on the first Business Day preceding the tenth day of the month will be used. If this index is no longer available, Lender will select a new index which is based upon comparable information. For purposes of clarity, the parties hereto agree that it is their intention to utilize the One Month LIBOR rate described above for each one-month period with the applicable One Month LIBOR rate being reset for each successive one-month period as described above.

4. Beginning on first Monthly Payment Date following the Closing Date and on each Monthly Payment Date thereafter until the Term Loan Maturity Date, the Borrower shall make equal monthly payments of principal and accrued interest in such amounts as will be required to fully amortize the entire outstanding principal of this Note, together with accrued interest thereon, over a period not to exceed ten (10) years from date of this Note. The amount of said monthly payments shall be recalculated and, if necessary, adjusted to account for changes in the effective rate of interest hereunder and to maintain said ten (10) year amortization.

5. In addition to all other payments of principal and interest required under the MLA and this Note, the Borrower shall remit to Lender, beginning with the first fiscal year end following the Closing Date and continuing throughout the term of the Term Loan, an amount equal to 25% of the Borrower’s Excess Cash Flow for the immediately preceding fiscal year (the “ Excess Cash Flow Payment ”), which shall be calculated based upon the immediately preceding fiscal year end audited financial statements of the Borrower, on or before 90 days after the end of each fiscal year, and which shall be paid on or before 120 days after the end of the fiscal year for which the payment is calculated. Total Excess Cash Flow Payments required under the MLA and this Note shall not exceed Two Million and No/100 Dollars ($2,000,000.00) for any fiscal year. All Excess Cash Flow Payments shall be applied to the reduction of the outstanding principal balance of the Term Loan. No Excess Cash Flow Payments shall be required for a fiscal year where Borrower’s Owner’s Equity Ratio is greater than 50% as calculated at the end of the fiscal year for which the Excess Cash Flow Payment is being calculated.

6. The outstanding principal balance hereof, together with all accrued interest, if not paid sooner, shall be due and payable in full on September 1, 2016 (the “ Term Loan Maturity Date ”).

7. All payments and prepayments shall, at the option of the Lender, be applied first to any costs of collection, second to any late charges, third to accrued interest and the remainder thereof to principal, in the sole discretion of the Lender.

8. This Note may be prepaid, at any time, at the option of the Borrower, either in whole or in part, subject to the obligations of the Borrower to compensate the Lender for any loss, cost or expense as a result of such prepayment as set forth in the MLA. This Note is subject to mandatory prepayment, at the option of the Lender, as provided in the MLA.

9. In addition to the rights and remedies set forth in the MLA : (i) if the Borrower fails to make any payment to Lender when due under this Note, then at Lender’s option in each instance, such obligation or payment shall bear interest from the date due to the date paid at 2% per annum in excess of the rate of interest that would otherwise be applicable to such obligation or payment under this Note; (ii) upon the occurrence and during the continuance of an Event of Default beyond any applicable cure period, if any, at Lender’s option in each instance, the unpaid balances under this Note shall bear interest from the date of the Event of Default or such later date as Lender shall elect at 2% per annum in excess of the rate(s) of interest that would otherwise be in effect under the terms of this Note; (iii) after the maturity date, whether by reason of acceleration or otherwise, the unpaid principal balance of this Note (including without limitation, principal, interest, fees and expenses) shall automatically bear interest at 2% per annum in excess of the rate of interest that would otherwise be in effect under this Note. Interest payable at the Default Rate shall be payable from time to time on demand or, if not sooner demanded, on the last day of each calendar month.

10. If the Borrower fails to make any payment to Lender within ten (10) days of the due date thereof (including, without limitation, any purchase of equity of Lender when required), the Borrower shall, in addition to such amount, pay a late charge equal to five percent (5%) of the amount of such payment.

11. This Note is secured by, among other instruments, that certain Fourth Amended and Restated Mortgage of even date herewith (the “ Mortgage ”) covering various parcels of real property, fixtures, and personal property located in Jackson County, Minnesota, and that certain Security Agreement dated September 29, 2005. In the event any such security is found to be invalid for whatever reason, such invalidity shall constitute an event of default hereunder. All of the agreements, conditions, covenants, provisions, and stipulations contained in the Mortgage, or any instrument securing this Note are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. It is agreed that time is of the essence of this Note.

12. Upon the occurrence at any time of an Event of Default or at any time thereafter, the outstanding principal balance hereof plus accrued interest hereon plus all other amounts due hereunder shall, at the option of the Lender, be immediately due and payable, without notice or demand and Lender shall be entitled to exercise all remedies provided in this Note, the MLA or any other Loan Document.

13. The occurrence at any time of an Event of Default or at any time thereafter, the Lender shall have the right to set off any and all amounts due hereunder by the Borrower to the Lender against any indebtedness or obligation of the Lender to the Borrower.

14. The Borrower promises to pay all reasonable costs of collection of this Note, including, but not limited to, reasonable attorneys’ fees paid or incurred by the Lender on account of such collection, whether or not suit is filed with respect thereto and whether or not such costs are paid or incurred, or to be paid or incurred, prior to or after the entry of judgment.

15. Demand, presentment, protest and notice of nonpayment and dishonor of this Note are hereby waived.

16. This Note shall be governed by and construed in accordance with the laws of the State of Minnesota.

17. The Borrower hereby irrevocably submits to the jurisdiction of any Minnesota state court or federal court over any action or proceeding arising out of or relating to this Note, the MLA and any instrument, agreement or document related hereto or thereto, and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Minnesota state or federal court. The Borrower hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. Nothing in this Note shall affect the right of the Lender to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdiction to the extent permitted by law.

18. Effective on the Closing Date, this Note shall supersede and replace in its entirety the Term Note of the Borrower dated October 1, 2007 (and all amendments thereto) which shall thereafter be of no force or effect.

	HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By:	Robert J. Ferguson
	Its:	President

Exhibit 10.42

AMENDED AND RESTATED

TERM REVOLVING NOTE

$8,008,689.00

September 1, 2011

1. FOR VALUE RECEIVED, HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (the “ Borrower ”), hereby promises to pay to the order of AGSTAR FINANCIAL SERVICES, PCA, a United States corporation (the “ Lender ”), the principal sum of Eight Million Eight Thousand Six Hundred Eighty-nine and 00/100ths ($8,008,689.00) Dollars, or so much thereof as may be advanced to, or for the benefit of, the Borrower and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein pursuant to that certain Fifth Amended and Restated Master Loan Agreement of even date herewith, by and between the Lender and the Borrower (as it may be amended, modified, supplemented, extended or restated from time to time, the “MLA” ), and which remains unpaid, in lawful money of the United States and immediately available funds. This Amended and Restated Term Revolving Note (the “ Note ”) is issued pursuant to the terms and provisions of the MLA and is entitled to all of the benefits provided for herein and therein. All capitalized terms used and not defined herein shall have the meanings assigned to them in the MLA.

2. The outstanding principal balance of this Note shall bear interest at a rate per annum equal to the greater of (A) LIBOR Rate plus three hundred fifty (350) basis points or (B) five percent (5.0%). The rate of interest due thereon shall initially be determined as of the Closing Date and shall thereafter be adjusted as and when LIBOR Rate changes. All such adjustments to the rate of interest shall be made and become effective as of the first day of the month following the date of any change in LIBOR Rate and shall remain in effect until and including the day immediately preceding the next such adjustment (each such day hereinafter being referred to as an “ Adjustment Date ”). All such adjustments to the rate of interest shall be made and become effective as of the first Adjustment Date following such change in the LIBOR Rate. All such adjustments to said rate shall be made and become effective as of the Adjustment Date, and said rate as adjusted shall remain in effect until and including the day immediately preceding the next Adjustment Date. Interest shall be computed on the basis of a year of three hundred sixty five (365) days, but charged for actual days principal is outstanding.

3. “ LIBOR Rate ”means the One Month London Interbank Offered Rate (“ One Month LIBOR ”), rounded upward to the nearest ten thousandth of one percent, reported on the tenth day of the month immediately preceding the month for which interest is being calculated by the Wall Street Journal in its daily listing of money rates, defined therein as the average of interbank offered rates for dollar deposits in the London market. If One Month LIBOR is not reported on the tenth day of a month, the One Month LIBOR reported on the first Business Day preceding the tenth day of the month will be used. If this index is no longer available, Lender will select a new index which is based upon comparable information. For purposes of clarity, the parties hereto agree that it is their intention to utilize the One Month LIBOR rate described above for each one-month period with the applicable One Month LIBOR rate being reset for each successive one-month period as described above.

4. Beginning on the first (1 st ) Monthly Payment Date following the Closing Date, and continuing on each Monthly Payment Date thereafter until the Term Revolving Loan Maturity Date, the Borrower shall make monthly payments of accrued interest on the outstanding principal balance

of this Note. In addition, the Borrower shall, without penalty or premium and within five (5) days following each anniversary date of this Note, prepay the Outstanding Revolving Advances in the amount, if any, by which the Outstanding Credit on such date exceeds the Term Revolving Loan Commitment then in effect, together with accrued interest thereon to the date of such prepayment. “Term Revolving Loan Commitment” means the following:

On the Closing Date	$	8,008,689.00
September 1, 2012	$	7,508,689.00
September 1, 2013	$	7,008,689.00
September 1, 2014	$	6,508,689.00
September 1, 2015	$	6,008,689.00

5. The outstanding principal balance hereof, together with all accrued interest, if not paid sooner, shall be due and payable in full on September 1, 2016 (the “ Term Revolving Loan Maturity Date ”).

6. All payments and prepayments shall, at the option of the Lender, be applied first to any costs of collection, second to any late charges, third to accrued interest and the remainder thereof to principal.

7. This Note may be prepaid, at any time, at the option of the Borrower, either in whole or in part, subject to the obligations of the Borrower to compensate the Lender for any loss, cost or expense as a result of such prepayment as set forth in the MLA. This Note is subject to mandatory prepayment, at the option of the Lender, as provided in the MLA.

8. In addition to the rights and remedies set forth in the MLA: (i) if the Borrower fails to make any payment to Lender when due under this Note, then at Lender’s option in each instance, such obligation or payment shall bear interest from the date due to the date paid at 2% per annum in excess of the rate of interest that would otherwise be applicable to such obligation or payment under this Note; (ii) upon the occurrence and during the continuance of an Event of Default beyond any applicable cure period, if any, at Lender’s option in each instance, the unpaid balances under this Note shall bear interest from the date of the Event of Default or such later date as Lender shall elect at 2% per annum in excess of the rate(s) of interest that would otherwise be in effect under the terms of this Note; (iii) after the maturity date, whether by reason of acceleration or otherwise, the unpaid principal balance of this Note (including without limitation, principal, interest, fees and expenses) shall automatically bear interest at 2% per annum in excess of the rate of interest that would otherwise be in effect under this Note. Interest payable at the Default Rate shall be payable from time to time on demand or, if not sooner demanded, on the last day of each calendar month.

9. If the Borrower fails to make any payment to Lender within ten (10) days of the due date thereof (including, without limitation, any purchase of equity of Lender when required), the Borrower shall, in addition to such amount, pay a late charge equal to five percent (5%) of the amount of such payment.

10. This Note is secured by, among other instruments, that certain Fourth Amended and Restated Mortgage of even date herewith (the “ Mortgage ”) covering various parcels of real property, fixtures, and personal property located in Jackson County, Minnesota, and that certain Security Agreement dated September 29, 2005. In the event any such security is found to be invalid for

whatever reason, such invalidity shall constitute an event of default hereunder. All of the agreements, conditions, covenants, provisions, and stipulations contained in the Mortgage, or any instrument securing this Note are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. It is agreed that time is of the essence of this Note.

11. Upon the occurrence at any time of an Event of Default or at any time thereafter, the outstanding principal balance hereof plus accrued interest hereon plus all other amounts due hereunder shall, at the option of the Lender, be immediately due and payable, without notice or demand and Lender shall be entitled to exercise all remedies provided in this Note, the MLA or any other Loan Document.

12. The occurrence at any time of an Event of Default or at any time thereafter, the Lender shall have the right to set off any and all amounts due hereunder by the Borrower to the Lender against any indebtedness or obligation of the Lender to the Borrower.

13. The Borrower promises to pay all reasonable costs of collection of this Note, including, but not limited to, reasonable attorneys’ fees paid or incurred by the Lender on account of such collection, whether or not suit is filed with respect thereto and whether or not such costs are paid or incurred, or to be paid or incurred, prior to or after the entry of judgment.

14. Demand, presentment, protest and notice of nonpayment and dishonor of this Note are hereby waived.

15. This Note shall be governed by and construed in accordance with the laws of the State of Minnesota.

16. The Borrower hereby irrevocably submits to the jurisdiction of any Minnesota state court or federal court over any action or proceeding arising out of or relating to this Note, the MLA and any instrument, agreement or document related hereto or thereto, and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Minnesota state or federal court. The Borrower hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. Nothing in this Note shall affect the right of the Lender to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdiction to the extent permitted by law.

17. Effective on the Closing Date, this Note shall supersede and replace in its entirety the Term Revolving Note of the Borrower dated October 1, 2007 (and all amendments thereto) which shall thereafter be of no force or effect.

	HERON LAKE BIOENERGY, LLC , a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By:	Robert J. Ferguson
	Its:	President

Exhibit 10.43

MORTGAGE REGISTRATION TAX WAS PREVIOUSLY PAID ON $70,283,000.00 WITH DOCUMENT NO. 248658 FILED ON December 27, 2006.

FOURTH AMENDED AND RESTATED MORTGAGE,

SECURITY AGREEMENT AND

ASSIGNMENT OF RENTS AND LEASES

THIS INDENTURE (hereinafter referred to as the “ Mortgage ”) made to be effective as of September 1, 2011 by and between HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (the “ Mortgagor ”), whose mailing address is 201 10 th Street, Heron Lake, Minnesota 56137, and whose Minnesota identification number is 22013-LLC, and AGSTAR FINANCIAL SERVICES, PCA, an United States instrumentality (the “ Mortgagee ”) whose mailing address is 1921 Premier Drive, P.O. Box 4249, Mankato, MN 56002-4249.

RECITALS

A. Mortgagor and Mortgagee are parties to the Fourth Amended and Restated Master Loan Agreement dated as of October 1, 2007, as amended by that certain First Amendment to Fourth Amended and Restated Master Loan Agreement dated April 27, 2011 (together, the “ 2007 MLA ”); the Third Supplement to the Master Loan Agreement (Term Loan) dated as of October 1, 2007 (the “ Third Supplement ”); the Amended and Restated Fourth Supplement to the Master Loan Agreement (Term Revolving Loan) dated as of April 27, 2011 (the “ Fourth Supplement ”); and the Amended and Restated Fifth Supplement to the Master Loan Agreement dated December 30, 2010 (which document was erroneously captioned First Amendment to Fifth Supplement to the Master Loan Agreement), as amended by the First Amendment to Amended and Restated Fifth Supplement dated March 1, 2011, Amendment No. 2 to Amended and Restated Fifth Supplement dated April 27, 2011, Amendment No. 3 to Amended and Restated Fifth Supplement dated June 30, 2011, and Amendment No. 4 to Amended and Restated Fifth Supplement dated August 1, 2011 (collectively, as amended, the “ Fifth Supplement ”), under which Mortgagee extend certain loans and financial accommodations to Mortgagor (collectively, the “ Loans ”).

B. The Loans are evidenced by a Term Note dated October 1, 2007, in the original

principal amount of $59,583,000.00 (“ Note One ”), a Term Revolving Note dated October 1, 2007, in the original principal amount of $5,000,000.00 (“ Note Two ”), and a Third Amended and Restated Revolving Line of Credit Note dated December 30, 2010, in the original principal amount of $6,750,000.00 (as the same has been modified from time to time, “ Note Three ”). Note One, Note Two and Note Three are collectively, the “ Original Notes .”

C. To secure payment and performance of the 2007 MLA, and other duties and liabilities arising out of the documents and agreements related to the 2007 MLA and the Original Notes, the Mortgagor executed, delivered and granted to Mortgagee that certain combination Mortgage, Security Agreement and Assignment of Rents and Leases dated September 29, 2005, recorded in the Office of the County Recorder of Jackson County on September 30, 2005, as Instrument No. 244879, as amended and restated by that certain Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated November 20, 2006, recorded in the Office of the County Recorder of Jackson County on December 6, 2006 as Instrument No. 248498; as amended and restated by that certain Second Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated December 27, 2006, recorded in the Office of the County Recorder of Jackson County on December 27, 2006 as Instrument No. 248658, as amended and restated by that certain Third Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated May 18, 2007, recorded in the Office of the County Recorder of Jackson County on June 4, 2007 as Instrument No. A 250019 (as amended, the “ Original Mortgage ”), by operation of which mortgage, the Mortgagee was granted liens and security interests covering real property and related improvements of the Mortgagor, as more fully described in Exhibit A attached thereto (the “ Original Legal Description ”).

D. Contemporaneously with the execution hereof, Mortgagor and Mortgagee are entering into a Fifth Amended and Restated Master Loan Agreement (the “ Amended Loan Agreement ”), an Amended and Restated Term Note in the principal amount of $40,000,000.00, and an Amended and Restated Term Revolving Note in the principal amount of $8,008,689.00 (together, the “ Amended Notes ”). The Amended Loan Agreement and the Amended Notes supersede and replace in their entirety the 2007 MLA, the Third Supplement, the Fourth Supplement, and the Fifth Supplement, Note One, Note Two, and Note Three, the Forbearance Agreement (as defined in the Amended Loan Agreement) and all supplements, amendments, restatements and other modifications thereof.

E. Pursuant to the Amended Loan Agreement and the Amended Notes the parties desire to amend and restate the Original Mortgage in accordance with this Fourth Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases (hereinafter, the “ Mortgage ”).

F. Upon survey of the Real Property the Original Legal Description was amended to the legal description as set forth on Exhibit A, attached hereto and made a part hereof by this reference (hereinafter, the “ Real Property ”) which more accurately describes the real property subject to the mortgage lien granted under this Mortgage; accordingly, the Original Mortgage is amended and restated to conform therewith, and the mortgage lien of this Mortgage shall cover the property legally described Exhibit A hereto, and not as set forth in the Original Legal Description.

This Mortgage shall secure the original principal amount of Forty-eight Million Eight

Thousand Six Hundred Eighty-nine and 00/100ths ($48,008,689.00) Dollars which amount constitutes the “ Initial Amount of the Debt ” within the meaning of Minnesota Statutes Section 287.03, and this Mortgage is further intended to secure the entire “Secured Indebtedness” as hereinafter defined.

Mortgagor is indebted to Mortgagee pursuant to the terms of (i) that certain Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011, as the same may from time to time be amended, modified, extended, renewed, refinanced or restated, (the “ Loan Agreement ”); (ii) that certain Amended and Restated Term Note in the principal amount of $40,000,000.00, issued by the Mortgagor to the order of the Mortgagee, as the same may from time to time be amended, modified, extended, renewed, refinanced or restated; and (iii) that certain Amended and Restated Term Revolving Note in the principal amount of $8,008,689.00, issued by the Mortgagor to the order of the Mortgagee, as the same may from time to time be amended, modified, extended, renewed, refinanced or restated (together, the “ Notes ”), in addition to any subsequent Notes that may be issued under the Loan Agreement and subsequent Supplements.

This Mortgage allows for future advances, but the amount of any advance is not currently known. The Mortgagee is aware of Minnesota Statutes Section 287.05, subdivision 5, and intends to comply with the requirements contained therein.

To secure the performance of the covenants and commitments of the Mortgagor to the Mortgagee, its successors and assigns, and the payment to the Mortgagee, its successors and assigns, of (i) the Initial Amount of the Debt, as evidenced by the Notes, in the principal sum of $48,008,689.00 the balance of the Notes being due and payable on or before the Maturity Date as defined in the Loan Agreement; unless sooner called by Mortgagee as provided in the Notes, (ii) the Loan Agreement, (iii) the Notes, and (iv) all existing and future debts, Notes, guaranties, and other obligations and liabilities of Mortgagee to Mortgagor of whatever nature or amount, as the same may be from time to time amended, modified, extended, renewed, refinanced or restated on any terms whatsoever, including increases in interest, including without limitation, amounts owed to Mortgagee, (v) for and to secure the payment to the Mortgagee, its successors and assigns, at the times demanded and with interest thereon at the same rate(s) specified in the Notes and Loan Agreement of all sums advanced in protecting the lien of this Mortgage; (a) in payment of taxes on the “ Mortgaged Premises ” (as hereinafter defined); (b) in payment of insurance premiums covering all improvements thereon; (c) in payment of principal and interest on prior liens; (d) in payment of expenses and attorneys’ fees herein provided for and all sums advanced for any other purpose authorized herein or authorized by law (the Notes, the Loan Agreement and all such sums advanced thereunder, together with interest thereon, being collectively referred to herein as the “ Secured Indebtedness ”); and (e) in consideration of the sum of $1.00 paid by the Mortgagee to the Mortgagor and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Mortgagor does hereby MORTGAGE, GRANT, BARGAIN, SELL AND CONVEY unto the Mortgagee, its successors and assigns, forever, and GRANTS A SECURITY INTEREST to the Mortgagee, its successors and assigns, in the following properties (all of the following being hereafter collectively referred to as the “ Mortgaged Premises ”):

A. Real Property

All the tracts or parcels of real property lying and being in the County of Jackson, State of Minnesota (the “ Land ”), all as more fully described in Exhibit A attached hereto and made a part hereof, together with all the estates and rights in and to the Land and in and to lands lying in any and all streets, lanes, alleys, passages and roads adjoining the Land, and together with all buildings, structures, improvements, fixtures, annexations, access rights, easements, rights of way or use, servitudes, licenses, tenements, hereditaments, appurtenances, minerals, mineral rights, water and water rights, now or hereafter belonging or pertaining to the Land; and

B. Personal Property

All buildings, structures, equipment, fixtures, improvements, building supplies and materials and personal property now or hereafter attached to, located in, placed in or necessary to the use of the improvements on the Mortgaged Premises; and

C. Leases, Rents, Issues and Profits

All leases, accounts, rents, issues and profits now due or which may hereafter become with respect to the Mortgaged Premises or any part thereof; and

D. Judgments and Awards

Any and all awards or compensation made by any governmental or other lawful authorities for the taking or damaging by eminent domain of the whole or any part of the Mortgaged Premises or any rights appurtenant thereto, including any awards for a temporary taking, change of grade of streets or taking of access; and

E. After-Acquired Property

All right, title, and interest of the Mortgagor in and to all extensions, improvements, betterments, renewals, substitutes, and replacements of, and all additions and appurtenants to the items or types of property described in Sections A through D above, which are hereafter acquired by or released to the Mortgagor, or are hereafter constructed, assembled or placed by the Mortgagor on the Mortgaged Premises, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement, or conversion, as the case may be, and in each such case, without any further mortgage, conveyance, assignment, or other act by the Mortgagor, shall become subject to the lien of this Mortgage as fully and completely, and with the same effect, as though now owned by the Mortgagor and specifically described in the granting clause hereof, but at any and all times the Mortgagor will execute and deliver to the Mortgagee any and all such further assurances, mortgages, conveyances, or assignments thereof as the Mortgagee may reasonably require for the purpose of expressly and specifically subjecting the same to the lien of this Mortgage.

TO HAVE AND TO HOLD the Mortgaged Premises unto the Mortgagee forever.

ARTICLE I

Mortgagor’s

Representations, Warranties

Covenants and Agreements

The Mortgagor makes and includes in this Mortgage the Statutory Covenants and other provisions set forth in Minnesota Statutes Section 507.15 or in any future Minnesota Statute providing for a statutory form of real estate mortgage, and the Mortgagor makes the following additional representations, warranties, covenants and agreements with the Mortgagee:

1.1. Good Title; Covenant to Defend. The Mortgagor represents, warrants and covenants to and with the Mortgagee that: (a) the Mortgagor is the lawful owner of and has good and marketable title to the Mortgaged Premises in fee simple, free and clear of all liens and encumbrances, except for the Permitted Encumbrances set forth on Exhibit B attached hereto and made a part hereof; (b) the Mortgagor has the right and lawful authority to mortgage, grant, sell, transfer and convey the Mortgaged Premises to the Mortgagee, as provided herein; (c) the Mortgagor owns or will own all chattels and improvements installed on the Mortgaged Premises and the same shall be free and clear of all liens and claims, except those specifically set forth on Exhibit B attached hereto; (d) this Mortgage is and shall remain a valid and enforceable lien on the Mortgaged Premises, subject only to the exceptions referred to above; (e) the Mortgagor will preserve its fee title to the Mortgaged Premises, and will warrant and defend such fee title to the Mortgagee, against all claims and demands of all persons and parties whomsoever; and (f) all buildings, structures and other improvements now or hereafter located on the Land are, or will be, located entirely within the boundaries of the Land and are set back from said boundaries in accordance with all applicable zoning and “set-back” laws and ordinances; (g) the present or contemplated use of the Mortgaged Premises complies with all applicable zoning laws and ordinances; and (h) if the Mortgagor is a corporation or limited liability company, the execution of this Mortgage has been duly authorized by its board of directors or board of governors and no provision of its Articles of Incorporation, Bylaws, Articles of Organization or Operating Agreement requires consent of its stockholders or member to the execution and delivery of this Mortgage.

1.2. Performance of the Notes and Mortgage . The Mortgagor shall: (i) duly and punctually pay each and every installment of principal and interest and all other sums to become due under and in accordance with the Notes, at the time and place and in the manner specified by the Notes; (ii) pay all other Secured Indebtedness, as and when the same shall become due; and (iii) duly and punctually perform and observe all of the covenants, agreements and provisions contained herein, in the Notes, and in any other instrument given as security for the payment of the Notes. No payment or collection of any of the Secured Indebtedness shall reduce the amount secured by this Mortgage.

1.3. Care of Mortgaged Premises; No Waste . The Mortgagor shall, at all times, keep and maintain the Mortgaged Premises in good condition, repair and operating condition, and shall not commit, or suffer to be committed, any waste or misuse of the Mortgaged Premises, and shall promptly repair, restore or replace, any buildings, improvements or structures now or hereafter placed or located on the Mortgaged Premises which may become damaged or destroyed. The

Mortgagor shall not, without the prior written consent of the Mortgagee, or except in accordance with the terms and conditions of the Loan Agreement: (i) remove or permit the removal of any material buildings, structures or other material improvements or material fixtures, or (ii) otherwise make any material alterations in any improvements which will adversely alter the basic structure, adversely affect the market value, or adversely change the existing architectural character of the Mortgaged Premises, and the Mortgagor will complete within a reasonable time any structures which are now or at any time in the process of erection. The Mortgagor will not acquiesce in any rezoning classification, modification or public or private restriction which in any way limits or otherwise affects the Mortgaged Premises, or any part thereof. The Mortgagor shall not vacate or abandon the Mortgaged Premises.

1.4. Payment of Utilities and Operating Costs . Subject to Section 1.9 hereof, the Mortgagor shall pay, or cause to be paid, when due, all charges made for electricity, gas, heat, water, sewer, and all other utilities and operating costs and expenses, received, furnished or used in connection with the Mortgaged Premises, and will, upon request by the Mortgagee, furnish proper receipt showing payment therefore.

1.5. Liens . Subject to Section 1.9 hereof, the Mortgagor shall pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or permit the creation of a lien on the Mortgaged Premises, or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom, and in general will do or cause to be done everything necessary so that the lien of this Mortgage shall be fully preserved, at the cost of the Mortgagor, without expense to the Mortgagee. The Mortgagor shall not do, or permit to be done, anything that may in anyway impair the value of the Mortgaged Premises, or weaken, diminish, or impair the security of this Mortgage. No fixtures will be installed on the Mortgaged Premises by the Mortgagor, by any tenant of the Mortgagor, or by any other person subject to a lease, vendor’s lien or other lien or claim. Should any fixture be installed to the Mortgages Premises from or after the date hereof, the lien of this Mortgage shall immediately attach to said fixture and shall be prior and superior to all other liens or claims. The Mortgagor will promptly perform and observe, or cause to be performed or observed, all of the terms, covenants, and conditions of all Permitted Encumbrances, as set forth in Exhibit B attached hereto, the noncompliance with which may affect the security of this Mortgage, or may impose duty or obligation upon the Mortgagor or any sublessee or occupant of the Mortgaged Premises or any part thereof, and the Mortgagor shall do or cause to be done all things necessary to preserve in tact and unimpaired all easements, appurtenances, and other interests and rights in favor of or constituting any portion of the Mortgaged Premises.

1.6. Real Property Taxes and Assessments . The Mortgagor agrees to pay all real property taxes, assessments, and other similar charges made against the Mortgaged Premises.

1.7. Mortgage Taxation . In the event of a court decree or an enactment after the date hereof by any legislative authority of any law imposing upon a mortgagee the payment of the whole or any part of the amounts herein required to be paid by the Mortgagor, or changing in any way the laws relating to the taxation of mortgages or debts secured by mortgages or a mortgagee’s interest in the Mortgaged Premises, so as to impose such imposition on the Mortgagee or on the interest of the

Mortgagee in the Mortgaged Premises, then, in any such event, the Mortgagor shall bear and pay the full amount of such imposition, provided that if for any reason payment by the Mortgagor of any such imposition would be unlawful, or if the payment thereof would constitute usury or render the Secured Indebtedness wholly or partially usurious, the Mortgagee, at its option, may declare the whole sum secured by this Mortgage with interest thereon to be immediately due and payable, without prepayment premium, or the Mortgagee, at its option, may pay that amount or portion of such impositions as renders the Indebtedness Secured Hereby unlawful or usurious, in which event the Mortgagor shall concurrently therewith pay the remaining lawful and nonusurious portion or balance of said imposition.

1.8. Compliance with Laws . Subject to Section 1.9 hereof, the Mortgagor shall comply with all present and future laws, ordinances, regulations, covenants, conditions and restrictions affecting the Mortgaged Premises or the operation thereof, and shall pay all fees or charges of any kind in connection therewith. The Mortgagor shall not, by act or omission, permit any property which is not subject to this Mortgage to rely on the Mortgaged Premises or any part thereof or any interest therein to fulfill any governmental requirement for the character or use of such property; and the Mortgaged Premises shall not rely on any property which is not subject to this Mortgage to fulfill any governmental requirement for the character or use of the Mortgaged Premises. The Mortgagor shall not, by act or omission, impair the integrity of the Mortgaged Premises as a single separate subdivided zoning lot separate and apart from all other lots.

1.9. Permitted Contests . Notwithstanding any provision of this Mortgage to the contrary, the Mortgagor shall not be required to: (a) pay any charge referred to Section 1.4 hereof; (b) discharge or remove any lien, encumbrance or charge referred to in Section 1.5 hereof; (c) pay the tax, assessment or other charged referred to in Sections 1.6 and 1.7 hereof, or (d) comply with any statute, law, rule, regulation or ordinance referred to in Section 1.8 hereof, so long as the Mortgagor shall in good faith contest the same or the validity thereof by appropriate legal proceedings which shall operate to prevent the collection of the imposition so contested, or the sale, forfeiture or loss of the Mortgaged Premises, or any part thereof to satisfy the same, and further provided that the Mortgagor shall, prior to the date such imposition is due and payable, have given the Mortgagee such reasonable security as may be reasonably demanded by the Mortgagee to ensure such payments and prevent any sale or forfeiture of the Mortgaged Premises by reason of such nonpayment. Any such contest shall be prosecuted with due diligence and the Mortgagor shall, after final determination thereof, promptly pay the amount of any such imposition so determined, together with all interest and penalties which may be payable in connection therewith. Notwithstanding the provisions of this Section 1.9, the Mortgagor shall (and if the Mortgagor shall fail so to do, the Mortgagee may but shall not be required to) pay any such imposition notwithstanding such contest if, in the reasonable opinion of the Mortgagee, the Mortgaged Premises shall be in jeopardy or in danger of being forfeited or foreclosed.

1.10. Duty to Defend . The Mortgagor shall promptly notify the Mortgagee of and appear in and defend any suit, action or proceeding that affects the value of the Mortgaged Premises, the Secured Indebtedness, or any right or interest of the Mortgagee under this Mortgage. The Mortgagee may, at its option, elect to appear in or defend any such action or proceeding, and the Mortgagor agrees to indemnify and reimburse the Mortgagee from any and all loss, damage, reasonable expense

or cost arising out of, or incurred in connection with any such suit, action or proceeding, including, but not limited to, costs of evidence of title and reasonable attorneys’ fees.

1.11. Insurance Coverage . The Mortgagor shall obtain and keep in full force and effect during the term of this Mortgage at its sole cost and expense, the following policies of insurance:

a. Property insurance, in broad form covering causes of loss customarily covered in the industry of Mortgagor’s business, including the cost of debris removal, together with a vandalism and malicious mischief endorsement, all in the amounts of not less than the full insurable value or full replacement cost, without deduction for depreciation, of the improvements on the Premises, whichever is greater, covering all buildings, structures, fixtures, personal property and other improvements now existing or hereafter erected or placed on the Premises, which insurance shall at all times be in an amount at least equal to the unpaid Secured Indebtedness at any given time.

b. If the Mortgaged Premises are now or hereafter located in a flood plain as defined by the Federal Insurance Administration, the Mortgagor shall obtain flood insurance in the maximum obtainable amount.

c. If steam boilers or similar equipment for the generation of steam are located in, on or about the Mortgaged Premises, the Mortgagor shall maintain insurance against loss or damage by explosion, rupture or bursting of such equipment and appurtenances thereto, without a co-insurance clause, in an amount satisfactory to the Mortgagee.

d. Comprehensive general public liability insurance covering the legal liability of the Mortgagor against claims for bodily injury, death or property damage occurring on, in or about the Mortgaged Premises in such amounts and with such limits as the Mortgagee may reasonably require.

e. Business interruption insurance in an amount at least equal to coverage over one year’s debt service and required escrow account.

All such insurance shall be written on forms and with companies satisfactory to the Mortgagee, shall name as the insured parties the Mortgagor and the Mortgagee as their interests may appear, shall be in amounts sufficient to prevent the Mortgagor from becoming a co-insurer of any loss thereunder, shall name the Mortgagee as a loss payee, shall bear a satisfactory mortgagee clause in favor of the Mortgagee, and shall contain an agreement of the insurer that the coverage shall not be terminated or materially modified without providing to the Mortgagee thirty (30) days’ prior written notice of such termination or modification. All required policies of insurance or acceptable certificates thereof, together with evidence of the payment of current premiums therefor shall be delivered to the Mortgagee. The Mortgagor shall, within thirty (30) days prior to the expiration of any such policy, deliver other original policies or certificates of the insurer evidencing the renewal of such insurance together with evidence of the payment of current premiums therefor. In the event of a

foreclosure of this Mortgage or any acquisition of the Mortgaged Premises by the Mortgagee, all such policies and any proceeds payable therefrom, whether payable before or after a foreclosure sale, or during the period of redemption, if any, shall become the absolute property of the Mortgagee to be utilized at its discretion. In the event of foreclosure or the failure to obtain and keep any required insurance, the Mortgagor empowers the Mortgagee to effect insurance upon the Mortgaged Premises at the Mortgagor’s expense and for the benefit of the Mortgagee in the amounts and types aforesaid for a period of time covering the time of redemption from a foreclosure sale, and if necessary therefore, to cancel any or all existing insurance policies. The Mortgagor agrees to furnish the Mortgagee with copies of all inspection reports and insurance recommendations received by the Mortgagor from any insurer.

1.12. Notice of Damage . The Mortgagor shall give the Mortgagee prompt notice of any material damage to or destruction of the Mortgaged Premises and authorize the Mortgagee to make proof of loss if not made promptly by the Mortgagor. In case of loss covered by policies of insurance (whether before or after foreclosure sale), the Mortgagee is hereby authorized at its option and without the consent of the Mortgagor to settle, adjust and compromise any claim arising out of such policies, and to collect and receive the proceeds payable therefrom; provided, that the Mortgagor may itself adjust and collect for any losses arising out of a single occurrence aggregating not in excess of $100,000.00. Any expense incurred by the Mortgagee in the adjustment and collection of insurance proceeds (including the cost of any independent appraisal of the loss or damage on behalf of the Mortgagee) shall be reimbursed to the Mortgagee first out of any proceeds. So long as the Mortgagor is not in default under the terms of this Mortgage, the proceeds or any part thereof shall be applied to the restoration or repair of the Mortgaged Premises or to reduction of the Secured Indebtedness then most remotely to be paid, whether due or not, without the application of any prepayment premium, the choice of such application to be solely at the discretion of the Mortgagor, otherwise, such choice shall be at the sole discretion of the Mortgagee.

1.13. Condemnation . The Mortgagor shall give the Mortgagee prompt notice of any action, actual or threatened, in condemnation or eminent domain. The Mortgagor may in good faith contest any condemnation or eminent domain action by appropriate legal action or proceedings. Any such contest shall be prosecuted with due diligence. The Mortgagor hereby irrevocably assigns, transfers, and sets over to the Mortgagee, to the extent of the remaining unpaid Secured Indebtedness, the entire proceeds of any award, payment or claim for damages for all or any part of the Mortgaged Premises taken or damaged, whether temporary or permanent, under the power of eminent domain or condemnation, and authorizes the Mortgagee to intervene in any such action in the name of the Mortgagor and to collect and receive from the condemning authorities and give proper receipts and acquaintances for such proceeds. Any expenses incurred by the Mortgagee in intervening in such action or collecting such proceeds shall be reimbursed to the Mortgagee first out of the proceeds. So long as the Mortgagor is not in default under the terms of this Mortgage, the proceeds or any part thereof shall be applied upon or in reduction of the Secured Indebtedness then most remotely to be paid, whether due or not, without the application of any prepayment premium, or to the restoration or repair of the Mortgaged Premises, the choice of application to be solely at the discretion of the Mortgagor, otherwise, such choice shall be at the sole discretion of the Mortgagee.

1.14. Restoration of Mortgaged Premises After Loss . Should any insurance or condemnation proceeds be applied to the restoration or repair of the Mortgaged Premises the restoration or repair shall be done under the supervision of an architect reasonably acceptable to the Mortgagee, pursuant to plans and specifications approved by the Mortgagee, and in accordance with all applicable building laws, regulations and ordinances, including, but not limited to, the Accessibility Guidelines set forth in the Americans with Disabilities Act. In such case, the proceeds shall be held by the Mortgagee for such purposes and will from time to time be disbursed by the Mortgagee to defray the costs of such restoration or repair under such safeguards and controls as the Mortgagee may reasonably require to assure completion in accordance with the approved plans and specifications and free of liens or claims. Any surplus which may remain after payment of all costs of restoration or repair may, at the option of the Mortgagee, be applied on account of the Secured Indebtedness then most remotely to be paid, whether due or not, without application of any prepayment premium, or shall be returned to the Mortgagor as its interest may appear, the choice of application to be solely at the discretion of the Mortgagee.

1.15. Hazardous Substances . The Mortgagor represents, warrants and covenants to the Mortgagee that, except in compliance with all applicable federal, state and local laws, regulations and ordinances, no toxic or hazardous substance, waste or constituent, as defined in any local, state or federal law, regulation, code or ordinance now existing or hereinafter enacted or amended, governing liability for any such substance, waste or constituent is, or has in the past, been located in, on or released from the Mortgaged Premises. The Mortgagor further represents, warrants and covenants to the Mortgagee that it shall not, nor shall the Mortgagor permit others to, except in compliance with all applicable federal, state and local laws, regulations and ordinances, use the Mortgaged Premises at any time to generate, transport, store, process, treat, or dispose of a toxic or hazardous substance, waste or constituent. The Mortgagor shall not, nor shall the Mortgagor permit others to take, fail to take, or permit any action which may result in a release of any toxic or hazardous substance, waste or constituent in, on, about or from the Mortgaged Premises. The Mortgagor warrants that neither the Mortgagor nor the Mortgaged Premises are subject to any claim for which any local, state or federal law governing liability for any such substance, waste or constituent may apply. Within five (5) business days after learning of the occurrence of (a) any violation of any applicable federal, state or local law, regulation or ordinance relating to any toxic or hazardous substance, waste or constituent with respect to the Mortgaged Premises, or (b) the commencement of any litigation, arbitration or other proceeding that affects the Mortgaged Premises, or (c) notice from any government or governmental agency that the Mortgaged Premises or any operations thereon are not in compliance with any local, state or federal law rule or ordinance, or (d) notice that the Mortgagor or all or part of the Mortgaged Premises is subject to any investigation relating to any toxic or hazardous substance, waste or constituent, the Mortgagor shall give the Mortgagee oral and written notice thereof, describing the same and the steps that will be taken by the Mortgagor with respect thereto.

1.16. Financial and Operating Statements . The Mortgagor shall keep and maintain, at all times, full, true, and accurate books of accounts, in sufficient detail to show the names of the tenants, if any, occupying the Mortgaged Premises, the rent paid by each such tenant and security deposits, if any, copies of all leases, if any, and such other books and records showing in detail the earnings and expenses of the Mortgaged Premises, all of which should adequately reflect the results of the

operation of the Mortgaged Premises. All such records relating thereto shall be open to inspection and copying by the Mortgagee or its representatives at any time and from time to time upon request by the Mortgagee, at the Mortgaged Premises or at such other place in the city and county in which the Mortgaged Premises are located. Throughout the term of this Mortgage, the Mortgagor shall deliver to the Mortgagee such other information with respect to the Mortgagor or the Mortgaged Premises as the Mortgagee may reasonably request from time to time. In the event the Mortgagor fails to furnish any such reports and statements within thirty (30) days of Mortgagee’s request, the Mortgagee may cause an audit to be made of the respective books and records at the sole cost and expense of the Mortgagor.

1.17. Mortgagee’s Right of Entry . The Mortgagor shall permit the Mortgagee or its authorized representatives to enter the Mortgaged Premises at all times for the purpose of inspecting the same; provided, however, the Mortgagee shall have no duty to make such inspections and shall not incur any liability or obligation for making or not making any such inspections. Mortgagee and its authorized representatives shall follow all safety procedures and protocols of Mortgagor during any inspection and Mortgagee shall take all necessary actions to ensure that such inspections shall not interfere with the operations of the Mortgagor at the Mortgaged Premises.

1.18. Due on Sale . The Mortgagor shall not voluntarily or involuntarily sell, convey, transfer, further mortgage, encumber, or dispose of the Mortgaged Premises, or any part thereof, or any interest therein, legal or equitable, or agree to do so, without first obtaining the written consent of the Mortgagee. The Mortgagee’s consent to any one transaction shall not be deemed to be a waiver of the requirement to receive the Mortgagee’s consent to future or successive transactions. If the Mortgagor is a corporation, partnership, limited liability company or other entity, seventy-five percent (75%) of the legal, beneficial or equitable ownership of such entity shall not be changed by sale, conveyance, transfer, assignment or encumbrance.

1.19. Mortgagee’s Right to Cure . Subject to the Mortgagor’s rights under Section 1.9 hereof, if the Mortgagor shall fail to comply with any of the covenants or obligations of this Mortgage, then the Mortgagee may, but shall not be obligated to, without further demand upon or notice to the Mortgagor, and without waiving or releasing the Mortgagor from any obligation contained in this Mortgage, perform such covenants and agreements, investigate and defend against such action or proceeding, and take such other action as the Mortgagee deems necessary to protect its interest in the Mortgaged Premises or this Mortgage. The Mortgagor agrees to repay upon demand all sums incurred by the Mortgagee in remedying any such failure, together with interest at the rate as specified in the Notes. All such sums, together with interest as aforesaid, shall become so much additional Secured Indebtedness, but no such advance shall be deemed to relieve the Mortgagor from any failure hereunder.

1.20. Uniform Commercial Code Security Interest . This Mortgage shall constitute a security agreement as defined in the Uniform Commercial Code and SHALL BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING which is to be filed in the real estate records of the County where the Mortgaged Premises are situated. The name of the record owner of said real estate is the Mortgagor set forth on page one of this Mortgage. Information concerning the security interest created by this Mortgage may be obtained from the Mortgagee, as secured party, at

its address as set forth on page one of this Mortgage. The name and address of the Mortgagor, as debtor, and the name and address of the Mortgagee, as secured party, are as set forth on page one of this Mortgage. This Mortgage covers goods which are, or are to become, fixtures. This Mortgage is sufficient as a financing statement, and as a financing statement it covers goods which are, or are to become, fixtures on the Land. In addition, the Mortgagor shall execute and deliver to the Mortgagee, upon the Mortgagee’s request, any financing statements or amendments thereto or continuation statements thereto that the Mortgagee may require to perfect a security interest in said items or types of property. The Mortgagor shall pay all costs of filing such instruments.

1.21. Leases . The Mortgagor shall, at its own cost and expense, perform, comply with and discharge all of the obligations of the Mortgagor under all leases and agreements for the use of the Mortgaged Premises and use its best efforts to enforce or secure the performance of each obligation and undertaking of the respective tenants under such leases and shall appear in and defend, at its own cost and expense, any action or proceeding arising out of or in any manner connected with the Mortgagor’s interest in any leases of the Mortgaged Premises. The Mortgagor shall apply all tenants security deposits as required by Minnesota Statutes Section 504B.178 and shall keep the covenants required of a lessor or licensor pursuant to Minnesota Statutes Section 504B.161, subdivision 1, if the Mortgaged Premises is used for residential purposes. The Mortgagor shall permit no surrender nor assignment of any tenant’s interest under said leases unless the right to assign or surrender is expressly reserved under the lease, nor receive any installment of rent for more than one (1) month in advance of its due date, nor execute any mortgage or create or permit a lien which may be or become superior to any such leases, nor permit a subordination of any lease to such mortgage or lien. The Mortgagor shall not materially modify or amend the terms of any such leases, nor borrow against or pledge the rentals from such leases, nor exercise or waive any default of the tenant thereunder without the prior consent of the Mortgagee. The Mortgagor agrees to obtain the Mortgagee’s prior written approval before entering into any lease with a term of five (5) years or more. Should the Mortgagor fail to perform, comply with or discharge any obligations of the Mortgagor under any lease or should the Mortgagee become aware of or be notified by any tenant under any lease of a failure on the part of the Mortgagor to so perform, comply with or discharge its obligations under said lease, the Mortgagee may, but shall not be obligated to, and without further demand upon or notice to the Mortgagor, and without waiving or releasing the Mortgagor from any obligation in this Mortgage contained, remedy such failure, and the Mortgagor agrees to repay upon demand all sums incurred by the Mortgagee in remedying any such failure together with interest at the rate as specified in the Notes. All such sums, together with interest as aforesaid, shall become so much additional Secured Indebtedness, but no such advance shall be deemed to relieve the Mortgagor from any default hereunder.

1.22. No Consent . Nothing contained in this Mortgage shall constitute any consent or request by the Mortgagee, express or implied, for the performance of any labor or services or for the furnishing of any materials or other property in respect of the Mortgaged Premises or any part thereof, nor as giving the Mortgagor or any party in interest with the Mortgagor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would create any personal liability against the Mortgagee in respect thereof, or would permit the making of any claim that any lien based on the

performance of such labor or services or the furnishing of any such materials or other property is prior to the lien of this Mortgage.

1.23. Further Assurances . The Mortgagor shall execute and deliver to the Mortgagee from time to time, on demand, such further instruments, security agreements, financing statements under the Uniform Commercial Code and assurances and do such further acts as Mortgagee may reasonably require to carry out more effectively the purposes of this Mortgage and without limiting the foregoing, to make subject to the lien hereof any property agreed to be subjected hereto or covered by the granting clause hereof, or so intended to be. The Mortgagor shall pay any recording fees, filing fees, mortgage registry taxes, stamp taxes and other charges arising out of or incident to the filing or recording of this Mortgage and all documents collateral there, such further assurances and instruments and the issuance and delivery of the Notes.

1.24. Miscellaneous Rights of Mortgagee . Without affecting the liability of any party liable for payment of the Secured Indebtedness or the performance of any obligation contained herein, and without affecting the rights of the Mortgagee with respect to any security not expressly released in writing, the Mortgagee may, at any time, and without notice to or the consent of the Mortgagor or any party with an interest in the Mortgaged Premises or the Notes (a) release any person or entity liable for payment of all or any part of the Secured Indebtedness or for the performance of any obligation herein, (b) make any agreement extending the time or otherwise altering the terms of payment of all or any part of the Secured Indebtedness or modifying or waiving any obligation, or subordinating, modifying or otherwise dealing with the lien or charge hereof, (c) accept any additional security, (d) release or otherwise deal with any property, real or personal, including any or all of the Mortgaged Premises, including making partial releases of the Mortgaged Premises, or (e) resort to any security agreements, pledges, contracts of guaranty, assignments of rents and leases or other securities, and exhaust any one or more of said securities and the security hereunder, either concurrently or independently and in such order as it may determine. No act or thing, except full payment of the Secured Indebtedness, which but for this provision could act as a release, termination, satisfaction or impairment of this Mortgage shall in any way release, terminate, satisfy or impair this Mortgage.

ARTICLE II

Defaults and Remedies

2.1. Events of Default . The occurrence of any one or more of the following events shall constitute an Event of Default under this Mortgage:

a. The Mortgagor shall fail to pay any amount on the Notes when due or shall fail to pay when due any subsequent loan or advance made by the Mortgagee hereunder or the interest thereon.

b. The Mortgagor shall fail to pay any other Secured Indebtedness when due.

c. The Mortgagor shall fail duly to perform or observe any covenant or agreement in the Notes, this Mortgage, the Loan Agreement, or any other promissory Notes, agreement, instrument or writing made or delivered

pursuant to or in connection with the Notes or this Mortgage beyond the applicable cure period, if any. If any failure is curable, it may be cured (and no Event of Default will have occurred) if Mortgagor, after receiving written notice from Mortgagee demanding cure of such failure: (i) cures the failure within thirty (30) days; or (ii) if the cure requires more than thirty (30) days, immediately initiates steps sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

d. Any statement, representation or warranty made by the Mortgagor at any time shall prove to have been incorrect or misleading in any material respect when made and the Mortgagor does not correct such incorrect or misleading statement, representation or warranty within thirty (30) days of receipt of notice in writing.

e. The Mortgagor shall be dissolved or shall make a general assignment for the benefit of creditors or shall initiate or have initiated against it any act, process or proceeding under any insolvency, bankruptcy or similar law. Notwithstanding, it shall not be an Event of Default if an involuntary case is commenced against Borrower by any creditor of Borrower unless the action is not dismissed or discharged within 30 days of filing.

f. The Mortgagor shall liquidate, merge, consolidate, transfer a substantial part of its property.

g. A trustee, receiver or liquidator of the Mortgagor shall be appointed with the consent or acquiescence of the Mortgagor, or any such appointment, if not so consented to or acquiesced in, shall remain unacted or unstayed for an aggregate of thirty (30) days (whether or not consecutive).

h. Subject to the provisions of Section 1.9 of this Mortgage, execution shall have been levied against the Mortgaged Premises or any lien creditor’s suit to enforce a judgment against the Mortgaged Premises shall have been brought and (in either case) shall continue unstayed and in effect for a period of more than ten (10) consecutive calendar days.

2.2. Remedies . Upon the occurrence of an Event of Default which remains uncured during the time period provided, or at any time thereafter until such Event of Default is cured to the satisfaction of the Mortgagee, the Mortgagee may, at its option, and without notice to the Mortgagor, unless otherwise provided herein, exercise any or all of the following rights and remedies, and any other rights and remedies now or then available to it, either hereunder or at law or in equity, including, without limitation, the rights and remedies provided in the Assignment of Rents:

a. Mortgagee may immediately, and without notice to the Mortgagor, declare the entire unpaid principal balance of the Notes together with all accrued

interest thereon to be immediately due and payable and thereupon all such and all other Secured Indebtedness shall be and become immediately due and payable.

b. The Mortgagee may foreclose this Mortgage by action or advertisement, and the Mortgagor hereby authorizes and fully empowers the Mortgagee to do so, with full authority to sell the Mortgaged Premises at public auction upon giving notice of the sale to Mortgagor in the manner required by law, and convey the same to the Purchaser in fee simple all in accordance with and in the manner prescribed by law, and out of the proceeds arising from sale and foreclosure to retain the principal and interest due on the Notes and the Secured Indebtedness together with all such sums of money as the Mortgagee shall have expended or advanced pursuant to this Mortgage or pursuant to statute together with interest thereon as herein provided and all costs and expenses of such foreclosure, including lawful attorneys’ fees, with the balance, if any, to be paid to the persons entitled thereto by law.

c. The Mortgagee may collect, receive, and retain all rents, income, and profits (the “Rents”) from the Mortgaged Premises, either through the appointment of a receiver or by self help and without appointment of a receiver.

The Mortgagee shall be entitled as a matter of right without notice and without giving bond and without regard to the solvency or insolvency of the Mortgagor, or waste of the Mortgaged Premises or adequacy of the security of the Mortgaged Premises, to apply for the appointment of a receiver in accordance with applicable law; and Mortgagor does hereby irrevocably consent to such appointment.

The Rents collected in accordance with this Mortgage, whether collected by a receiver appointed in accordance with the preceding paragraph and applicable law or collected directly by the Mortgagee exercising self-help, shall be applied in the following order, or such other order as mandated by Minnesota Statutes Sections 559.17 and 576.01, and applicable successor statutes: (i) reasonable fees of the receiver, where one is appointed; (ii) application of tenant security deposits as required by applicable law, including Minnesota Statutes Section 504B.178 and applicable successor statutes; (iii) payment when due of prior or current real estate taxes or special assessments with respect to the Mortgaged Premises, or the periodic escrow for the payment of the taxes or special assessments; (iv) payment when due of premiums for insurance of the type required by this Mortgage, or the periodic escrow for the payment of said premiums; (v) payment of all expenses for normal maintenance of the Mortgaged Premises; and (vi) as further required in any assignment of rents executed by the Mortgagor as security for the Secured Indebtedness (whether in this Mortgage or a separate instrument).

Nothing contained in this Mortgage and no actions taken pursuant to this Mortgage shall be construed as constituting the Mortgagee a mortgagee in possession.

d. In addition to the rights available to a mortgagee of real property, the Mortgagee shall also have all the rights, remedies and recourse available to a secured party under the Uniform Commercial Code, including without limitation the right to proceed under the provisions of the Uniform Commercial Code governing default as to any personal property which may be included in the Mortgaged Premises or which may be deemed nonrealty in a foreclosure of this Mortgage or to proceed as to such personal property in accordance with the procedures and remedies available pursuant to a foreclosure of real estate.

ARTICLE III

Miscellaneous

3.1. Mortgagor’s Acknowledgment of Remedies . THE MORTGAGOR HEREBY CONSENTS AND AGREES TO THE FORECLOSURE AND SALE OF THE MORTGAGED PREMISES BY ACTION PURSUANT TO MINNESOTA STATUTES CHAPTER 581 OR, AT THE OPTION OF THE MORTGAGEE, BY ADVERTISEMENT PURSUANT TO MINNESOTA STATUTES CHAPTER 580 (OR PURSUANT TO ANY SIMILAR OR REPLACEMENT STATUTES HEREAFTER ENACTED), WHICH PROVIDES FOR SALE AFTER SERVICE OF NOTICE THEREOF UPON THE OCCUPANT OF THE MORTGAGED PREMISES AND PUBLICATION OF SAID NOTICE FOR SIX (6) WEEKS IN THE COUNTY IN MINNESOTA WHERE THE MORTGAGED PREMISES ARE SITUATED; ACKNOWLEDGES THAT SERVICE NEED NOT BE MADE UPON THE MORTGAGOR PERSONALLY (UNLESS THE MORTGAGOR IS AN OCCUPANT) AND THAT NO HEARING OF ANY TYPE IS REQUIRED IN CONNECTION WITH THE SALE; AND EXCEPT AS MAY BE PROVIDED IN SAID STATUTES EXPRESSLY WAIVES ANY AND ALL RIGHTS TO A PRIOR HEARING OF ANY TYPE IN CONNECTION WITH THE SALE OF THE MORTGAGED PREMISES. Notwithstanding the foregoing provision, the Mortgagor’s foregoing acknowledgment does not constitute a waiver of the Mortgagor’s defenses to the foreclosure. The Mortgagor further understands that in the event of such default the Mortgagee may also elect its rights under the Uniform Commercial Code and take possession of the Personal Property (as defined in this Mortgage) and dispose of the same by sale or otherwise in one or more parcels provided that at least ten (10) days’ prior notice of such disposition must be given, all as provided for by the Uniform Commercial Code, as hereafter amended or by any similar or replacement statute hereafter enacted. THE MORTGAGOR ACKNOWLEDGES THAT IT IS REPRESENTED BY LEGAL COUNSEL; THAT BEFORE SIGNING THIS DOCUMENT THIS PARAGRAPH AND THE MORTGAGOR’S RIGHTS WERE FULLY EXPLAINED BY SUCH COUNSEL AND THAT THE MORTGAGOR UNDERSTANDS THE NATURE AND EXTENT OF THE RIGHTS WAIVED HEREBY AND THE EFFECT OF SUCH WAIVER.

3.2. Continued Priority . Any agreement hereafter made by the Mortgagor and the

Mortgagee pursuant to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance.

3.3. Cumulative Rights . Each right, power or remedy herein conferred upon the Mortgagee is cumulative and in addition to every other right, power or remedy, express or implied, now or hereafter arising, available to the Mortgagee, at law or in equity, or under the Uniform Commercial Code or other law, or under any other agreement, and each and every right, power and remedy herein set forth or otherwise so existing may be exercised from time to time as often and in such order as may be deemed expedient by the Mortgagee and shall not be a waiver of the right to exercise at any time thereafter any other right, power or remedy. No delay or omission by the Mortgagee in the exercise of any right, power or remedy arising hereunder or arising otherwise shall impair any such right, power or remedy or the right of the Mortgagee to resort thereto at a later date or be construed to be a waiver of any Event of Default under this Mortgage or the Notes.

3.4. Waiver . The Mortgagor hereby waives to the full extent lawfully allowed the benefit of any homestead, appraisement, evaluation, stay and extension laws now or hereafter in force. The Mortgagor hereby waives any rights available with respect to marshaling of assets so as to require the separate sales of any portion of the Mortgaged Premises, or as to require the Mortgagee or any other person to exhaust its remedies against a specific portion of the Mortgaged Premises before proceeding against the other and does hereby expressly consent to and authorize the sale of the Mortgaged Premises or any part thereof as a single unit or parcel.

3.5. Satisfaction of Mortgage . When all Secured Indebtedness has been paid, this Mortgage and all assignments herein contained shall be void and this Mortgage shall be satisfied and released by the Mortgagee at the cost and expense of the Mortgagor.

3.6. Governing Law . This Mortgage is made and executed under the laws of the State of Minnesota and is intended to be governed by the laws of said State.

3.7. Binding Effect . This Mortgage and each and every covenant, agreement and other provision hereof shall be binding upon the Mortgagor and its successors and assigns including without limitation each and every from time to time record owner of the Mortgaged Premises and any other person having an interest therein, shall run with the land and shall inure to the benefit of the Mortgagee and its successors and assigns. As used herein the words “successors and assigns” shall also be deemed to include the heirs, representatives, administrators and executors of any natural person who is a party to this Mortgage.

3.8. Severability and Survival . The unenforceability or invalidity of any provisions hereof shall not render any other provision, or provisions herein contained unenforceable or invalid. The foreclosure of this Mortgage will not affect or limit any remedy of the Mortgagee on account of any breach by the Mortgagor of the terms of this Mortgage occurring prior to such foreclosure, except to the extent of the amount bid at foreclosure.

3.9. Captions . The captions and headings of the various sections of this Mortgage are for convenience only and are not to be construed as confining or limiting in any way the scope or intent

of the provisions hereof. Whenever the context requires or permits the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable.

3.10. Notices . Any notice which any party hereto may desire or may be required to give to any other party shall be in writing and the mailing thereof by certified mail to their respective addresses as set forth on page one herein, or to such other places any party hereto may hereafter by notice in writing designate shall constitute service of notice hereunder.

THE MORTGAGOR REPRESENTS, CERTIFIES, WARRANTS AND AGREES THAT THE MORTGAGOR HAS READ ALL OF THIS MORTGAGE AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS MORTGAGE. THE MORTGAGOR ALSO AGREES THAT THE MORTGAGEE’S COMPLIANCE WITH THE EXPRESS PROVISIONS OF THIS MORTGAGE SHALL CONSTITUTE GOOD FAITH AND SHALL BE CONSIDERED REASONABLE FOR ALL PURPOSES.

IN WITNESS WHEREOF , the undersigned has executed this Mortgage as of the day and year first above written.

	MORTGAGOR:

	HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By: Robert J. Ferguson
	Its: President

STATE OF MINNESOTA	)
	) ss.
COUNTY OF JACKSON	)

On this day of , 2011, before me a Notary Public within and for said County, personally appeared Robert J. Ferguson, to me known, who being by me duly sworn, did say that he is the President of Heron Lake BioEnergy, LLC, the limited liability company named in the foregoing instrument, and that said instrument was signed on behalf of said company by authority of its board and as the free act and deed of said company.


	Notary Public

THIS INSTRUMENT WAS DRAFTED BY:

GRAY PLANT MOOTY MOOTY & BENNETT, P.A.

Phillip L. Kunkel, 1010 West St. Germain St. , Suite 600, St. Cloud, MN 56301

EXHIBIT A

LEGAL DESCRIPTION

TRACT A

Parcel A

Part of the SW¼ of Sec. 16, T104N, R37W, Jackson County, Minnesota, lying Southerly of the Southerly right of way line of the Union Pacific Railroad, described as follows:

Parcel B

Part of the SE¼ of Sec. 16, T104N, R37W, Jackson County, Minnesota, described as follows:

EXHIBIT B

PERMITTED ENCUMBRANCES

1. Jackson County Ordinances, Codes, and Resolutions of record.

2. Transmission Line Easement in favor of Interstate Power Company, dated 02/17/50, filed 03/03/50, in Book 160, Page 72. Runs over and across the S½SW ¼, Sec. 16-104-37, with other land. Appears to be UNCONFINED. TRACT A, Parcel A

3. Transmission Line Easement in favor of Interstate Power Company, dated 05/10/51, filed 05/17/51, in Book 160, Page 178. Grants permission to construct an H-Fixture to be located on a 50-foot strip of land further described in this document. TRACT A, Parcel A

Partial Easement Assignment dated 12/20/07, filed 01/03/08 as Doc #A251649, by Interstate Power and Light Company, to ITC Midwest LLC

4. Transmission Line Easement in favor of Interstate Power Company, dated 09/16/52, filed 10/02/52, in Book 160, Page 227. Runs over and across SW¼, Sec. 16-104-37. Permission granted to install 3 poles and 11 anchors and guys in the SW corner of said land lying North of the highway. TRACT A, Parcel A

Partial Easement Assignment dated 12/20/07, filed 01/03/08 as Doc #A251650, by Interstate Power and Light Company, to ITC Midwest LLC

5. Transmission Line Easement In favor of Interstate Power Company, dated 09/14/62, filed 10/24/62, in Book 190, Page 113. Runs over and across SW¼, Sec. 16-104-37. Poles to be located 1 foot North of the North boundary of the East-West highway along the South boundary. TRACT A, Parcel A

6. Weimer Township Resolution filed 3/25/86 as Doc #190214. Establishes township roads

7. Electric Line Easement in favor of Interstate Power Company, dated 08/16/96, filed 08/26/96, as Doc #216185. Runs over and across the West 1320 feet of the South 450 feet of the SW¼, Sec. 16-104-37. TRACT A, Parcel A

8. Minnesota Department of Transportation Right of Way Plat No. 32-44, dated 10/26/00, filed 10/31/00 as Doc #228639. TRACT A, Parcel A

9. Minnesota Department of Transportation Right of Way Plat No. 32-45, dated 10/26/00, filed 10/31/00 as Doc #228640. TRACT A, Parcel A

10. Electric Line Easement in favor of Interstate Power Company, dated 01/18/2001, filed 02/16/01, in Book N/A, Page N/A, as Doc #229399. Runs over and across portions of the SW¼, Sec. 16-104-37. Document contains the exact locations of the easements. Consent to this Easement was given by AgStar Financial Services in a document dated 2/2/01, filed 2/16/01 as Doc #229400. TRACT A, Parcel A

11. Unrecorded Drain Tile Easement dated 6/29/63, between Daramag, Inc., a Minnesota Corporation, Party of the First Part, and Fred G. Diemer and Mildred E. Diemer, husband and wife, Parties of the Second Part. Wherein Party of the First Part owns the SW¼, Sec. 15-104-37, Jackson County, MN, and Parties of the Second Part own the SE¼ of Sec. 16-104-37, Jackson County, MN. And wherein

the Party of the First Part agrees to grant and convey to the Parties of the Second Part, their heirs and assigns forever, a perpetual and permanent easement for the purpose of draining the above-described property through a 12-inch tile drain located upon the First Party’s property. With other terms and conditions. TRACT A, Parcel B

12. Transmission Line Easement in favor of Interstate Power Company, dated 10/30/1946, filed 11/13/46, in Book 158, Page 502, as Doc #N/A. Runs over and across the SE¼ of Sec. 16-104-37, said line to be constructed 1 foot North of the highway along the South side of said property. TRACT A, Parcel B

13. Mortgage dated 9/29/05, filed 9/30/05 as Doc #244879, given by Heron Lake BioEnergy, LLC, a Minnesota limited liability company, in favor of AgStar Financial Services, PCA, securing the amount of $61,883,000.00. TRACT A

AND

Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company, and AgStar Financial Services, PCA, dated 11/20/06, filed for record on 12/6/06, as Doc #248498, amending the original principal amount to $65,583,000.00, among other items.

AND

Second Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company, and AgStar Financial Services, PCA, dated 12/27/06, filed for record on 12/27/06, as Doc #248658, amending the original principal amount to $70,283,000.00, and amending the legal description of the original mortgage to exclude an additional parcel, among other Items.

AND

Third Amended and Restated Mortgage, Security Agreement and Assignment of Rents and Leases, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company, and AgStar Financial Services, PCA, dated 05/08/07, filed for record on 06/04/07, as Doc #A250019, amending the original principal amount to $72,083,000.00, among other items.

14. Conditions and terms contained in that Pipeline Easement for carrying water, dated 11/2/05, filed 11/10/05 as Doc #245218, given by George Dumer and Collette Dumer, husband and wife, to Heron Lake BioEnergy, LLC. Easement runs over and across part of the NW½ of Sec. 15-104-37 lying South of the railroad right of way, and part of the E½ of Sec. 15-104-37 lying South of the railroad right of way, for the benefit of TRACT A. This easement is perpetual and is to run with the land.

15. Mortgage dated 12/28/07, filed 01/09/08 as Doc #A251707, given by Heron Lake BioEnergy, LLC , to Federated Rural Electric Association, securing the principal sum of $600,000.00. Secured by a .62 acre parcel located in a portion of Parcel A of TRACT A.

16. UCC Financing Statement filed 1/9/08 as Doc #A251708, given by Heron Lake BioEnergy, LLC, to Federated Rural Electric Association. Describes substation fixtures and equipment located on TRACTS A and B.

Exhibit 10.44

FIFTH AMENDED AND RESTATED GUARANTY

In consideration of and in order to induce AGSTAR FINANCIAL SERVICES, PCA, a United States instrumentality, with its main banking house located in Mankato, Minnesota (the “Lender”), to extend financial accommodations to HERON LAKE BIOENERGY, LLC , a Minnesota limited liability company (the “ Borrower ”), pursuant to that certain Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011 (as the same has been amended, modified, supplemented, extended or restated from time to time, the “ MLA ”), the undersigned (the “ Guarantor ”), hereby:

1. Unconditionally and absolutely guarantees to the Lender:

a. the full and prompt payment, when due, whether at the maturity date specified therein or theretofore upon acceleration of maturity pursuant to the provisions thereof, of the outstanding principal and accrued interest, and prepayment premium, if any, on the Amended and Retated Term Note and Amended and Restated Term Revolving Note of the Borrower dated September 1, 2011 (collectively, the “ Notes ”); and

b. the payment and performance by the Borrower of all of its respective obligations under and pursuant to the Notes, the MLA and any and all documents related thereto (the Notes, the MLA, and such other liability, indebtedness and obligations are herein collectively referred to as the “ Obligations ”) together with the full and prompt payment of any and all costs and expenses of and incidental to the collection of the Obligations for the enforcement of this Guaranty, including, without limitation, attorneys’ fees.

c. Capitalized terms used and not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the MLA.

2. Agrees that the Lender may demand payment from the Guarantor of any installment (or portion thereof) of principal or interest on the Notes, when due, and the Guarantor shall immediately pay the same to the Lender, and the Lender may demand payment or performance of any or all of the other Obligations, when such payment or performance is due or required and the Guarantor shall immediately pay or perform the same, whether or not the Lender has (1) accelerated payment of the Obligations; or (2) commenced repossession of, or foreclosure of any security interest, mortgage or other lien in, any or all of the collateral securing the Obligations; or (4) otherwise exercised its rights and remedies hereunder or under the Obligations, the documents related thereto or applicable law.

3. Waives (a) presentment, demand, notice of nonpayment, protest, and notice of protest and dishonor on the Obligations; (b) notice of acceptance of this Guaranty by the Lender; and (c) notice of the creation or incurrence of the Obligations by the Borrower.

4. Agrees that the Lender may, from time to time, without notice to the Guarantor, which notice is hereby waived by the Guarantor, extend, modify, renew or compromise the Obligations, in whole or in part, without releasing, extinguishing or affecting in any manner whatsoever the liability of Guarantor hereunder, the foregoing acts being hereby consented to by the Guarantor.

5. Agrees that the Lender shall not be required to first resort for payment to the Borrower or any other person, corporation or entity, or their properties or estate, or any other right or remedy whatsoever, prior to enforcing this Guaranty.

6. Agrees that this Guaranty shall be construed as a continuing, absolute, and unconditional guaranty without regard to (a) the validity, regularity or enforceability of the Obligations or the disaffirmance thereof in any insolvency or bankruptcy proceeding relating to the Borrower; or (b) any event or any conduct or action of the Borrower or the Lender or any other party which might otherwise constitute a legal or equitable discharge of a surety or guarantor but for this provision.

7. Agrees that this Guaranty shall remain in full force and effect and be binding upon the Guarantor until the Obligations are paid in full.

8. Agrees that the Lender is expressly authorized to forward or deliver any or all collateral and security which may, at any time, be placed with it by the Borrower, the Guarantor or any other person, directly to the Borrower for collection and remittance or for credit, or to collect the same in any other manner and to renew, extend, compromise, exchange, release, surrender or modify the installments of, any or all of such collateral and security with or without consideration and without notice to the Guarantor and without in any manner affecting the absolute liability of the Guarantor hereunder; and that the liability of the Guarantor hereunder shall not be affected or impaired by any failure, neglect or omission on the part of the Lender to realize upon the Obligations, or upon any collateral or security therefore, nor by the taking by the Lender of any other guaranty or guaranties to secure the Obligations or any other indebtedness of the Borrower to the Lender, nor by the taking by the Lender of collateral or security of any kind nor by any act or failure to act whatsoever which, but for this provision, might or could in law or in equity act to release or reduce the Guarantor’s liability hereunder.

9. Agrees that notwithstanding any payment or payments made by the Guarantor hereunder or any setoff or application of funds of the Guarantor by the Lender, the Guarantor shall not be entitled to be subrogated to any of the rights of the Lender against the Borrower or any other guarantor or any collateral security or guaranty or right of offset held by the Lender for the payment of the Obligations, nor shall the Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other guarantor in respect of payments made by the Guarantor hereunder, until all amounts owing to the Lender by the Borrower and on account of the Obligations are paid in full. Notwithstanding any of the foregoing, to the extent (a) any right of subrogation which the Guarantor may have pursuant to this Guaranty or otherwise, or (b) any right of

reimbursement or contribution or similar right against the Borrower, any property of the Borrower or any other guarantor of any of the Obligations would result in the Guarantor being “creditors” of or the holders of a “claim” against the Borrower within the meaning of Title 11 of the United States Bankruptcy Code as now in effect or hereafter amended, or any comparable provision of any successor statute, the Guarantor hereby irrevocably waives such right of subrogation, reimbursement or contribution.

10. Agrees that the liability of the Guarantor hereunder shall not be affected or impaired by the existence or creation from time to time, with or without notice to the Guarantor, which notice is hereby waived, of indebtedness from the Borrower to the lender in addition to the indebtedness evidenced by the Notes; the creation or existence of such additional indebtedness being hereby consented to by the Guarantor.

11. Agrees that the possession of this instrument of guaranty by the Lender shall be conclusive evidence of due execution and delivery hereof by the Guarantor.

12. Agrees that this Guaranty shall be binding upon the legal representative, successors and assigns of the Guarantor, and shall inure to the benefit of the Lender and its successors, assigns and legal representative; that notwithstanding the foregoing, the Guarantor shall have no right to assign or otherwise transfer their rights and obligations under this Guaranty to any third party without the prior written consent of the Lender; and that any such assignment or transfer shall not release or affect the liability of the Guarantor hereunder in any manner whatsoever.

13. Agrees that the Guarantor may be joined in any action or proceeding commenced against the Borrower in connection with or based upon the Obligations and recovery may be had against the Guarantor in any such action or proceeding or in any independent action or proceeding against the Guarantor should the Borrower fail to duly and punctually pay any of the principal of or interest on the Obligations without any requirement that the Lender first assert, prosecute or exhaust any remedy or claim against the Borrower.

14. Agrees that upon the occurrence at any time of an Event of Default (as defined in the MLA), the Lender shall have the right to set off any and all amounts due hereunder by the Guarantor to the Lender against any indebtedness or obligation of the Lender to the Guarantor.

15. Agrees that the Guarantor shall be liable to the Lender for any deficiency remaining after foreclosure of any mortgage on real estate or any security interest in personal property granted by the Borrower, the Guarantor or any third party to the Lender to secure repayment of the Obligations and the subsequent sale by the Lender of the property subject thereto to a third party (whether at a foreclosure sale or at a sale thereafter by the Lender in the event the Lender purchases said property at the foreclosure sale) notwithstanding any provision of applicable law which may prevent the Lender from obtaining a deficiency judgment against, or otherwise collecting a deficiency from, the Borrower, including without limitation, Minnesota Statutes Section 580.23.

16. Agrees that this Guaranty shall be deemed a contract made under and pursuant to the laws of the State of Minnesota and shall be governed by and construed under the laws of such state; and that, wherever possible, each provision of this Guaranty shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provisions of this Guaranty shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of the Guaranty.

17. Agrees that no failure on the part of the Lender to exercise, and no delay in exercising, any right or remedy hereunder shall operate as or constitute a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law.

18. Agrees to deliver to the Lender, as soon as available and in any event within one hundred twenty (120) days after the end of Guarantor’s fiscal year ending December 31, 2006, and for each succeeding fiscal year, a copy of the audited financial statements (including balance sheet, statements of income and cash flows, all accompanying notes thereto and any management letter), for such year for the Guarantor, certified, without qualification, in an opinion acceptable to the Lender by independent certified public accountants of recognized standing selected by the Guarantor and acceptable to the Lender, and the federal and state income tax returns and schedules of the Guarantor, or copies of all extensions for such returns and returns within 30 days of filing. In addition, Guarantor agrees with reasonable promptness, to provide to Lender such further information regarding the business, operations, affairs and financial and other condition of the Guarantor as the Lender may reasonably request.

19. Waives any and all claims against the Lender and defenses to performance and payment hereunder relating in any way, directly or indirectly, to the performance of the Lender’s obligations or exercise of any of its rights under the Notes and the documents related thereto.

20. Warrants and represents to the Lender as follows:

a. Enforceability . This Guaranty constitutes the legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms (subject, as to enforceability, to limitations resulting from bankruptcy, insolvency or other similar laws affecting creditors’ rights generally).

b. Litigation . There is no action, suit or proceeding, other than the Permit Litigation, pending or, to the knowledge of the Guarantor, threatened against or affecting the Guarantor which, if adversely determined, would have a material adverse effect on the condition (financial or otherwise), property or assets of the Guarantor, or which would question the validity of this Guaranty or any instrument, document or other agreement related hereto or required hereby, or impair the ability of the Guarantor to perform their obligations hereunder or thereunder.

c. Default . Guarantor is not in default of a material provision under any material agreement, instrument, decree or order to which they are parties or by which they or their property is bound or affected.

d. Consents . No consent, approval, order or authorization , registration, declaration or filing with, or notice to, any governmental authority or any third party is required in connection with the execution and delivery of this Guaranty or any of the agreements or instruments herein mentioned to which Guarantor is a party or the carrying out or performance of any of the transactions required or contemplated hereby or thereby or, if required, such consent, approval, order or authorization has been obtained or such registration, declaration or filing has been accomplished or such notice has been given prior to the date hereof.

e. Taxes . Guarantor has filed all tax returns required to be filed and have paid all taxes shown thereon to be due, including interest and penalties, which are not being contested in good faith and by appropriate proceedings and none of them has any information or knowledge of any objections to or claims for additional taxes in respect of federal income or excess profits tax returns for prior years.

21. Agrees that (a) the Guarantor will indirectly benefit by and from the making of the loan by the Lender to the Borrower evidenced by the Notes by virtue of the fact that the Guarantor is a subsidiary of the Borrower and the Borrower is the sole member of the Guarantor; (b) the Guarantor has received legal and adequate consideration for the execution of this Guaranty and has executed and delivered this Guaranty to the Lender in good faith in exchange for reasonably equivalent value; (c) the Guarantor is not presently insolvent and will not be rendered insolvent by virtue of the execution and delivery of this Guaranty; (d) the Guarantor has not executed or delivered this Guaranty with actual intent to hinder, delay or defraud the Guarantor’s creditors; and (e) the Lender has agreed to make such loan in reliance upon this Guaranty.

22. Agrees that if, at any time, all or any part of any payment previously applied by the Lender to any of the Obligations must be returned by the Lender for any reason, whether by court order, administrative order or settlement, the Guarantor shall remain liable for the full amount returned as if said amount had never been received by the Lender, notwithstanding any term of this Guaranty or the cancellation or return of any note or other agreement evidencing the Obligations.

23. Agrees that (a) the Guarantor irrevocably submits to the jurisdiction of any Minnesota state court or federal court over any action or proceeding arising out of or relating to the Notes, the MLA, and any instrument, agreement or document related thereto; (b) all claims in respect of such action or proceeding may be heard and determined in such Minnesota state or federal court; (c) the Guarantor irrevocably waives, to the fullest extent they may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding; (d) the Guarantor irrevocably consent to the service of copies of the Summons and Complaint and any other process which may be served in any such action or proceeding by the mailing by United States certified mail, return receipt

requested, of copies of such process to the Guarantor’s last known addresses; (e) judgment final by appeal, or expiration of time to appeal without an appeal being taken, in any such action or proceeding shall be conclusive and may be enforced in any other jurisdictions by suit on the judgment or in any other manner provided by law; and (f) nothing in this Paragraph shall affect the right of the Lender to serve legal process in any other manner permitted by law or affect the right of Lender to bring any action or proceeding against the Guarantor or their property in the courts of any other jurisdiction to the extent permitted by law.

Dated this 1st day of September, 2011.

	GUARANTOR:

	LAKEFIELD FARMERS ELEVATOR, LLC, a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By: Robert J. Ferguson
	Its: President

Exhibit 10.45

AMENDED AND RESTATED GUARANTY

In consideration of and in order to induce AGSTAR FINANCIAL SERVICES, PCA, a United States instrumentality, with its main banking house located in Mankato, Minnesota (the “ Lender ”), to extend financial accommodations to HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company (the “ Borrower ”), pursuant to that certain Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011 (as the same has been amended, modified, supplemented, extended or restated from time to time, the “ MLA ”), the undersigned (the “ Guarantor ”), hereby:

1. Unconditionally and absolutely guarantees to the Lender:

c. Capitalized terms used and not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the MLA.

2. Agrees that the Lender may demand payment from the Guarantor of any installment (or portion thereof) of principal or interest on the Notes, when due, and the Guarantor shall immediately pay the same to the Lender, and the Lender may demand payment or performance of any or all of the other Obligations, when such payment or performance is due or required and the Guarantor shall immediately pay or perform the same, whether or not the Lender has (a) accelerated payment of the Obligations; or (b) commenced repossession of, or foreclosure of any security interest, mortgage or other lien in, any or all of the collateral securing the Obligations; or (c) otherwise exercised its rights and remedies hereunder or under the Obligations, the documents related thereto or applicable law.

7. Agrees that this Guaranty shall remain in full force and effect and be binding upon the Guarantor until the Obligations are paid in full.

Guarantor hereunder, until all amounts owing to the Lender by the Borrower and on account of the Obligations are paid in full. Notwithstanding any of the foregoing, to the extent (a) any right of subrogation which the Guarantor may have pursuant to this Guaranty or otherwise, or (b) any right of reimbursement or contribution or similar right against the Borrower, any property of the Borrower or any other guarantor of any of the Obligations would result in the Guarantor being “creditors” of or the holders of a “claim” against the Borrower within the meaning of Title 11 of the United States Bankruptcy Code as now in effect or hereafter amended, or any comparable provision of any successor statute, the Guarantor hereby irrevocably waives such right of subrogation, reimbursement or contribution.

11. Agrees that the possession of this instrument of guaranty by the Lender shall be conclusive evidence of due execution and delivery hereof by the Guarantor.

prevent the Lender from obtaining a deficiency judgment against, or otherwise collecting a deficiency from, the Borrower, including without limitation, Minnesota Statutes Section 580.23.

18. Agrees to deliver to the Lender, as soon as available and in any event within one hundred twenty (120) days after the end of Guarantor’s fiscal year ending December 31, 2011, and for each succeeding fiscal year, a copy of its audited financial statements (including balance sheet, statements of income and cash flows, all accompanying notes thereto and any management letter), for such year for the Guarantor, certified, without qualification, in an opinion acceptable to the Lender by independent certified public accountants of recognized standing selected by the Guarantor and acceptable to the Lender, and the federal and state income tax returns and schedules of the Guarantor, or copies of all extensions for such returns and returns within 30 days of filing. In addition, Guarantor agrees with reasonable promptness, to provide to Lender such further information regarding the business, operations, affairs and financial and other condition of the Guarantor as the Lender may reasonably request.

20. Warrants and represents to the Lender as follows:

b. Litigation . There is no action, suit or proceeding, pending or, to the knowledge of the Guarantor, threatened against or affecting the Guarantor which, if adversely determined, would have a material adverse effect on the condition (financial or otherwise), property or assets of the Guarantor, or which would question the validity

of this Guaranty or any instrument, document or other agreement related hereto or required hereby, or impair the ability of the Guarantor to perform their obligations hereunder or thereunder.

inconvenient forum to the maintenance of such action or proceeding; (d) the Guarantor irrevocably consent to the service of copies of the Summons and Complaint and any other process which may be served in any such action or proceeding by the mailing by United States certified mail, return receipt requested, of copies of such process to the Guarantor’s last known addresses; (e) judgment final by appeal, or expiration of time to appeal without an appeal being taken, in any such action or proceeding shall be conclusive and may be enforced in any other jurisdictions by suit on the judgment or in any other manner provided by law; and (f) nothing in this Paragraph shall affect the right of the Lender to serve legal process in any other manner permitted by law or affect the right of Lender to bring any action or proceeding against the Guarantor or their property in the courts of any other jurisdiction to the extent permitted by law.

Dated this 1st day of September, 2011.

	GUARANTOR:

	HLBE PIPELINE COMPANY, LLC , a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By: Robert J. Ferguson
	Its: President & Chief Manager

Exhibit 10.46

COLLATERAL ASSIGNMENT

This Collateral Assignment (this “ Assignment ”) is made to be effective as of September 1, 2011, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company (the “ Company ”) and AgStar Financial Services, PCA, an United States instrumentality (the “ Lender ”).

The Company and Lender have entered into a Fifth Amended and Restated Master Loan Agreement, dated to be effective as of September 1, 2011, as amended, modified and restated from time to time (the “ MLA ”), under which the Lender has extended certain financial accommodations to the Company. As a condition to the making of the loans to the Company under the MLA, the Lender has required the execution hereof by the Company, and the acknowledgment hereof and consent hereto by Gavilon, LLC, a Delaware limited liability company (the “ Gavilon ”).

Accordingly, in consideration of the foregoing, the parties agree as follows:

1. For good and valuable consideration, the sufficiency of which is hereby acknowledged, the Company does hereby grant, assign, transfer and set over unto the Lender all of its right, title and interest in and to the following contracts: (a) Master Netting, Setoff, Credit and Security Agreement between Gavilon and the Company, (b) Corn Supply Agreement between Gavilon and the Company, and (c) Ethanol and Distiller’s Grains Marketing Agreement between Gavilon and the Company, each dated on or about the date of this Agreement, as the same may be extended, renewed, amended or otherwise modified from time to time (collectively the “ Contract ”). True and correct copies of the foregoing agreements are attached here to as Exhibit A.

2. The Company agrees that the Lender does not assume any of the obligations or duties of the Company under and with respect to the Contract unless and until the Lender shall have given Gavilon written notice that it has affirmatively exercised its right to assume the Contract following the occurrence of an Event of Default under the MLA. In the event that the Lender does not exercise its right to assume the Contract, the Lender shall have no liability whatsoever for the performance of any of such obligations or duties. For the purpose of performing under the Contract, the Lender may, in its absolute discretion, reassign its right, title and interest in the Contract, upon notice to Gavilon and subject to the terms of the Contract but without any requirement of the Company’s consent.

3. The Company represents and warrants there have been no prior assignments of the Contract, that the Contract is a valid and enforceable agreement and that neither party is in default thereunder and that all covenants, conditions and agreements have been performed as required therein, except those not due to be performed until after the date hereof. The Company agrees that no material change in the terms thereof shall be valid without the prior written approval of the Lender. The Company agrees not to assign, sell, pledge, mortgage or otherwise transfer or encumber its interest in the Contract so long as this Assignment is in effect.

4. The Company hereby irrevocably constitutes and appoints the Lender as its attorney-in-fact, effective only upon the occurrence and during the continuance of an Event of Default under the MLA, to demand, receive and enforce the Company’s rights with respect to the Contract, to make payments under the Contract and to give appropriate receipt, releases and satisfactions for and on behalf of and in the name of the Company, at the option of the Lender in the name of the Lender, with the same force and effect as the Company could do if this Assignment had not been made.

5. This Assignment shall constitute a perfected, absolute and present assignment provided that the Lender shall have no right under this Assignment to enforce the Company’s rights with respect to the Contract until an Event of Default shall occur and be continuing under the MLA. Upon the occurrence and during the continuance, the Lender may, without affecting any of its rights or remedies against the Company under any other instrument, document or agreement, exercise its rights under this Assignment as the Company’s attorney-in-fact in any manner permitted by law.

6. The Company hereby agrees to indemnify and hold Lender harmless from and against any and all claims, demands, liabilities, losses, lawsuits, judgment, and costs and expenses, including without limitation reasonable attorneys’ fees, to which Lender may become exposed, or which Lender may incur, in exercising any of its rights under this Assignment.

7. Subject to the aforesaid limitation of further assignment by the Company, this Assignment shall be binding upon the Company, its successors and assigns, and shall inure to the benefit of the Lender, its successors and assigns.

8. This Assignment can be waived, modified, amended, terminated or discharged only explicitly in writing signed by the Lender. A waiver signed by the Lender shall be effective only in a specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of the Lender’s rights or remedies hereunder. All rights and remedies of the Lender shall be cumulative and shall be exercised singularly or concurrently, at the Lender’s option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise of enforcement of any other.

IN WITNESS WHEREOF, the Company executed this Collateral Assignment to be effective as of September 1, 2011.

	HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By Robert J. Ferguson
	Its: President

CONSENT TO ASSIGNMENT

In consideration of the promises of the parties to the above Assignment and this Consent to Assignment, and subject to the terms contained herein and in the above Assignment, the undersigned (“ Gavilon ”) hereby consents to the assignment of the Contract (as defined below) in the event that the Lender notifies Gavilon that it has assumed the duties and obligations of the Company under the terms of the above Assignment and acknowledges and agrees with the Lender as follows:

1. Gavilon and the Company have entered into the following agreements: (a) Master Netting, Setoff, Credit and Security Agreement between Gavilon and the Company, (b) Corn Supply Agreement between Gavilon and the Company, and (c) Ethanol and Distiller’s Grains Marketing Agreement between Gavilon and the Company, each dated on or about the date of this Agreement, as the same may be extended, renewed, amended or otherwise modified from time to time (collectively the “ Contract ”).

2. The Contract has not been amended since the date of execution by Gavilon and Company.

3. Upon the occurrence and continuance of an Event of Default under the MLA (as MLA is defined in the Collateral Assignment entered between Lender and Company of which this Consent to Assignment is a part) and notification to Gavilon that Lender has personally undertaken performance under the Contract, including the obligation to take and/or pay for service under the Contract, Gavilon will, at the Lender’s request, continue performance to Lender as an assignee of the Contract in accordance with the terms thereof, provided that Gavilon shall be reimbursed in accordance with the terms of Contract.

4. The Lender may enforce the obligations of the Contract with the same force and effect as if enforced by the Company, provided that Lender is fully performing the obligations of the Company under the Contract, including but not limited to the obligation to make payment to Gavilon. Upon assumption of the Contract by the Lender, Gavilon may enforce the obligations of the Contract against the Lender with the same force and effect as if enforced against the Company. Gavilon will accept Lender’s performance in lieu of performance by the Company and in full satisfaction of those obligations for which performance is made.

5. Lender may not further assign the Contract without first having obtained the consent of Gavilon, such consent to be at Gavilon’s sole discretion.

6. Nothing herein shall be interpreted as extending in any way the termination date contained in the Contract or otherwise creating any additional obligation or duty on Gavilon’s behalf other than those that may be set forth in the Contract.

7. Gavilon will give the Lender prompt written notice of any default by the Company under the Contract and in accordance with the terms of that certain Intercreditor Agreement between Lender and Gavilon of even date herewith (the “Intercreditor Agreement”). If any term is inconsistent between this Consent and the Intercreditor Agreement, the Intercreditor Agreement shall control.

Dated: September 1, 2011	GAVILON, LLC, a Delaware limited liability company

	/s/ John W. Neppl

	By:	John W. Neppl
	Its:	CFO

Exhibit 10.47

COLLATERAL ASSIGNMENT

This Collateral Assignment (this “ Assignment ”) is made to be effective as of September 1, 2011, by and between Lakefield Farmers Elevator, LLC, a Minnesota limited liability company (the “ Company ”) and AgStar Financial Services, PCA, an United States instrumentality (the “ Lender ”).

The Heron Lake BioEnergy, LLC, a Minnesota limited liability company (“ Borrower ”) and Lender have entered into a Fifth Amended and Restated Master Loan Agreement dated to be effective as of September 1, 2011, as amended, modified and restated from time to time (the “ MLA ”), under which the Lender has extended certain financial accommodations to the Borrower. The Company has guaranteed Borrower’s obligations to Lender under the MLA. As a condition to the making of the loans to the Borrower under the MLA, the Lender has required the execution hereof by the Company, and the acknowledgment hereof and consent hereto by Gavilon, LLC, a Delaware limited liability company (the “ Gavilon ”).

Accordingly, in consideration of the foregoing, the parties agree as follows:

1. For good and valuable consideration, the sufficiency of which is hereby acknowledged, the Company does hereby grant, assign, transfer and set over unto the Lender all of its right, title and interest in and to the Corn Storage Agreement between Gavilon and the Company dated on or about the date of this Agreement, as the same may be extended, renewed, amended or otherwise modified from time to time (the “ Contract ”). A true and correct copy of the Contract is attached here to as Exhibit A.

against the Borrower or the Company under any other instrument, document or agreement, exercise its rights under this Assignment as the Company’s attorney-in-fact in any manner permitted by law.

IN WITNESS WHEREOF, the Company executed this Collateral Assignment to be effective as of September 1, 2011.

	LAKEFIELD FARMERS ELEVATOR, LLC, a Minnesota limited liability company


	/s/ Robert J. Ferguson
	By Robert J. Ferguson
	Its: President

CONSENT TO ASSIGNMENT

1. Gavilon and the Company have entered into Corn Storage Agreement dated on or about the date of this Agreement, as the same may be extended, renewed, amended or otherwise modified from time to time (collectively the “ Contract ”).

2. The Contract has not been amended since the date of execution by Gavilon and Company.

3. Upon the occurrence and continuance of an Event of Default under the MLA (as MLA is defined in the Collateral Assignment of which this Consent to Assignment is a part) and notification to Gavilon that Lender has personally undertaken performance under the Contract, including the obligation to take and/or pay for service under the Contract, Gavilon will, at the Lender’s request, continue performance to Lender as an assignee of the Contract in accordance with the terms thereof, provided that Gavilon shall be reimbursed in accordance with the terms of Contract.

5. Lender may not further assign the Contract without first having obtained the consent of Gavilon, such consent to be at Gavilon’s sole discretion.

7. Gavilon will give the Lender prompt written notice of any default by the Company under the Contract and in accordance with the terms of that certain Intercreditor Agreement between Lender and Gavilon of even date herewith (the “ Intercreditor Agreement ”). If any term is inconsistent between this Consent and the Intercreditor Agreement, the Intercreditor Agreement shall control.

Dated: September 1, 2011	GAVILON, LLC, a Delaware limited liability company

	/s/ John W. Neppl

	By:	John W. Neppl
	Its:	CFO

Exhibit 10.48

CORN SUPPLY AGREEMENT

(HERON LAKE, MINNESOTA)

THIS CORN SUPPLY AGREEMENT (the “ Agreement ”) is dated and made effective as of September 1, 2011, by and between Heron Lake BioEnergy, LLC, a Minnesota limited liability company (“ Buyer ”), and Gavilon, LLC, a Delaware limited liability company (“ Gavilon ”) (each of Buyer and Gavilon is a “ Party ” and together they are collectively referred to as the “ Parties ”).

RECITALS:

(a) Buyer desires to have Gavilon originate and supply corn (or assist in originating and supplying corn) required at Buyer’s plant located at Heron Lake, Minnesota (the “ Plant ”), and to provide related services to Buyer; and

(b) Gavilon desires to enter into an agreement with Buyer to originate and supply (or assist in originating and supplying) such products and provide the related services for Buyer.

AGREEMENT:

NOW THEREFORE, in consideration of the above recitals and the mutual promises and covenants set forth herein, the Parties agree as follows:

Article 1
DEFINITIONS AND INTERPRETATIONS

1.1 Definitions. As used in this Agreement, the following terms have the following meanings:

1.1.1 “Agreement” means this Corn Supply Agreement.

1.1.2 “Business Day” or “Business Days” means the hours from 8:00 a.m. to 5:00 p.m. Central Time excluding Saturdays, Sundays, and scheduled holidays observed by the Chicago Board of Trade, Chicago, Illinois, USA.

1.1.3 “Buyer’s Corn Order(s)” has the meaning given in Section 3.2.1.

1.1.4 “Change in Control” means a change in the ownership of a Party, whereby such change results in any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), other than Project Viking, L.L.C. or any affiliates owned or controlled by Ron and Diane Fagen with respect to Buyer, directly or indirectly, having the ability to control the governing body of such Party.

1.1.5 “Claims” has the meaning given in Section 10.2.

1.1.6 “Confidential Information” has the meaning given in Section 9.1.

1.1.7 “Confirmed Order” has the meaning given in Section 3.2.2.

1.1.8 “Constructively Placed” or “Constructive Placement” means, with respect to a shipment of Corn by railcar, that such railcar has been deemed constructively placed by the applicable railroad to the Delivery Point.

1.1.9 “Corn” means corn to be sold by Gavilon to Buyer pursuant to the terms of this Agreement and as further described in Section 3.1.

1.1.10 “Corn Buyer(s)” has the meaning given in Section 3.2.

1.1.11 “Delivered Corn Price” means the price in $/bushel for the applicable Corn as established in the applicable Buyer’s Corn Order or Confirmed Order.

1.1.12 “Delivery Point” means the location at the Plant where the Corn is unloaded from railcars or trucks to storage.

1.1.13 “Delivery Schedule” has the meaning given in Exhibit “A” .

1.1.14 “Demurrage” means all costs, damages, penalties and charges resulting from any delay in loading and/or unloading of Corn shipments, including, without limitation, any delay related to any truck or railcar (as applicable) being incapable of timely offloading any shipment of Corn due to mechanical failure or for other reasons.

1.1.15 “Elevator” means, collectively, (i) the grain elevators owned by Lakefield Farmers Elevator, LLC, and located in Lakefield, Minnesota (1,872,000 bushel capacity) and Wilder, Minnesota (920,000 bushel capacity), and (ii) the grain storage facility owned by Buyer and located in Heron Lake, Minnesota (550,000 bushel capacity) which is utilized for temporary grain storage prior to use at the Plant.

1.1.16 “Ethanol and DDG Agreement” has the meaning given in Section 10.1.

1.1.17 “Force Majeure” has the meaning given in Section 11.2.

1.1.18 “Holiday” means New Year’s Day, Good Friday (i.e., Friday before Easter Sunday), Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

1.1.19 “Indemnitee Group” has the meaning given in Section 10.2.

1.1.20 “Indemnitor” has the meaning given in Section 10.2.

1.1.21 “Limited Sale(s)” has the meaning given in Section 3.9.

1.1.22 “Initial Term” has the meaning given in Section 2.1.

1.1.23 “Master Agreement” means the Master Netting, Setoff, Credit and Security Agreement of even date herewith between Buyer and Gavilon.

1.1.24 “NGFA” means the National Grain and Feed Association.

1.1.25 “Plant” has the meaning given in the first recital.

1.1.26 “Renewal Terms” has the meaning given in Section 2.2.

1.1.27 “Representatives” has the meaning given in Section 9.2.

1.1.28 “Storage Agreement” means that certain Corn Storage Agreement, dated concurrently herewith, by and between Gavilon and Lakefield Farmers Elevator, LLC, a Minnesota limited liability company.

1.1.29 “Supply Fee” has the meaning given in Section 3.3.

1.1.30 “Term” means the Initial Term and any Renewal Terms.

1.1.31 “Third-Party Purchases” has the meaning given in Section 3.1.

1.1.32 “Trade Rules” means the trade rules of the NGFA Trade Rules and Arbitration Rules Booklet, as amended March 5, 2010, and as otherwise amended or restated from time to time. Any reference to the Trade Rules in this Agreement shall be a reference to the specific portions of the Trade Rules which are applicable to such reference. By way of example and not limitation, any reference to arbitration in accordance with the terms of the Trade Rules shall be a specific reference to the arbitration provisions of the Trade Rules.

1.2 Industry Usage . Any word, phrase or expression that is not defined in this Agreement and that has a generally accepted meaning in the custom and usage in the corn industry shall have that meaning in this Agreement.

Article 2
TERM

2.1 Initial Term . This Agreement shall become effective as of the date hereof and shall remain in effect for two (2) years (the “ Initial Term ”) unless extended as set forth in Section 2.2.

2.2 Renewal Terms . This Agreement shall automatically extend for successive one (1) year terms (each a “ Renewal Term ”), unless either (i) at least six (6) months prior to expiration of the Term, Gavilon provides written notice to Buyer that the Agreement shall terminate at the end of the then-current Term, or (ii) at least sixty (60) days prior to expiration of the Term, Buyer provides written notice to Gavilon that the Agreement shall terminate at the end of the then-current Term.

Article 3
CORN SUPPLY TERMS

3.1 Supply of Corn . Except as otherwise provided in this Agreement, Buyer agrees to purchase from Gavilon one-hundred percent (100%) of Buyer’s corn requirements at the Plant, and Gavilon agrees to supply and sell such corn to Buyer, at the Delivered Corn Price and otherwise in accordance with terms and conditions of this Agreement (the “Corn”). Gavilon may deliver the Corn via railcars or trucks with such shipments not to exceed size units as mutually agreed. The Parties agree to discuss Corn availability and delivery options, and to reach a mutually-acceptable Delivery Schedule as set forth in Exhibit “A” .

Should Buyer subsequently plan to increase crush volumes at the Plant in excess of the current maximum volume, whether via expansion or otherwise, Buyer shall utilize Gavilon to supply the Corn needed for such increased production, all in accordance with the terms of this Agreement.

3.2 Delivered Corn Price; Confirmation Process . As of the date of this Agreement, the Parties anticipate that Buyer shall utilize its own personnel to originate and supply corn required at the Plant (each a “ Corn Buyer ” and collectively the “ Corn Buyers ”); provided, however, in the event that the Corn Buyers are unable to originate and supply enough Corn for the Plant, then Gavilon shall assist in originating and supplying corn. Buyer acknowledges and agrees that any Corn Buyers shall be employees or subcontractors (as applicable) of Buyer, and Buyer shall maintain all responsibility and liability for paying wages, benefits or other forms of remuneration for such Corn Buyers’ activities.

3.2.1 In the event that Buyer originates and supplies Corn for its Plant, Buyer shall establish the Delivered Corn Price based upon its offer and confirmation process with the seller of the Corn (each a “ Buyer’s Corn Order ” and collectively the “ Buyer’s Corn Orders ”); provided, however, the terms and conditions of each Buyer’s Corn Order shall fit within the parameters as set forth on Exhibit “B” . At least one time per day, Buyer shall provide Gavilon with all Buyer’s Corn Orders for such day, whereby such Orders shall be input into Gavilon’s electronic system for tracking Corn purchases, with any such input process to be mutually agreed upon by the parties. After receiving the Buyer’s Corn Orders, Gavilon shall send a “confirmation” back to Buyer which reflects (i) the total amount of bushels purchased by Corn Buyer during said day for a specified period ( i.e. , a specified week, month or quarter), and (ii) the average price for the bushels purchased in each confirmation. By way of example and not limitation, in the event that there are 50 Buyer’s Corn Orders during any particular day, whereby (i) 25 of such Orders are for delivery during the week of December 5-9, 2011, (ii) 15 of the Orders are for delivery in January 2012, and (iii) 10 of the orders are for delivery anytime during the first quarter of 2012, then Gavilon would provide Buyer with three “confirmations” to reflect in the aggregate the amount of bushels specifically purchased in the 50 Buyers Corn Orders for delivery during the specific week, month and quarter, and the average price per bushel for such purchases. In the event that the Corn Buyers determine that he/she/they cannot originate and supply enough Corn as needed for the Plant at any time, Buyer shall promptly notify Gavilon and request that Gavilon assist in originating and supplying Corn in accordance with Section 3.2.2 below. After entering the Buyer’s Corn Orders into Gavilon’s system as described in this Section 3.2.1., Buyer shall have no right to subsequently change any such Buyer’s Corn Orders or sell any of the Corn purchased under such Buyer’s Corn Orders except as set forth in Section 3.9 below.

3.2.2 In the event that Buyer desires to have Gavilon assist in originating and supplying Corn for the Plant, the Delivered Corn Price to Buyer will be established through an “offer” and “confirmation” process between both Parties. Gavilon will offer market-based (delivered) Corn prices to Buyer and Buyer shall timely confirm the offered price, volume and delivery period to establish each “ Confirmed Order ”, all as set forth in Exhibit “A” . To the extent that any terms of any Confirmed Order conflict with the terms of this Agreement, the terms of this Agreement shall govern unless both Parties have specifically expressed their intent in writing to supersede the terms of this Agreement. Should Buyer reject, or fail to confirm,

the Corn offers on said timely basis, Gavilon will be relieved of any obligation to deliver any such Corn or to procure any substitute Corn should Buyer’s inventory become depleted as a result.

3.3 Gavilon Supply Fee . Buyer shall pay Gavilon a “ Supply Fee ” for every bushel of Corn received at the Elevator or Plant by Buyer from a Buyer’s Corn Order or a Confirmed Order. The Supply Fee shall be based upon the following:

3.3.1 [ * * * ] for every bushel of Corn purchased by Gavilon for Buyer; and

3.3.2 The length of time measured between (i) Gavilon’s purchase of any Corn under Buyer’s Corn Orders which is either stored in, or enroute to or from, the Elevator or the Plant after Gavilon’s payment for such Corn, and (ii) Buyer’s receipt of an invoice for such Corn after title to the Corn passes from Gavilon to Buyer. [ * * * ].

Gavilon will invoice and identify the Supply Fee (i) arising under Section 3.3.1 above on each invoice related to delivery of Corn to Buyer, and (ii) arising under Section 3.3.2 above on each Netting Statement (as defined in the Master Agreement). Buyer hereby acknowledges that the Supply Fee charged by Gavilon in accordance with the terms of this Section 3.3 has been reduced from Gavilon’s normal fees and charges to other purchasers of Corn, with such discount reflecting, in part, the value of storage services received by Gavilon under the terms of the Storage Agreement. Buyer further acknowledges and agrees that the benefits it receives from Gavilon under this Agreement, the Master Agreement and any other agreements referenced herein or therein shall constitute fair and adequate consideration for the storage provided by Buyer’s wholly-owned subsidiary Lakefield Farmers Elevator, LLC under the terms of the Storage Agreement.

3.4 Buyer’s Failure to Purchase . In the event that Gavilon is prepared to deliver Corn per the relevant Buyer’s Corn Order or Confirmed Order, and Buyer fails to take delivery of any such tonnage, and Gavilon, after using commercially reasonable efforts to mitigate any damages, sells such Corn to a substitute buyer, then Buyer shall reimburse Gavilon for (i) the amount, if any, by which the Delivered Corn Price exceeds the price paid by the substitute buyer, plus (ii) reasonable out-of-pocket additional costs incurred by Gavilon due to such substitute sale, including, without limitation, additional leased railcar costs, dead mileage costs for leased railcars, and out-of-pocket costs of selling Corn (Gavilon’s internal costs shall be excluded). If Gavilon is unable to sell the Corn to a substitute buyer, then Buyer shall reimburse Gavilon for the entire purchase price plus reasonable additional costs, and Gavilon shall sell and redeliver such Corn to Buyer (at Buyer’s expense). Buyer acknowledges and agrees that Gavilon shall be entitled to the Supply Fee on Corn sales under this Section. Payment shall be made according to the terms set forth in Article 4 upon Buyer’s receipt of appropriate documentation from Gavilon, including, without limitation, invoices and receipts related to such sale of Corn. All such additional costs incurred by Gavilon, if any, shall be fully documented by Gavilon and submitted to Buyer as a condition to Buyer’s reimbursement hereunder. Except to the extent specified in Section 8.2.1, the remedy specified in this Section 3.4 shall be Gavilon’s sole and exclusive remedy in the event that Buyer fails to take delivery of any Corn per the relevant Buyer’s Corn Order or Confirmed Order.

3.5 Delivery Shortfall . If Gavilon fails to make available for purchase the quantity of Corn specified in any Buyer’s Corn Orders, Buyer shall be responsible for addressing any such shortfalls with the seller of such Corn under the Buyer’s Corn Order. If Buyer is unable to obtain satisfaction from the supplier under the Buyer’s Corn Order, Buyer may request that Gavilon obtain replacement Corn in accordance with Section 3.2.2; provided, however, Buyer shall

maintain responsibility for obtaining any remedies against the original supplier of such Corn as agent of Gavilon or as assignee of Gavilon under the original contract, and Buyer shall be entitled to retain any damages or other amounts obtained against the original supplier. If requested by Buyer, Gavilon shall provide reasonable assistance to Buyer and provide reasonable documentation in addressing Corn shortfalls arising under Buyer’s Corn Orders.

If Gavilon fails to make available for purchase the quantity of Corn specified in any Confirmed Orders or in the event Corn specified in any Confirmed Order is rightfully rejected, and Buyer, using commercially reasonable efforts to mitigate any damage, is unable to obtain a substitute supply of Corn at a price equal to or less than the Delivered Corn Price, as set forth in such specified Confirmed Orders, then Gavilon shall pay Buyer: (i) the amount, if any, by which the Delivered Corn Price is less than the price paid by Buyer for substitute supply, multiplied by the delivery shortfall (Confirmed Order quantity less the amount actually delivered by Gavilon); plus (ii) any reasonable additional costs solely and directly incurred by Buyer to identify a substitute seller. All such additional costs incurred by Buyer, if any, shall be fully documented by Buyer and submitted to Gavilon as a condition to Gavilon’s payment obligation hereunder. Except to the extent specified in Section 8.3, the remedy specified in this Section 3.5 shall be Buyer’s sole and exclusive remedy in the event that Gavilon fails to supply the quantity of Corn specified in any Confirmed Order.

3.6 Gavilon Responsibilities . In addition to, and without limiting Gavilon’s other obligations hereunder, Gavilon shall:

3.6.1 Coordinate logistics for delivery of the Corn in accordance with the applicable Delivery Schedule.

3.6.2 Be responsible for all inbound shipment logistics including the management of railcars and truck transportation.

3.6.3 Manage all claims by Gavilon vendors under, and be responsible for such vendors’ compliance with shipments governed by, the various Trade Rules.

3.7 Buyer Responsibilities . In addition to, and without limiting Buyer’s other obligations hereunder, Buyer shall:

3.7.1 Advise Gavilon of Buyer’s annual Corn requirements, and provide Gavilon with timely and accurate forecasts of the amount, as well as the type or grade, of Corn needed pursuant to Exhibit “A” .

3.7.2 Provide timely notice to Gavilon if Buyer desires Gavilon to assist in originating and supplying Corn due to any shortfall in Buyer’s ability to originate and supply Corn to the Plant.

3.7.3 Provide to Gavilon on a daily basis complete and accurate reports and downloads of all related data on Corn (i) delivered to the Plant, (ii) moved from storage at the Plant into the grinders at the Plant, and (iii) sold as a Limited Sale in accordance with Section 3.9 below.

3.7.4 Provide to Gavilon on a daily basis all data related to the Buyer’s Corn Orders, as described in Section 3.2.1.

3.7.5 Inform Gavilon of all scheduled Plant shutdowns at the time the quarterly Delivery Schedule is submitted by Buyer under Exhibit “A” , Section 1, and as soon as reasonably possible after Buyer becomes aware of the occurrence of any event that may result in an unscheduled Plant shutdown.

3.7.6 Provide a designated individual for daily operational and logistic issues and provide a designated individual for pricing and other contractual issues.

3.7.7 Submit to Gavilon by 10:00 A.M. (Central time) each Monday an inventory report reflecting total Corn inventory.

3.7.8 Make available certain of its employees or subcontractors to serve as Corn Buyers to purchase Corn from producers as necessary to meet the Delivery Schedule for Corn.

3.7.9 Operate the Plant scales where the Corn is received from the delivering parties, for the purpose of receiving, weighing and inputting customer account information related to the delivery and unloading of Corn. Buyer shall notify Gavilon immediately of any errors, problems or complaints from any third-party relating to the Plant scales, operation of the scales and/or weighing of Corn. Buyer will maintain properly certified scales in accordance with the Trade Rules and accurately weigh, grade and account for all such incoming Corn. Buyer shall provide, at least on an annual basis, Gavilon with any certification certificates related to its scales and, in the event that either Buyer or Gavilon reasonably believes that any scales are not working properly, either Party may request that such scales be tested and recertified.

3.7.10 Provide to Gavilon certain annual reports and financial statements of Buyer in accordance with the terms of the Master Agreement.

3.8 Trade Rules . The Parties agree that they are subject to the Trade Rules for purposes of this Agreement; however, the terms of this Agreement shall govern in the event of a conflict with the applicable Trade Rules. Each Party is responsible for the administration and execution of the Trade Rules with respect to their respective suppliers of Corn. Buyer agrees to comply with the Trade Rules to the extent applicable to Corn specifications, analysis and discounts, unless otherwise stated herein.

3.9 Limited Corn Sales . Buyer shall have the right to make certain limited Corn sales (each a “ Limited Sale ”) for purposes of either (i) supplying local users with Corn consistent with Buyer’s past practices or (ii) locking in profits when Buyer’s Corn supplies are adequate to continue operations at the Plant despite the sale of such Corn. In order to accomplish a Limited Sale, Buyer shall notify Gavilon in writing of its desire to make such Limited Sale and provide Gavilon with information on the terms and conditions of such Limited Sale (the “ Sale Notice ”). Gavilon shall review the Sale Notice and, within a reasonable time, provide Buyer with approval of such Limited Sale; provided, however, Gavilon may withhold its consent for Buyer’s request to make any Limited Sale if Gavilon determines, in its sole and reasonable discretion, that such Limited Sale would materially and adversely impact operations at the Plant or have a negative impact on Buyer’s netting payments under the terms of the Master Agreement. Upon Gavilon’s approval of any Limited Sale, Buyer shall have the right to make such sale in accordance with the terms of the Sale Notice. If such sale of Corn shall occur from the Elevator(s) located in Lakefield, Minnesota or Wilder, Minnesota, Gavilon shall provide Lakefield Farmers Elevator, LLC with notice that Buyer has the right to sell such Corn in accordance with the terms of the

Sale Notice. Any Corn sold under the terms of a Sale Notice may be shipped from any Elevator, and Buyer shall provide Gavilon with a report as soon as reasonably practicable stating from which Elevator the Corn will be shipped and specifically note any such shipment in the daily reports provided to Gavilon in accordance with Section 3.7.3. Upon approval of any Limited Sale, Gavilon shall issue an invoice or confirmation to Buyer for such Corn, whereupon payment by Buyer for such invoice or confirmation, along with a credit to Buyer for the proceeds of such sale, shall be made in accordance with the Master Agreement.

3.10 Beginning / Ending Corn Purchase / Sale . Effective as of the date of this Agreement, Gavilon agrees to purchase all Corn currently owned by Buyer and located in the Elevator (the “Initial Purchase”) for a price per bushel equal to (i) [ * * * ], minus (ii) [ * * * ] per bushel (the “Iniital Purchase Price”). Gavilon and Buyer shall work in good faith to determine the amount of Corn owned by Buyer in the Elevators as of the effective date of this Agreement, and after agreeing on such amount Gavilon’s payment of the Initial Purchase Price to Buyer for the Initial Purchase shall be due two (2) Business Days later. Upon any termination of this Agreement at the end of its natural Term (but not due to an event of default), Buyer shall purchase all Corn then owned by Gavilon and located in the Elevator (the “Final Purchase”) for a price per bushel equal to (i) [ * * * ], minus (ii) [ * * * ] per bushel (the “Final Purchase Price”). Gavilon and Buyer shall work in good faith to determine the amount of Corn owned by Gavilon in the Elevators as of the date of such termination, and after agreeing on such amount Buyer’s payment of the Final Purchase Price to Gavilon for the Final Purchase shall be due two (2) Business Days later.

Article 4
BILLING AND PAYMENT

4.1 Corn Billing . Gavilon shall issue to Buyer, at the time title for Corn passes from Gavilon to Buyer in accordance with Section 12.1 below, an invoice containing the description of delivered products, estimated weight and price, date of shipment, point of origin, and amount payable to Gavilon including the Supply Fee. By entering into this Agreement, Buyer acknowledges that Gavilon’s method for obtaining a calculation of the amount of Corn delivered into the grinders at the Plant shall require Buyer to provide Gavilon with data reflecting such amounts, all in accordance with Section 3.7.3 above. In an effort to confirm that the amount of Corn remaining in the Elevator at the end of each month is consistent with the data received showing the amount of Corn delivered into the grinders at the Plant and the amount of Corn shipped into or out of the Elevator, Buyer shall provide Gavilon with a measurement of the amount of Corn remaining in the Elevator at the end of each month. In the event that there is ever a discrepancy between the data regarding the amount of Corn moved into the grinders at the Plant and the amount of Corn remaining in inventory, Buyer and Gavilon shall work in good faith to true-up such amounts and account for the same. Either Party may request a third-party audit of the Corn located in the Elevators as of the end of any month, with any such audit to be paid for by the requesting Party. Additionally, Buyer shall provide Gavilon with any audit information it receives each year from the State of Minnesota which, as of the date of this Agreement, occurs two times per year.

4.2 Payment . Subject to the receipt of the invoice and other information required in Section 4.1, payment therefor will be made in accordance with the Master Agreement.

Article 5
CORN GRADE AND QUALITY SPECIFICATIONS

5.1 Corn Quality Specifications . Any Corn purchased by Buyer from Gavilon under a Confirmed Order shall, at the time of delivery by Gavilon to Buyer pursuant to this Agreement, meet the specifications provided in Exhibit “C” . In the event that any Corn does not meet such specifications at the time of delivery, Buyer shall have the right to reject such Corn. Except as set forth in the preceding sentence and in Section 5.3, Gavilon makes no warranty, whether expressed, implied, statutory or otherwise, concerning the Corn sold hereunder, and Gavilon expressly disclaims any implied warranty of merchantability or fitness or suitability for a particular purpose. Buyer assumes all risk and liability resulting from (i) Corn purchased by Corn Buyers under Buyer’s Corn Orders, provided Buyer shall have the right to reject such Corn in the event it does not meet the contract specifications or the specifications established from time to time by Buyer in accordance with Exhibit “C” , whereupon Buyer shall maintain its rights against the supplier in accordance with Section 3.5 above, and (ii) the use and sale of any Corn and products made from any Corn, whether used singly or in combination with other substances or in any process. There are no oral warranties collateral to or affecting the sale of any Corn from Gavilon to Buyer.

5.2 Specification Responsibilities . Gavilon shall allow Buyer to have the right to inspect, test, weigh and grade any and all Corn deliveries. Buyer shall have the right to reject any Corn that does not meet specifications, whereupon Buyer shall maintain its rights against Gavilon or any other supplier in accordance with Section 3.5 above. Should Buyer modify, alter or unload any or all Corn from the delivery vessel (i.e., railcar or truck), the portion of the shipment that is modified, altered or unloaded (other than is necessary for the tests contemplated hereunder) shall be considered accepted without rights of shipment rejection.

5.3 Express Warranty Against Liens . Gavilon represents and warrants that title to all Corn delivered and sold under a Confirmed Order will be free and clear of all liens, security interests and other encumbrances. Gavilon makes no representations and warranties to title with regard to any Corn delivered and sold under a Buyer’s Corn Order and Buyer shall be solely responsible for ensuring that any Corn purchased under a Buyer’s Corn Order is free and clear of all liens, security interests and other encumbrances.

Article 6
LOGISTICS AND DELIVERY OF CORN

6.1 Railroad Coordination . Gavilon will track the estimated time of arrival and placement and release times at origin and destination. Gavilon will also coordinate unloading schedules in an effort to minimize Demurrage exposure.

6.2 Demurrage . Buyer shall be responsible for any Demurrage that arises with regard to (i) any Corn purchased under a Buyer’s Corn Order and (ii) purchased from Gavilon under a Confirmed Order after the railcar has been Constructively Placed, or the truck has been placed, at the Plant for unloading. Demurrage shall be calculated in accordance with the rules of the applicable carrier.

6.3 Notification of Problems with Delivery . Gavilon shall promptly inform Buyer of any problem regarding any Corn delivery, including the possible event that Corn is not available for purchase by Gavilon in the quantity or type originally ordered per the relevant Buyer’s Corn Order or Confirmed Order. Similarly, Buyer shall promptly inform Gavilon of any problems in accepting any Corn delivery.

Article 7
RISK MANAGEMENT

7.1 Monitoring of Corn Positions . Gavilon will monitor Corn purchases and may (but shall not be required to), from time to time, make suggestions concerning Buyer’s risk management program and the position of its Corn purchases for future physical delivery. After receiving any Buyer’s Corn Orders or establishing any Confirmed Order, Gavilon shall take the risk of any hedge thereafter made on such Corn by Gavilon.

7.2 Market Conditions . Gavilon will review with Buyer on a daily basis market conditions relating to Corn, existing Corn supply and ownership positions, and forward marketing strategies in an attempt to assist Buyer in lowering its cost of Corn. It is understood by Buyer that all risk management services must be tied to a valid written purchase contract requiring physical delivery of Corn to Buyer.

7.3 No Liability . Buyer recognizes that Gavilon’s monitoring of Corn positions, periodic suggestions (if any), review of market conditions and risk management services are informational and optional, and that the final decisions concerning purchases and risk management strategies, and the implementation of such strategies, will be made by, and is the sole responsibility of, Buyer. Gavilon is not responsible for any Buyer losses or entitled to any Buyer gains resulting from risk management information supplied by Gavilon.

Article 8
DEFAULT AND TERMINATION

8.1 Termination by Mutual Agreement . This Agreement may be terminated upon mutual written agreement between the Parties.

8.2 Termination By Either Party . Except as otherwise provided in this Agreement, either Party may immediately terminate this Agreement upon written notice to the other Party if:

8.2.1 The other Party defaults on any material term, covenant or condition hereunder and fails to cure such default within thirty (30) days after receiving written notice thereof from the non-defaulting Party;

8.2.2 Such other Party shall (i) become subject to any foreclosure proceeding by such Party’s primary lender or other material creditor(s), or (ii) become insolvent or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors, or such other Party shall file a voluntary petition in bankruptcy, or seek reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title XI of the United States Code, as amended or recodified from time to time, or under any state or federal law granting relief to debtors;

8.2.3 Such other Party defaults on any payment obligation with such Party’s primary lender or any other material creditor(s), or such other Party has received notice of acceleration or demand for payment from such Party’s primary lender or any other material creditor, and such payment obligation default is not cured or the primary lender or material creditor does not forbear such payment obligation

default, acceleration or demand for payment within ten (10) days following such default or notice;

8.2.4 Such other Party is in default under the Ethanol and DDG Agreement, the Master Agreement or the Storage Agreement (and such default is not cured within the applicable cure period); or

8.2.5 A Change in Control occurs in such other Party in violation of Section 14.1.

8.3 Default for Non-Payment or Non-Delivery . If either Party: (i) does not make payment as required under Section 2 of the Master Agreement within ten (10) days following written notice to the defaulting party; or (ii) otherwise fails to post margin or perform its other obligations under the Master Agreement, the non-defaulting party shall have the right to immediately terminate this Agreement. If Gavilon is responsible for supplying Corn to Buyer in accordance with the terms of Section 3.2.2, and if Gavilon fails to make deliveries in accordance with the terms of Confirmed Orders for a period of ten (10) consecutive days (but excluding any days during which the Plant has been shut down), such action shall be deemed an event of default and Buyer shall have the right to immediately terminate this Agreement upon written notice to Gavilon. For purposes of calculating such ten (10) day period, each day for which there is no Delivery made (but a Confirmed Order indicates a Delivery should occur), shall be deemed to be a day on which Gavilon has failed to deliver.

8.4 Termination for Force Majeure . In the event that Force Majeure shall continue unabated for a period of six (6) months from the date a Party gives notice thereof pursuant to Article 11, either Party hereto shall have the right to terminate this Agreement by furnishing written notice to the other Party no less than thirty (30) days prior to, or after, the expiration of such six (6) month period, with termination effective upon the later of the expiration date of such 6-month period or such 30-day notice.

8.5 Rights and Obligations Upon Termination . Any rights and obligations of Gavilon or Buyer to payments accrued through termination, the obligations of Buyer under Section 3.4 and the obligations of Gavilon under Section 3.5, as well as obligations of the Parties under Buyer’s Corn Orders or Confirmed Orders for the supply of Corn that exist at the time of termination, shall remain in effect following termination of this Agreement. The above notwithstanding, Gavilon shall have no obligation to supply Corn to Buyer (whether pursuant to outstanding Buyer’s Corn Orders or Confirmed Orders or otherwise) in the event of termination due to Buyer’s nonpayment or failure to post margin. Upon termination of this Agreement for any reason, each Party shall thereafter be relieved from its respective obligations and have no further liability hereunder, except as set forth in this Section 8.5 and for (i) the confidentiality obligations set forth in Article 9, (ii) the rights and obligations set forth in Article 10 and Article 14, and (iii) matters involving fraud.

Article 9
CONFIDENTIALITY

9.1 Confidential Information . For purposes of this Agreement, the term “ Confidential Information ” shall mean the terms of this Agreement and any information which is not in the public domain and is disclosed by one Party to the other pursuant to this Agreement and which is in written, graphic, machine readable or other tangible form. Confidential Information may also include oral information disclosed by one Party to the other pursuant to this Agreement, provided that such information is designated as Confidential Information at the time of disclosure and is reduced to writing by the disclosing Party within a reasonable time (not to exceed ten (10)

days) after its oral disclosure, and the writing is marked in a manner to indicate its confidential nature and delivered to the receiving Party. Nothing in this Agreement shall be construed to prohibit or limit a receiving Party from disclosing information (a) previously known to it, (b) independently developed by it without use of the disclosing Party’s Confidential Information by those employees or representatives of the disclosing Party that have not had access to such Confidential Information, as can be substantiated by reasonable evidence, (c) acquired by it from a third party which was not, to the receiving Party’s knowledge, under an obligation to the disclosing Party or any third party not to disclose such information, (d) that is or becomes publicly available through no breach by the receiving Party, or (e) to the extent disclosure and filing of such information is required by law or by the rules, regulations or practices of the Securities and Exchange Commission or any exchange or automated quotation system upon which shares of such Party may be listed, quoted or traded. Prior to filing, the disclosing Party will notify the other Party and cooperate in such a manner intended to minimize or reduce, to the extent permissible under the applicable laws, rules or regulations, the disclosure of the terms of this Agreement. If a receiving Party receives a subpoena or other validly issued administrative or judicial process demanding Confidential Information of a disclosing Party, the receiving Party must promptly notify the disclosing Party and tender to it the defense of such demand. Unless the demand has been timely limited, quashed or extended, the receiving Party will thereafter be entitled to comply with that demand to the extent required by law but shall exercise commercially reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such Confidential Information. If requested by the disclosing Party, the receiving Party shall cooperate (at the expense of the disclosing Party) in the defense of such a demand.

9.2 Nondisclosure . Each Party acknowledges that, by reason of this Agreement, its principals, employees, agents, advisors, lenders and other financing sources (collectively, “ Representatives ”) may become privy to Confidential Information belonging to the other Party. The receiving Party agrees that it will not, without the prior written consent of the disclosing Party, disclose to any third parties or use for its own benefit any such Confidential Information except in the carrying out of its obligations under this Agreement. The receiving Party shall inform each of its Representatives of the confidential nature of such Confidential Information and shall be responsible for the compliance by such Representatives with the provisions of this Article 9. The confidentiality obligations hereunder shall survive any expiration or termination of this Agreement.

9.3 Announcements . Any public statements, press releases and similar announcements concerning the negotiation or consummation of the transactions contemplated hereby, including such statements made by Representatives of the Parties, shall be jointly planned and coordinated by the Parties. Neither Party shall issue any such statement without the prior review (for which the reviewing Party shall have a minimum of five (5) Business Days) and consent of the other Party, which consent shall not be unreasonably withheld or delayed. In no event will the terms and conditions of this Agreement be disclosed except to the extent required by applicable law.

Article 10
LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE

10.1 Limitation of Liability . Without limiting any express remedies set forth in this Agreement, and except for any acts of willful misconduct or fraud, neither Buyer nor Gavilon will be liable to each other or any third party for any indirect, consequential, punitive, exemplary or special damages, loss of business expectations, lost profits, or business or facility interruption or shut-down costs. Under no circumstances (other than for willful misconduct or fraud) will either Party be liable to the other for any damages for breach that collectively arise under this

Agreement and the Ethanol and Distiller’s Grain Marketing Agreement, dated concurrently herewith (“Ethanol and DDG Agreement”), and exceed the total amount of $1,000,000; provided, however, that such limitation shall not apply with respect to (a) the payment by Buyer for Corn received hereunder, (b) the obligation of Gavilon to reimburse Buyer for payments in respect of nonconforming or undelivered Corn arising from Confirmed Orders, (c) third-party Claims involving personal injury or property damage asserted under Section 10.2, or (d) damages covered by the insurance specified below. In the event that damages exceed such limitation, the sole remedy of the damaged Party with respect to such excess damages shall be to terminate this Agreement.

10.2 Indemnification . Each Party (the “ Indemnitor ”) shall release, defend, indemnify and hold harmless the other Party, its affiliates, its contractors and their respective members, partners, directors, officers, shareholders, managers, employees, agents and representatives (collectively, the “ Indemnitee Group ”) from and against any and all losses, damages, fines, liens, levies, penalties, claims, demands, causes of action, suits, legal or administrative proceedings, orders, governmental actions and judgments of every kind and character, and any and all costs and expenses (including, without limitation, reasonable attorneys’ fees, reasonable expert witness fees and court costs) related thereto (collectively, “ Claims ”), which arise out of, result from or relate in any way, directly or indirectly, to (a) a breach of this Agreement by the Indemnitor, or (b) the acts or omissions hereunder of the Indemnitor or its affiliates, contractors and their respective members, partners, directors, officers, shareholders, managers, employees, agents and representatives.

The Party claiming indemnification shall give prompt written notice to the Indemnitor of any matter for which the Indemnitor may become liable under this provision. Said notice shall contain full details of the matter in order to provide the Indemnitor with sufficient information to assess its potential liability and to undertake defense of the Claim. The indemnified Party shall have the right at all times to participate in the preparation for and conducting of any hearing, trial or other proceeding related to the provisions of this Section, as well as the right to appear on its own behalf at any such hearing, trial or other proceeding. Any such participation or appearance by the indemnified Party shall be at its sole cost and expense. The indemnified Party shall cooperate in all reasonable respects with the Indemnitor and its counsel in defending any Claims and shall not take any action that is reasonably likely to be detrimental to such defense. The Indemnitor shall obtain written approval, which shall not be unreasonably withheld, from the indemnified Party prior to any settlement that may impose obligations or restrictions on the indemnified Party.

10.3 Insurance . Each Party shall, during the term of this Agreement, provide the insurance coverages set forth in Exhibit “D” .

Article 11
FORCE MAJEURE

11.1 Force Majeure . In the event either Party hereto is rendered unable by reason of Force Majeure, as defined in Section 11.2, to carry out its obligations under this Agreement, such Party shall promptly give written notice and reasonably complete particulars of such Force Majeure to the other Party stating the obligation(s) the performance of which are, or are expected to be, delayed or prevented. The obligations of the notifying Party shall be suspended during and to the extent affected by Force Majeure and such event shall, so far as possible, be remedied with all reasonable dispatch.

1.2 Definition of Force Majeure . The term “ Force Majeure ” shall mean any cause not reasonably within the control of the Party claiming suspension and which, by the exercise of due diligence, such Party is unable to prevent or overcome. Such term shall include, but not be limited to: (i) acts of God, (ii) strikes, lockouts or acts of the public enemy, (iii) wars, blockades, insurrections, riots, epidemics, acts of terrorism, (iv) transportation shortages, (v) landslides, lightning, earthquakes, fires, storms, floods, washouts, tornadoes, (vi) civil disturbances, and (vii) explosions. The term “Force Majeure” shall specifically include those events affecting any transporter of Corn acting on behalf of Gavilon hereunder, but shall in all events exclude any price fluctuations in Corn or other economic or commercial changes involving the purchase and sale of Corn or the production of ethanol or co-products therefrom. Events directly and proximately caused by the gross negligence or willful misconduct of a Party or its affiliates shall in no event constitute Force Majeure.

Article 12
POSSESSION AND TITLE

12.1 Title; Risk of Loss . Title to the Corn shall only pass from Gavilon to Buyer at the time the Corn passes from storage at the Plant (albeit temporary) into the grinders located at the Plant. Notwithstanding the foregoing provisions of this Section 12.1, risk of loss in the Corn shall pass from Gavilon to Buyer (i) for any Corn stored in the Elevator in accordance with the terms of the Storage Agreement, risk of loss shall pass to Buyer at the time when such Corn is subject to a sale confirmation between the Parties, and (ii) with regard to any Corn which is not stored in the Elevator prior to delivery to the Plant, risk of loss shall only pass from Gavilon to Buyer at the time the rail car is Constructively Placed or, with respect to truck deliveries, at the time the Corn is unloaded from the truck at the Delivery Point.

12.2 Liability . Except for Buyer’s continuing obligations, risk and/or liability for Corn under Buyer’s Corn Orders as set forth in this Agreement, Buyer shall have no responsibility or liability with respect to any Corn deliverable under this Agreement until title and/or risk of loss (as applicable) have transferred as described in Section 12.1. Gavilon shall have no responsibility or liability with respect to the Corn after title and/or risk of loss (as applicable) transfer to Buyer as described in Section 12.1 or on account of anything which may be done or happen to arise with respect to the Corn after such transfer.

Article 13
NOTICES

13.1 Addresses . Except as specifically otherwise provided herein, any notice or other written matter required or permitted to be given hereunder by one Party to the other Party shall be deemed to be sufficiently given if delivered by hand or by nationally-recognized overnight courier, or sent by U.S. Mail (certified mail return receipt requested), and addressed if to Gavilon, at:

Gavilon, LLC
Eleven ConAgra Drive
Omaha, NE 68102-5011
Attn:	Legal Department
Phone:	(402) 889-4000

And if to Buyer, at:

Heron Lake BioEnergy, LLC
91246 390 th Avenue
Heron Lake, MN 68301
Attn:	Bob Ferguson
Phone:	507-793-0077

13.2 Change of Address . Each Party shall give notice within thirty (30) days to the other Party, in the manner herein provided, of a change in its address for notice.

13.3 Effective Date of Notice . Any notice or other written matter shall be deemed to have been given and received: if delivered by hand or courier, on the date of delivery; and, if sent by telecopy, on the Business Day following the sending of the notice.

Article 14
MISCELLANEOUS

14.1 Assignment . Neither Party may assign any of its rights or obligations under this Agreement without the prior written consent of the other Party, not to be unreasonably withheld. A Change in Control of Buyer or Gavilon shall be construed to be an assignment for purposes of this Section. The above notwithstanding: (i) Gavilon may, without the need for consent from Buyer, (A) transfer, sell, pledge, encumber or assign this Agreement, including the revenues or proceeds hereof, in connection with any financing arrangements, and (B) transfer or assign this Agreement to an affiliate; and (ii) Buyer may, without the need for consent from Gavilon, transfer, sell, pledge, encumber or assign this Agreement, including the revenues or proceeds hereof, in connection with any financing arrangements. In the event the Plant is sold by Buyer, Buyer shall assign this Agreement to the purchaser of the Plant and require the purchaser to assume all of Buyer’s obligations hereunder, provided that such purchaser is reasonably acceptable to Gavilon. No such assignment shall in any way relieve the assigning Party from liability for full performance hereunder. It is further agreed that no such assignment shall be permitted unless the Master Agreement and all other agreements referenced therein are similarly assigned in accordance with their terms.

14.2 Records . Each Party will establish and maintain true and accurate books, records and accounts relating to their own transactions under this Agreement with respect to all Corn prices charged, payments made, and types and quantities of Corn delivered hereunder, including calculations of the Supply Fees. These books, records and accounts will be preserved by the applicable Party for a period of at least one (1) year after the expiration of the term of this Agreement, but in no event longer than seven (7) years from the date of creation.

14.3 Audit Rights; Inspection Rights . Upon five (5) Business Days notice and during normal business hours each Party has the right to audit such books, records and accounts of the other Party to the extent necessary in order to verify the accuracy of any statement, charge, computation or demand made under or pursuant to any provision of this Agreement. If any material error is discovered in any statement rendered hereunder, such error will be adjusted within seven (7) days from the date of discovery, but no adjustment will be made for errors discovered more than two (2) years after delivery and receipt of such statements. Any error or discrepancy detected which has led to an overpayment or an underpayment between the Parties shall be corrected by an appropriate balancing payment to the underpaid Party or by a refund by the overpaid Party. Such balancing payment or refund shall be made on the first

payment date thereafter arising under the Master Agreement. Gavilon shall also have the right to inspect the Plant and any Corn held in storage by Buyer at any time during normal business hours. Such inspections may include, but shall not be limited to, Gavilon’s right to inventory the Corn, monitor Buyer’s process for unloading trucks and railcars at the Plant, testing the scales and accuracy thereof, and otherwise reviewing the process and paperwork related to Buyer’s Corn Orders and the input of same into Gavilon’s electronic system for tracking Corn purchases. Buyer shall reasonably cooperate with Gavilon during any such audits or inspections.

14.4 Dispute Resolution . Except where a different dispute resolution mechanism is specified herein, in the event a dispute arises in connection with the performance or non-performance of this Agreement which the Parties are unable to mutually resolve, the Parties shall submit such matter to arbitration in a neutral geographic location using the arbitration process set forth in the Trade Rules, provided such matter involves commercial aspects of the delivery of Corn and is accepted by the NGFA for resolution; otherwise the Parties shall have available whatever rights or remedies exist at law or equity. The arbitrator(s) shall have no power to award damages inconsistent with this Agreement. All aspects of the arbitration shall be treated as confidential and judgment on the arbitrator’s award may be entered in any court having jurisdiction. The expenses of the arbitrator(s) shall be shared equally by the Parties, and each Party shall bear its own legal costs, unless the arbitrators determine that legal costs shall be otherwise assessed. Nothing contained in any indemnification provision hereunder shall be construed as having any bearing on the award of attorney’s fees under this Section. The foregoing dispute-resolution process shall in no event be deemed to excuse either Party from continuing to fulfill its respective obligations under, or to prevent or impede either Party from exercising its rights or remedies set forth in, this Agreement.

14.5 Inurement . This Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the Parties, and Buyer shall cause the same to be assumed by and to be binding upon any successor owner or operator of the Plant, provided that such successor or assignee is reasonably acceptable to Gavilon.

14.6 Entire Agreement . This Agreement and the Exhibits attached hereto, together with the Master Agreement, the Storage Agreement, and the Ethanol and DDG Agreements, constitute the entire agreement between the Parties with respect to the subject matter contained herein and any and all previous agreements, written or oral, express or implied, between the Parties or on their behalf relating to the matters contained herein are hereby terminated and canceled. In the event of any conflict between the terms of this Agreement and any Buyer’s Corn Order or Confirmed Order, this Agreement shall govern.

14.7 Amendments . There will be no modification of the terms and provisions hereof except by the mutual agreement in writing signed by the Parties. Any attempt to so modify this Agreement in the absence of such writing signed by the Parties shall be considered void and of no effect.

14.8 Governing Law; Venue; Waiver of Jury Trial . The Agreement will be interpreted, construed and enforced in accordance with the procedural, substantive and other laws of the State of Nebraska without giving effect to principles and provisions thereof relating to conflict or choice of law even though one or more of the Parties is now or may do business in or become a resident of a different state. Subject to Section 14.4, all disputes arising out of this Agreement shall be resolved exclusively by state or federal courts located in Nebraska, and each of the Parties waives any objection that it may have to the bringing of an action in any such court. Each of the Parties hereby waives its rights to trial by jury and any judicial proceeding involving, directly or indirectly, any matter (whether sounding in tort, contract or otherwise) in any way

arising out of, related to, or connected with this Agreement, the Master Agreement, the Storage Agreement or the Ethanol and DDG Agreement.

14.9 Setoff. In addition to, and without limitation of, any rights hereunder, if Buyer becomes insolvent, however evidenced, or if Buyer defaults and fails to cure the default within the applicable period specified herein, then any and all amounts due and owing by Buyer may be applied by Gavilon toward the payment of amounts due and owing to Buyer. This right of setoff shall be without prejudice and in addition to any right of setoff, net income, recoupment, a combination of accounts, lien, charge or the right to which Gavilon is at any time otherwise entitled (whether by operation of law, by contract or otherwise). If an amount is unascertained, Gavilon may reasonably estimate the amount to be setoff.

14.10 Cumulative Remedies . Unless otherwise specifically provided in this Agreement, the rights, powers and remedies of each of the Parties provided in this Agreement are cumulative and the exercise of any right, power or remedy under this Agreement does not affect any other right, power or remedy that may be available to either Party under this Agreement or otherwise at law or in equity.

14.11 Faithful Performance and Good Faith. The Parties shall faithfully perform and discharge their respective obligations in this Agreement and endeavor in good faith to negotiate and settle all matters arising during the performance of this Agreement which are not specifically provided for herein.

14.12 No Partnership; Relationship . This Agreement shall not create or be construed to create in any respect a partnership or any agency or joint venture relationship between the Parties. The relationship of Gavilon and Buyer established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed: to give either Party the power to unilaterally direct and control the day-to-day activities of the other or to be considered an agent of the other; to constitute the Parties as partners, joint venturers, co-owners or otherwise; or to allow either Party to create or assume any obligation on behalf of the other Party for any purpose whatsoever. Except as otherwise provided herein, nothing contained in this Agreement shall be construed as conferring any right or benefit on a person not a Party to this Agreement.

14.13 Costs To Be Borne by Each Party . Except as otherwise provided herein, Buyer and Gavilon shall pay its own costs and expenses incurred in the negotiation, preparation and execution of this Agreement and of all documents referred to herein.

14.14 Counterparts . This Agreement may be executed in multiple counterparts with the same effect as if Buyer and Gavilon had signed the same document and all counterparts will be construed together and constituted as one and the same instrument. Each counterpart signature may be executed and delivered to the other Party by facsimile machine or electronic transfer, and the signature as so transmitted shall be as binding upon the executing Party as its original signature, without the necessity of the recipient Party to establish original execution or the existence of such original signature or the document to which affixed, all of which shall be deemed waived.

14.15 Severability . Any provision of this Agreement which is or becomes prohibited or unenforceable in any jurisdiction shall not invalidate or impair the remaining provisions of this Agreement, and the remaining terms of this Agreement shall continue in full force and effect or, if allowed by the law of the applicable jurisdiction, it shall be amended so as to most closely

conform to the original intent of this Agreement without the offending provision, and as so amended shall continue in full force and effect.

14.16 Forward Contract/Forward Contract Merchants . The Parties agree that each of them is a forward contract merchant as set forth in 11 U.S.C. §101(26). The Parties also agree that this Agreement is a forward contract as defined in 11 U.S.C. §101(25). The payments and transfers described herein shall constitute “Settlement Payments” or “Margin Payments” as set forth in 11 U.S.C. §§ 101(51A) and (38).

14.17 Headings; Construction . The article and section headings used herein are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. Unless the context of this Agreement otherwise requires, (i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or plural number shall also include the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,” “hereby,” “hereto,” and derivative or similar words shall refer to this entire Agreement. This Agreement is the product of negotiation by and among the Parties hereto. This Agreement shall be interpreted and construed neutrally as to all Parties, without any Party deemed to be the drafter of this Agreement.

14.18 Waiver . No delay or omission in the exercise of any right, power or remedy hereunder shall impair such right, power or remedy or be construed to be a waiver of any default or acquiescence therein.

14.19 Interpretation . This Agreement shall not be interpreted against the Party drafting or causing the drafting of this Agreement. All Parties hereto have participated in the preparation of this Agreement.

[The Remainder of This Page Intentionally Left Blank; Signature Page Follows.]

IN WITNESS WHEREOF the Parties have executed this Agreement by their respective proper signing officers as of the date first above written.

Gavilon, LLC		Heron Lake BioEnergy, LLC


By:	/s/ John W. Neppl	By:	/s/ Robert J. Ferguson
Name:	John W. Neppl	Name:	Robert J. Ferguson
Title:	CFO	Title:	CEO

Corn Supply Agreement

(Heron Lake, Minnesota)

Signature Page

EXHIBIT “A”

PLANNING, ORDERING AND DELIVERY OF CORN

1. Delivery Schedule . The Parties shall jointly develop a delivery schedule (the “ Delivery Schedule ”) which will serve as the formal planning tool for Corn requirements for each quarter and each month of the quarter. The specific format of the Delivery Schedule will be mutually created by the Parties to accommodate the required information outlined above.

If the Delivery Schedule shows that Buyer desires to have Gavilon assist in originating and supplying Corn, then Gavilon shall review the initial draft of the Delivery Schedule and advise Buyer of market conditions, Corn availability and inventory, transportation and logistics issues within ten (10) Business Days after receipt. Gavilon shall amend the Delivery Schedule to include planned shipment of Corn in bushels and the expected mode of transport of such Corn.

2. Buyer’s Corn Orders . Buyer shall submit all Buyer’s Corn Orders to Gavilon on a daily basis, all in a format as mutually agreed upon by the parties. The Delivery Schedule shall reflect and be further governed by such Buyer’s Corn Orders. Except as otherwise set forth in the Agreement, Gavilon shall be responsible for coordinating on the delivery of Corn purchases under each Buyer’s Corn Order.

3. Confirmed Orders . In the event that Buyer desires to have Gavilon assist in originating or supplying Corn for the Plant, it is understood that, in all events, pricing of Corn shall be quoted by Gavilon and either accepted or rejected by Buyer. Price quotations for Corn deliveries shall be submitted to Buyer by Gavilon prior to purchases, substantially in the form of Exhibit “A-1” attached hereto. It is understood that such quotations shall correlate to the forward-delivered price of the corn as established by [ * * * ], adjusted to reflect deviations from then-current market conditions (either at a premium or discount), as well as [ * * * ]. Buyer shall reject or accept Gavilon’s price quotation within the time period set forth on any written quotations or immediately with respect to any quotations offered via telephone. Such acceptances shall constitute “ Confirmed Orders ” and the price in $/bushel thereunder shall be the Delivered Corn Price for the applicable Corn. The Delivery Schedule shall reflect and be further governed by such Confirmed Orders of Corn. The Parties understand and agree that either party may record telephone conversations in the ordinary course of their respective businesses for purposes of, among other things, further documenting the quotation and acceptance of Corn prices in order to establish and verify Confirmed Orders. Gavilon shall be responsible for the sourcing and delivery of each Corn purchase per the Confirmed Orders.

4. Delivery Schedule Deviations . The Parties recognize the need to maintain a degree of flexibility to accommodate unexpected changes in the Plant operating capacity and changing Corn market conditions. Upon notification by either Party of any substantial deviations to the Delivery Schedule, the Parties agree to work in good faith to jointly resolve any such discovered deviations and correct such deviations within fifteen (15) days following first notification. For purposes of this Agreement, “substantial deviations” shall mean any increase or decrease in Corn requirements by Buyer in an amount of five percent (5%) or more of Buyer’s previously required Corn for a specified month as set forth in the Delivery Schedule.

5. Liability Disclaimer . Each of the Parties understands and agrees that except for Corn quantity, grade and price quotations confirmed by the Parties in Buyer’s Corn Orders and

Exhibit A-1

Confirmed Orders pursuant to this Exhibit “A” , the planned production rates, estimated costs, pricing and market information, and all other information furnished by the Parties in the preparation of the Delivery Schedule is for planning and informational purposes only. Neither Party shall be responsible to the other for any actions taken in reliance on such estimates, plans and other information.

6. Contact Information . Each Party shall appoint at least one (1) person to act as the point of contact regarding delivery coordination, preparation of Delivery Schedules, orders and order confirmation and other technical and logistical questions relating to Corn or the delivery thereof. The respective contact persons shall, unless notified otherwise, be as follows:

Buyer:		Tyronne Bialis
		Heron Lake BioEnergy, LLC
		91246 390 th Avenue
		Heron Lake, MN 68301
	Phone:	507-793-0077
	E-Mail:	tyronneb@heronlakebioenergy.com

Gavilon:		Matt Gibson
		Eleven ConAgra Drive
		Omaha, NE 68102
	Phone:	(402) 889-4424
	E-Mail:	matt.gibson@gavilon.com

Exhibit A-2

EXHIBIT “A-1”

FORM FOR CONFIRMED ORDERS

Gavilon Grain, LLC
d.b.a. Peavey Company

	Our Number:
	PRICED
	Contract Date:

B	Customer No.
U	Payment Terms:
Y	Broker:
E	Broker No.:
R	Delivery Terms:

BUYER HEREBY AGREES TO AND CONFIRMS THE PURCHASE OF THE FOLLOWING DESCRIBED COMMODITIES FROM GAVILON GRAIN, LLC (SELLER) SUBJECT TO THE TERMS AND CONDITIONS STATED ON THE FACE AND BACK THEREOF. FAILURE TO ADVISE GAVILON GRAIN, LLC IMMEDIATELY BY WIRE OF ANY DISCREPANCY, OBJECTION TO, OR DISAGREEMENT WITH SUCH TERMS AND CONDITIONS SHALL BE AN ACCEPTANCE THEREOF.

	WEIGHTS:
COMMODITY:	GRADES:
	TRANSPORTATION:
QUANTITY:	REFERENCE:
	MARKET REGION:

Delivery

Schedule

Futures

Basis

Status

Dates

Price

Month

Price

Priced

Total Contracted BUSHELS

SELLER OBJECTS TO THE INCLUSION OF ANY DIFFERENT OR ADDITIONAL TERMS PROPOSED BY BUYER. IF PRICE OF GRAIN IS ON A PREMUIM BASIS, CONTRACT TO BE PRICED OR SPREAD PRIOR TO THE LAST TRADING DAY PRECEDING THE FIRST DELIVERY DAY OF THE FUTURES CONTRACT.

Confirmation Acknowledged		Gavilon Grain, LLC


Date		Date
PLEASE SIGN ONE COPY AND RETURN TO ABOVE ADDRESS.		Original

TERMS AND CONDITIONS

Except as modified or limited by the terms and conditions stated herein, the Contract shall be governed by and construed in accordance with the applicable rules and regulations of the exchange. board or association designated on the face hereof, or, if none is designated or Seller is not a member of said exchange, board, or association, then the applicable trade rules of the National Grain and Feed Association in effect on the date hereof, and, to the extent not inconsistent therewith, the applicable provisions of the Uniform Commercial Code.

The price does not include any tax, duty, tariff or charge assessed or imposed by any governmental authority. If any such tax, duty, tariff or charge is or shall be assessed or imposed on this transaction or any aspect thereof, the same shall be paid by Buyer.

This Contract is made on the basis of freight rates in effect on the date hereof. Any increase in freight rates taking effect before the full performance of the Contract shall be for the account of Buyer unless otherwise adjusted and agreed upon between the parties at the time of the affected shipment.

Notwithstanding the right of Seller to cancel this Contract or demand other adequate assurance of performance by Buyer, Seller may, at any time Buyer’s creditworthiness or financial responsibility becomes unsatisfactory in Seller’s sole opinion, (i) require cash payment in advance of or on delivery of remaining quantities under this Contract, and (ii) require that Buyer post a margin payment based on the difference between the Contract price and the market price (as determined by Seller in a commercially reasonable manner) at the time of such demand.

In the event that Buyer fails to pay any amounts due hereunder and such failure continues for two (2) business days after Seller’s notice to Buyer of such failure, or Buyer becomes insolvent, or suffers or consents to or applies for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or generally fails to pay its debts as they become due, or makes a general assignment for the benefit of creditors, or files a voluntary petition in bankruptcy, or seeks reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title 11 of the United States Code, as amended or recodified from time to time, or under any state or federal law granting relief to debtors then Seller may (i) immediately cancel this Contract and all other Contracts between Buyer and Seller. (ii) liquidate such cancelled Contracts in a commercially reasonable manner. and (iii) aggregate such liquidated amounts into a single liquidated settlement amount (the “Settlement Amount”) due to Seller or Buyer, which shall be due and payable two (2) business days after written notice by Seller. In addition, Seller may set-off any amounts owed by Buyer to Seller under any other agreements between the parties against any Settlement Amount owed by Seller to Buyer hereunder.

The parties agree that each of them is a forward contract merchant as set forth in 11 U.S.C. Section 101(25). The parties also agree that this Contract and any other commodity contract between the parties are all forward contracts as defined in 11 U.S.C. Section 101(25). The payments and transfers described herein shall constitute “Settlement Payments” or “Margin Payments” as set forth in 11 U.S.C. Sections 101 (51A) and (38).

Seller warrants to Buyer that all grain sold and delivered hereunder will be of good, sound, dry and merchantable quality in accordance with the grade specified herein; that it will not be adulterated or misbranded within the meaning of Federal Food. Drug and Cosmetic Act, nor be a commodity which may not, under the provisions of Section 404 or 505 of the Act, be introduced into interstate commerce; that neither any such grain nor the shipment thereof will be in violation of any other federal, state or local law, ordinance or regulation; and all grain sold hereunder will be delivered to Buyer free and clear of any and all liens, encumbrances, or security regulation; and all grain sold hereunder will be delivered to Buyer free and clear of any and all liens, encumbrances, or security interests.

EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER MAKES NO WARRANTY, EXPRESS OR IMPLIED, WHETHER ARISING BY STATUTE OR RULE, COURSE OF DEALING OR OTHERWISE, AS TO THE GOODS SOLD HEREUNDER, INCLUDING WITHOUT LIMITATION, THEIR FITNESS FOR ANY PARTICULAR PURPOSE.

BUYER ASSUMES ALL RISK AND LIABILITY FOR RESULTS OBTAINED BY THE USE OF THE GOODS COVERED BY THIS CONTRACT, WHETHER USED SINGLY OR IN COMBINATION WITH OTHER PRODUCTS. SELLER SHALL IN NO EVENT BE RESPONSIBLE FOR ANY CONSEQUENTIAL DAMAGES AND BUYER REMEDIES UNDER THIS CONTRACT SHALL BE LIMITED TO REJECTION AND REPLACEMENT OF OR ADJUSTMENT FOR DEFECTIVE GOODS. BUYER’S REMEDIES SHALL IN NO EVENT EXCEED THE PURCHASE PRICE OF THE DEFECTIVE GOODS.

Unless otherwise specified, each shipment hereunder will be applied to the oldest open contract between Buyer and Seller.

Seller’s performance hereunder, or any delay in such performance, including delivery of the date or dates specified, shall be excused where such failure to perform or delay is attributable to any cause or reason beyond Seller’s control, including without limitation product shortages, labor trouble, governmental regulations, transportation difficulties, civil disturbances, acts of God, or any other causes of the like or different character beyond Seller’s control.

Seller’s failure to deliver or perform in accordance with any installment provided for in this Contract shall not constitute a breach as to any other installment or as to the entire Contract.

Any change in price or other terms of this Contract caused by governmental regulations will entitle Seller, at its option, to cancel any unshipped portion of the goods covered by this Contract.

This Contract is intended by the parties as a final expression of their agreement and is intended also as a complete and exclusive statement of the terms and conditions of their agreement. This Contract is limited to the terms and conditions stated herein, which terms and conditions shall prevail insofar as they might in any way conflict with any terms or conditions of Buyer’s confirmation.

There are hereby incorporated herein by reference the respective Equal Opportunity Clauses set forth in 41 C. F. R. para 60-1.4 (a), 41 C.F.R. para. 60-250.4 and 41 C.F.R. para 60-741.4 to extent the incorporation thereof is required by or necessary for compliance with applicable federal laws, regulation or orders. As used in such clauses, “contractor” shall mean the Buyer hereunder.

EXHIBIT “B”

BUYER’S CORN ORDER PARAMETERS

1. Each Buyer’s Corn Order shall be placed on a Sales Contract in the form attached hereto as “Exhibit B-1”.

2. Each Sales Contract shall contain a minimum of 500 bushels.

3. All Corn shall meet the commodity and grade requirements as is acceptable to Buyer.

4. Gavilon shall be named as the purchaser of the Corn in the Sales Contract, and title of the Corn shall pass to Gavilon at time of delivery to the Elevator or the Plant, as applicable.

5. Each Sales Contract shall be subject to the rules of the National Grain and Feed Association.

6. Buyer shall have the right to set the purchase price for the Corn based upon “Flat Price” pricing for up to [ * * * ] ahead, provided that (i) such purchases shall not exceed [ * * * ], (ii) all such purchases shall be promptly reported to Gavilon’s hedge desk to allow for adequate hedging and (iii) the prices being paid are consistent with market prices for Corn which could otherwise be obtained by Gavilon.

7. In the event that Buyer desires to purchase Corn more than [ * * * ] in advance on any contract, Buyer shall notify Gavilon of the same and may only enter into such contracts in excess of [ * * * ] upon Gavilon’s prior approval.

Buyer acknowledges and agrees that Gavilon shall have the right to limit or suspend any Corn purchased by Buyer’s Corn Orders if Gavilon determines in its reasonable discretion that the prices being paid by Buyer exceed the prices which could otherwise be obtained by Gavilon on the open market by [ * * * ]. Upon any such limitation or suspension of trading on Buyer’s Corn Orders, Gavilon and Buyer shall work in good faith to resolve any such pricing issues.

EXHIBIT “B-1”

FORM OF BUYER’S CORN ORDER

Gavilon Grain, LLC

Heron Lake BioEnergy, LLC

Heron Lake		Our Number: PRICED Contract Date:

S E L L E R		Customer No. Payment Terms: Broker: Broker No.: Delivery Terms:

SELLER AGREES TO AND CONFIRMS THE SALE OF THE FOLLOWING DESCRIBED COMMODITIES TO GAVILON GRAIN, LLC, (BUYER) SUBJECT TO THE TERMS AND CONDITIONS STATED ON THE FACE AND BACK THEREOF. FAILURE TO ADVISE GAVILON GRAIN, LLC IMMEDIATELY BY WIRE OF ANY DISCREPANCY, OBJECTION TO OR DISAGREEMENT WITH SUCH TERMS AND CONDITIONS SHALL BE AN ACCEPTANCE THEREOF.

COMMODITY: #2 YC

QUANTITY:

YELLOW CORN

BU

15.0%MST

WEIGHTS:
GRADES:
TRANSPORTATION:
REFERENCE:
MARKET REGION:

DESTINATION
DESTINATION
TRUCK

Status	Delivery Dates	Schedule Price	BU Priced

Buyer’s scale of discounts at time of delivery to apply.		Total Contracted BUSHELS
Rules to apply: NGFA
Must be less than 20 PPB Aflatoxin to be applicable

BUYER OBJECTS TO THE INCLUSION OF ANY DIFFERENT OR ADDITIONAL TERMS PROPOSED BY SELLER, BUYER’S SCHEDULE OF DISCOUNTS TO APPLY. SELLER GUARANTEES GRAIN U.S. GROWN. IF PRICE OF GRAIN IS ON A PREMIUM BASIS, CONTRACT TO BE PRICED OR SPREAD PRIOR TO THE LAST TRADING DAY PRECEDING THE FIRST DELIVERY DAY OF THE FUTURES CONTRACT.

Confirmation Acknowledged Gavilon Grain, LLC

Date		Date
PLEASE SIGN ONE COPY AND RETURN TO ABOVE ADDRESS.		Original

TERMS AND CONDITIONS

Except as modified or limited by the terms and conditions stated herein, the Contract shall be governed by and construed in accordance with the applicable rules and regulations of the exchange, board or association designated on the face hereof, or, if none is designated or Seller is not a member of said exchange, board, or association, then the applicable trade rules of the National Grain and Feed Association in effect on the date hereof, and, to the extent not inconsistent therewith, the applicable provisions of the Uniform Commercial Code.

Seller warrants to Buyer that all grain sold and delivered hereunder will be of good, sound, dry and merchantable quality in accordance with the grade specified herein; that it will have been grown in the Continental United States unless a non-United States grown clause has been made a part of this Contract and so stated on the face hereof; that it will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, nor be a commodity which may not, under the provisions of Section 404 or 505 of the Act, be introduced into interstate commerce; that neither any such grain nor the shipment thereof will be in violation of or subject to penalty, seizure or lien under any other federal, state or local law, ordinance regulation quota or order, and all grain sold hereunder will be delivered to Buyer free and clear of any and all liens, encumbrances, security interests, claims and penalties of any kind and nature.

In the event that a party hereto (the “Defaulting Party”) becomes insolvent, or suffers or consents to or applies for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or generally fails to pay its debts as they become due, or makes a general assignment for the benefit of creditors, or files a voluntary petition in bankruptcy, or seeks reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title 11 of the United States Code, as amended or recodified from time to time, or under any state or federal law granting relief to debtors then the other party (the “Non-defaulting Party”) may (i) immediately cancel this Contract and all other Contracts between the parties hereto, (ii) liquidate such cancelled Contracts in a commercially reasonable manner, and (iii) aggregate such liquidated amounts into a single liquidated settlement amount (the “Settlement Amount”) due, which shall be due and payable two (2) business days after written notice by the Non-defaulting Party. In addition, the Non-defaulting Party may set-off any amounts owed by the Defaulting Party to the Non-defaulting Party under any other agreements between the parties against any Settlement Amount owed by the Non-defaulting Party to the Defaulting Party hereunder.

Each Party consents to the recording of all telephone conversations between its representative and the representatives of the other Party.

This Contract is made on the basis of freight rates in effect on the date hereof. Any increase in freight rates taking effect before the full performance of this Contract shall be for the account of Seller unless otherwise adjusted and agreed upon between the parties at the time of the affected shipment.

All shipments of grain hereunder shall be made by Seller to the place of delivery designated herein. Buyer may subsequently designate any reasonable alternate place of delivery to facilitate Seller’s performance of this Contract but shall have no obligation to do so. Any increased shipping charges incurred under this provision shall be for Seller’s account and any reductions in shipping charges shall be for Buyer’s account; provided however, if the designated alternate delivery points are solely for Buyer’s convenience, increase shipping charges shall be for Buyer’s account.

Unless otherwise specified, each shipment hereunder will be applied to the oldest open contract between Buyer and Seller.

Buyer reserves the right to apply off-grade grain at market difference without first notifying Seller.

Buyer’s performance hereunder, or any delay in such performance, including the acceptance of deliveries of grain on the date or dates specified, shall be excused where such failure to perform or delay is attributable to any cause or reason beyond Buyer’s control, including without limitation lack of available storage space, equipment breakdown, labor trouble, governmental regulations, transportation difficulties, embargoes, civil disturbances, acts of God, or any other causes of the like or different character beyond Buyer’s control.

There are hereby incorporated herein by reference the respective Equal Opportunity Clauses set forth in 41 C.F.R. para. 60-1.4 (a). 41 C.F.R. para. 60-250.4 and 41 C.F.R. para. 60-741.4 to extent the incorporation thereof is required by or necessary for compliance with applicable federal laws, regulations or orders. As used in such clauses, “contractor” shall mean the Seller hereunder. Unless otherwise exempt, this Purchase Order incorporates by reference the EEO Clause contained in 41 C.F.R. Sections 60-1.4,60-741.5, and 60-250.5.

CONTROVERSIES: Controversies and/or other disagreements between Buyer and Seller arising under this Contract shall be settled by arbitration which shall be a condition precedent to any right of legal action that either Buyer or Seller may have against the other party. Any arbitration shall be in accordance with the rules of the National Grain and Feed Association [NGFA]. At the time notice of arbitration is served by either Buyer or Seller upon the other, (i) if either is a member of NGFA, the NGFA Arbitration Committee shall serve as the arbitrator; (ii) if neither is a member of the NGFA, the American Arbitration Association shall serve as the arbitrator.

EXHIBIT “C”

SPECIFICATIONS; TRADE RULES

1. General. Each Party shall be responsible for the administration of and compliance with all applicable Trade Rules with its suppliers. The standard of quality, specifications, method of analysis, sampling and adjustment procedures are defined in the Trade Rules and Buyer agrees to the specifications and procedures set forth in the applicable Trade Rules, unless otherwise noted herein.

2. Trade Rules. Buyer agrees to the standard of quality, specifications, methods of analysis, sampling and adjustment procedures in the applicable Trade Rules, unless otherwise noted herein.

3. Specifications. The specifications for Corn shall be as provided under the applicable Trade Rules unless agreed to in writing by Buyer and Gavilon.

4. Analysis Methods. Buyer shall use approved NGFA analysis methods and comply with the sampling procedures per the applicable Trade Rules.

5. Testing . In the event analysis by Buyer shows that any Corn obtained by Gavilon under Confirmed Orders is out-of-specification or nonconforming according to the applicable Trade Rules, Buyer shall timely notify Gavilon pursuant to the applicable Trade Rules and provide a copy of the test results. A mutually agreeable laboratory may be used for analysis, if agreement on analysis results cannot be reached, and Buyer and Gavilon will share equally the costs for such third party analysis. Gavilon is responsible for the final resolution of non-conforming product with its supplier, including filing of quality claims, securing adjustments and/or return of shipment. In the event an analysis by Buyer shows that any Corn obtained by Buyer under Buyer’s Corn Orders is out-of-specification or non-conforming according to the applicable Trade Rules, Buyer shall be responsible for the final resolution of non-conforming product with its supplier, including filing of quality claims, securing adjustments and/or return of shipment.

EXHIBIT “D”

INSURANCE COVERAGES

Each Party shall be required to purchase, maintain and provide proof (via Certificate of Insurance) of the following insurance:

Commercial General Liability Insurance - $2 Million Combined Single Limit

Policy shall include coverage for liability resulting from Premises/Operations, Products and Completed Operations, Blanket and Contractual Liability. Policy shall also include coverage for Broad Form Property Damage, including explosion, collapse and underground hazards. Such insurance shall be on an occurrence basis.

Commercial Automobile Liability Insurance - $1 Million Combined Single Limit

Policy shall include coverage for liability resulting from the operation of all owned, non-owned and hired automobiles.

Such insurance shall be on an occurrence basis.

In addition, Buyer shall be required to maintain the following insurance:

Workers’ Compensation with statutory limits as required by the State of Minnesota. Employers liability with limits of $1 million per accident, $1 million disease - each employee, and $1 million policy limits

Environmental Pollution Liability Insurance - $2 Million Combined Single Limit

Policy shall include coverage for bodily injury or property damage arising from the transportation, handling, storage, disposal, dumping, processing or treatment of waste. Such insurance shall be on an occurrence basis.

Each Party shall also carry excess or umbrella liability insurance with limits of at least $4,000,000 per occurrence for bodily injury or property damage in excess of the limits afforded for general liability, automobile liability and environmental liability provided above.

All required policies of insurance shall be endorsed to provide that the insurance company shall notify the certificate holder at least thirty (30) days prior to the effective date of any cancellation or material change of such policies. All insurance companies shall have an A.M. Best rating of A- or better.

Exhibit 10.49

ETHANOL AND DISTILLER’S GRAINS MARKETING AGREEMENT
(HERON LAKE, MINNESOTA)

THIS ETHANOL AND DISTILLER’S GRAINS MARKETING AGREEMENT (the “ Agreement ”) is dated and made effective as of September 1, 2011 (the “ Commencement Date ”), by and between Heron Lake BioEnergy, LLC , a Minnesota limited liability company (“ Producer ”), and Gavilon, LLC , a Delaware limited liability company (“ Gavilon ”).

RECITALS

(a) Producer will produce ethanol (also referred to herein as the “ Ethanol Product ”) at its facility located one mile east of Heron Lake, Minnesota on Highway 60 (the “ Plant ”);

(b) In the process of producing Ethanol Product, Producer will produce dried distiller grains (“ DDG Co-Product” ) at the Plant;

(c) In the process of producing Ethanol Product, Producer will produce modified wet distiller grains (“ WDG Co-Product ”) at the Plant;

(d) Gavilon will provide (or assist in providing) Producer with corn for purposes of producing the Ethanol Product, all in accordance with that certain Corn Supply Agreement, dated concurrently herewith, by and between Producer and Gavilon (“ Corn Supply Agreement ”); and

(e) It is a condition to Producer’s and Gavilon’s obligations to consummate the Corn Supply Agreement that Producer and Gavilon enter into this Agreement.

AGREEMENT

NOW THEREFORE, in consideration of the above Recitals, which are incorporated herein and made a part hereof, and the mutual promises and covenants set forth herein, and intending to be legally bound, Gavilon and Producer mutually agree as follows:

Article 1
DEFINITIONS

1.1 “ Acceptance Deadline ” has the meaning provided for in Section 6.2.1.

1.2 “ Actually Placed ” or “ Actual Placement ” means that such railcars have been delivered to and received by Producer at the Plant.

1.3 “ Agreement ” means this Ethanol and Distiller’s Grains Marketing Agreement and any exhibits or schedules attached hereto as the same may be amended from time to time.

1.4 “ Annual Forecast ” has the meaning provided for in Section 4.1.1.

1.5 “ Bankruptcy ” has the meaning provided for in Section 13.1.5.

1.6 “ Bid ” has the meaning provided for in Section 6.2.1.

1.7 “ Business Day ” or “ Business Days ” means the hours from 8:00 a.m. to 5:00 p.m. Central Time excluding Saturdays, Sundays, and scheduled holidays observed by the Chicago Board of Trade, Chicago, Illinois, USA.

1.8 “ Central Time ” means the local time in Omaha, Nebraska at any relevant time, taking into account daylight saving time, if applicable.

1.9 “ Change in Control ” means a change in the ownership of a Party, whereby such change results in any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), other than Project Viking, L.L.C. or any affiliates owned or controlled by Ron and Diane Fagen with respect to Producer, directly or indirectly, having the ability to control the governing body of such Party.

1.10 “ Claims ” has the meaning provided for in Section 12.1.

1.11 “ Commencement Date ” has the meaning provided for in the opening paragraph of this Agreement.

1.12 “ Confidential Information ” has the meaning provided for in Section 10.1.

1.13 “ Confirmation ” has the meaning provided for in Section 6.2.1.

1.14 “ Constructively Placed ” or “ Constructive Placement ” means either: (i) with respect to a loaded shipment of Product by railcars, that such railcars are located at the Delivery Point in such condition ready for shipment to or if the Producer’s Constructively Placed designation is unavailable, then at such nearby location as determined by the railroad, or (ii) with respect to receipt of railcars for Product loading, that such railcars are located at the Delivery Point or if the Producer’s Constructively Placed designation is unavailable, then at such nearby location as determined by the railroad and within the operating hours specified, in such condition ready for Producer’s use in fulfilling its obligations hereunder.

1.15 “ Contract Year ” means a period of twelve (12) consecutive months with the first Contract Year to begin on the Commencement Date.

1.16 “ Co-Product ” means, collectively, the DDG Co-Product and WDG Co-Product meeting the specifications set forth in Exhibit “B” attached hereto and incorporated by this reference.

1.17 “ Corn Supply Agreement ” has the meaning provided for in the Recitals.

1.18 “ Cross Default ” has the meaning provided for in Section 13.4.

1.19 “ Damages ” has the meaning provided for in Section 12.1.

1.20 “ DDG Co-Product ” has the meaning provided for in the Recitals.

1.21 “ DDG Co-Product Marketing Fee ” has the meaning provided for in Section 6.3.1.

1.22 “ Delivery ” means the Product has crossed the point between the Terminal output apparatus and the intake apparatus of the respective Transport Carrier.

1.23 “ Delivery Point ” means for Transport Carriers the location(s) at the Terminal or Plant where Transport Carriers are received for loading of Product on the respective Transport Carriers, as follows:

1.23.1 The Delivery Point for railcar shipments is the railway’s “ Constructively Placed ” or “ Actually Placed ” designation; and

1.23.2 The Delivery Point for trucks is the point that the Products are loaded into the truck from the Plant’s loading facility.

1.24 “ Delivery Schedule ” has the meaning provided for in Section 5.3.

1.25 “ Demurrage ” means all costs, damages, penalties and charges resulting from any delay in excess of two (2) business hours in loading of Product shipments, including, without limitation, any delay related to any Transport Carrier, as applicable: (i) being incapable of timely loading any shipment of Product due to mechanical failure or for other reasons, or (ii) delivering any shipment of Product to an incorrect Delivery Point.

1.26 “ Designated Logistics Individual ” has the meaning provided for in Section 5.2.

1.27 “ Designated Pricing Individual ” has the meaning provided for in Section 6.1.

1.28 “ DOT ” means the United States Department of Transportation.

1.29 “ Ethanol Product ” means the product meeting the Specifications set forth in Exhibit “A” attached hereto and incorporated herein by this reference.

1.30 “ Ethanol Marketing Fee ” has the meaning provided for in Section 6.3.1.

1.31 “ Event of Default ” has the meaning provided for in Section 13.1.

1.32 “ Fees ” has the meaning provided for in Section 6.3.

1.33 “ Force Majeure ” has the meaning provided for in Section 11.2.

1.34 “ Forward Market Services ” has the meaning provided for in Section 9.1.

1.35 “ Gavilon Service Fee ” has the meaning provided for in Section 6.3.1.

1.36 “ Governing Body ” means (i) with regard to Ethanol Product disputes, the American Arbitration Association and (ii) with regard to Co-Product disputes, the National Grain and Feed Association.

1.37 “ Governing Body Arbitration Rules ” means (i) with regard to Ethanol Product disputes, the commercial arbitration rules of the American Arbitration Association and (ii) with regard to Co-Product, the applicable rules of the National Grain and Feed Association Trade Rules and Arbitration Rules Booklet, as amended March 5, 2010, and as otherwise amended or restated from time to time.

1.38 “ Initial Term ” has the meaning provided for in Section 2.1.

1.39 “ Invoice” has the meaning provided for in Section 6.5.1.

1.40 “ Invoice Date” has the meaning provided for in Section 6.5.1.

1.41 “ Logistics ” means activities related to or connected with either (i) transporting, storing and otherwise handling Product after Delivery to Gavilon hereunder, or (ii) delivery of Transport Carriers to the Delivery Point for Product loading.

1.42 “ Master Agreement ” shall mean that certain Master Netting, Setoff, Credit and Security Agreement, dated concurrently herewith, by and between Producer and Gavilon.

1.43 “ Nonconforming Product ” has the meaning provided for in Section 4.3.

1.44 “ Party ” shall mean either Producer or Gavilon, as the context requires, and “ Parties ” shall mean both Producer and Gavilon.

1.45 “ Plant ” has the meaning provided for in the Recitals.

1.46 “ Product ” shall mean, collectively, the Ethanol Product and the Co-Product as defined herein.

1.47 “ Production Forecast ” has the meaning provided in Section 4.1.2.

1.48 “ Purchase Price ” has the meaning provided for in Section 6.2.1.

1.49 “ Renewal Term ” has the meaning specified in Section 2.2.

1.50 “ Specifications ” has the meaning provided in Section 4.2.

1.51 “Storage Agreement” means that certain Corn Storage Agreement, dated concurrently herewith, entered into by and between Gavilon and Lakefield Farmers Elevator, LLC, a Minnesota limited liability company, with regard to Gavilon’s use of two grain elevators for storage of corn for the benefit of Producer.

1.52 “ Storage Costs ” means direct or indirect costs incurred by Gavilon or charged by a third-party for storing Product, together with insurance and all other charges incurred to third-parties in connection with such storage, without markup by Gavilon.

1.53 “ Taxes ” has the meaning provided for in Section 6.4.

1.54 “ Term ” has the meaning provided for in Section 2.2.

1.55 “ Terminal ” means the site and facilities of the terminal operator serving the operations of the Plant.

1.56 “ Transport Carrier ” means railcars or trucks.

1.57 “ Units ” means gallons in the case of Ethanol Product and tons in the case of Co-Product.

1.58 “ WDG Co-Product ” has the meaning provided for in the Recitals.

1.59 “ WDG Co-Product Marketing Fee ” has the meaning provided for in Section 6.3.1.

1.60 “ Written ” or “ in writing ” conditions will be satisfied by any one of the following: email, mail, or facsimile and addressed to the proper Parties as set forth in Section 15.16, except any written notice required under Sections 13 and 15 shall be done strictly in accordance with Section 15.16.

Article 2
TERM

2.1 Initial Term. Unless terminated earlier according to its terms, this Agreement shall be in effect for two (2) years beginning on the Commencement Date unless extended as set forth in Section 2.2 (the “ Initial Term ”).

2.2 Renewal Term . The Initial Term will automatically be extended for additional one (1) year periods (each, a “ Renewal Term ”), unless either (i) at least six (6) months prior to expiration of the then-current Term, Gavilon provides written notice to Producer that the Agreement shall terminate at the end of the then-current Term, or (ii) at least sixty (60) days prior to expiration of the then-current Term, Producer provides written notice to Gavilon that the Agreement shall terminate at the end of the then-current Term (collectively, the Initial Term and any Renewal Term are referred to herein as the “ Term ”).

Article 3
PRODUCT PURCHASE

3.1 Sale/Purchase. Subject to the Confirmations referenced in Section 6.2 and the other terms and conditions herein, on the Commencement Date and during each Contract Year of the Term, Producer shall sell and make available for Delivery to Gavilon, and Gavilon shall purchase and take Delivery of, one hundred percent (100%) of the Product produced at the Plant. All Product produced at the Plant shall be subject to the terms of this Agreement. Producer hereby represents and warrants that, as of the Commencement Date, it shall have no obligation or commitment to any third party with respect to the delivery or sale of Ethanol Product or Co-Product produced at the Plant, and that any and all such obligations and commitments that existed prior to the Commencement Date shall have been terminated or otherwise fulfilled without liability to any Party hereto as of the Commencement Date. In the event that the Plant produces other byproducts other than Product and for which a market is found to exist after the Commencement Date, Producer agrees to give Gavilon first considerations for marketing such byproducts. With regard to any such byproducts, Producer and Gavilon agree to negotiate in good faith to reach a new agreement, or an amendment to this Agreement, pursuant to which Producer would sell, and Gavilon would purchase, such byproducts on such economic terms (including marketing fees) as may be agreed upon by the parties.

Article 4
PRODUCT QUANTITY AND QUALITY

4.1 Quantity. Except as otherwise stated in this Agreement, Producer shall sell its entire output of Product produced at the Plant to Gavilon. For Product sales and purchase planning purposes, Producer shall provide to Gavilon, in form and substance reasonably

acceptable to Gavilon, its monthly production targets reflected in the then current Annual Forecast and the Production Forecast in accordance with the following:

4.1.1 Promptly after the Commencement Date, Producer’s monthly Product production output forecast for the Plant for the Initial Term (the “ Annual Forecast ”);

4.1.2 On or before the first day of each calendar month during the Term, monthly updates of the Annual Forecast in writing, by electronic mail or facsimile (each a “Production Forecast”) concerning operations of the Plant and activities that relate to the output of Product;

4.1.3 On or prior to 10:30 am Central Time of each day of operation, the estimated daily Product inventory balances of the Plant, Product production status and Product shipment information in writing or electronically;

4.1.4 Promptly after the Commencement Date, and at least forty five (45) days prior to the beginning of each calendar year during the Term, written notice of any then-scheduled Plant shutdowns;

4.1.5 Prompt written notice, within twenty four (24) hours, of any event that has resulted or could reasonably be expected to result in an unscheduled Plant shutdown, suspension or significant decrease in the Plant’s production of Product that was not reported or anticipated in the Production Forecasts provided for herein; and

4.1.6 Immediately upon request, such other information reasonably requested by Gavilon.

The quantity of each Delivery of Product to Gavilon shall be established by origin weight or origin metered volume prior to shipment and certified by Producer as of the time of such weighing or metering. Producer shall measure either the weight or the volume of the shipments on scales or metering equipment calibrated at least once yearly beginning on the Commencement Date during the Term of this Agreement in accordance with the USDA Grain Inspection, Packers & Stockyard’s Administration’s applicable standards and which provide both gross and net 60° Fahrenheit temperature compensated gallons. Producer’s scales and metering equipment shall be certified on an annual basis, whereupon Producer shall provide the certification certificate(s) to Gavilon. In the event that the scale or metering equipment at the Plant is deemed faulty or inoperable, then the quantity of Product shall be established by a replacement scale or replacement metering system(s) which is/are certified as of the time of such weighing or metering and which comply with the terms and conditions of this Agreement and all applicable laws, rules and regulations. In the event that either Gavilon or Producer reasonably believes that Producer’s scales or metering equipment are not working properly, either Party may request that such scales or metering equipment be tested and re-certified.

4.2 Quality. Unless otherwise agreed by Gavilon in writing, Producer represents and warrants that the Product produced at the Plant and delivered to Gavilon (i) shall be free and clear of all liens and encumbrances, (ii) shall comply in all material respects with any applicable federal, state, and local laws, regulations and requirements governing quality, naming, and labeling of Product, the specifications of which shall be determined by Producer in its sole discretion, and in the case of Ethanol Product, shall conform to the specifications set forth in Exhibit “A” attached hereto and in the case of Co-Product shall conform with the

specifications set forth on Exhibit “B” (the “ Specifications ”). The Specifications shall be deemed modified upon mutual agreement or, without any further action by either of the Parties hereto, from time to time to conform with legally mandated standards currently in existence or as modified or amended.

4.2.1 Producer shall provide to Gavilon, on or prior to Delivery of any Product to Gavilon, a certificate representing an analysis of the Product to be sold to Gavilon, certifying and evidencing to the reasonable satisfaction of Gavilon that such Product (i) is free and clear of all liens and encumbrances, (ii) complies in all material respects with any applicable federal, state, and local laws, regulations and requirements governing quality, naming, and labeling of Product, and (iii) conforms to the Specifications. Producer, at its sole cost and expense, shall provide or cause to be provided all testing and related test equipment, which shall be calibrated at least once every six (6) months during the Term of this Agreement, at or in the vicinity of the Plant to determine, to Gavilon’s satisfaction, that the Product is compliant with the Specifications. Gavilon or Gavilon’s representative shall have the right to perform, at any time within a reasonable period of time following delivery or receipt by Gavilon’s customers and at Gavilon’s sole expense, tests to determine whether or not the Product is in compliance with the Specifications. If the Product so tested does not conform to the Specifications, Producer shall reimburse Gavilon its actual costs in conducting such tests.

4.2.2 If Producer knows or reasonably suspects that any of the Product produced at the Plant is adulterated or misbranded, or does not conform to any warranty or Specification, Producer shall promptly notify Gavilon to such effect so that such Product can be tested before entering interstate commerce. If Gavilon knows or reasonably suspects that any of the Product produced by Producer at the Plant is adulterated, misbranded or non-conforming to the Specifications, then Gavilon may obtain independent laboratory tests of the Product in question. If such Product is tested and found to comply with all warranties and the Specifications made by Producer herein, then Gavilon shall be responsible for all applicable testing costs; and if the Product is found not to conform with such warranties and the Specifications, Producer shall be responsible for all applicable testing costs.

4.2.3 Gavilon’s payment for the Product, whether or not in conformance with this Agreement or any applicable Confirmation, does not constitute a waiver by Gavilon of Gavilon’s rights in the event the Product does not comply with the terms of this Agreement.

4.2.4 Producer shall, using standard sampling methodology, take an origin sample of the Product from each source denatured ethanol tank before loading onto Transport Carrier for Delivery. Producer shall label such samples and cross reference them to all Transport Carriers loaded from said tank. Unless the Parties agree otherwise, Producer shall store such samples at the Plant for testing by Gavilon, at Gavilon’s sole discretion, for a period of two (2) months, at which time Producer may include the sample Product in future shipments to Gavilon.

4.2.5 If requested by Gavilon, Producer shall provide all information to Gavilon pursuant to this Section 4.2 in electronic form.

4.3 Nonconforming Product. In the event the Product delivered to Gavilon is determined to be nonconforming to the Specifications or otherwise nonconforming in any material respect to any other representation or warranty made by Producer herein (the “ Nonconforming Product ”), Gavilon shall notify Producer of Gavilon’s rejection (or Gavilon’s customer’s rejection) of such Nonconforming Product in writing within two (2) Business Days of determining that such Product is a Nonconforming Product. Gavilon shall provide a copy of the certified laboratory report(s) evidencing the nonconformity. Producer will then direct Gavilon to either (i) sell the Nonconforming Product at a discounted price, or (ii) return the Nonconforming Product to Producer, each at Producer’s sole cost and expense. Producer shall replace the Nonconforming Product with an acceptable type and/or quality of Product within two (2) Business Days of receipt of written notice that the delivered Product is nonconforming. In the event Producer is unable to ship the replacement for the Nonconforming Product within said two (2) day period, Gavilon shall have the option in Gavilon’s sole, absolute and unreviewable discretion to return the Nonconforming Product, withhold payment thereof and purchase replacement Product. Producer will be responsible for the difference in cost between the higher cost replacement Product and the cost of Producer’s Product which is the subject of the confirmed order, and the costs of returning or disposing of any such Nonconforming Product. Such costs may include, without limitation, reasonably incurred Storage Costs or costs reasonably incurred by Gavilon to return such Nonconforming Product to Producer. If such Nonconforming Product is sold by Gavilon at a discount, the Purchase Price payable by Gavilon may be reasonably adjusted by Gavilon by the amount of such discount, and payment shall be made according to this Agreement. In the event that the replacement Product costs less than the cost of Producer’s Product which is the subject of replacement (after taking into consideration all costs to obtain such replacement Product), Producer will receive a credit for any such gain associated with the replacement Product.

In the event that any Product is seized or condemned by any federal or state department or agency for any reason except noncompliance by Gavilon with applicable federal or state requirements for shipping the Product, such seizure or condemnation shall operate as a rejection by Gavilon of the goods seized or condemned, whereupon: (i) unless otherwise agreed by Gavilon, Gavilon shall have no responsibility for selling the Nonconforming Product or returning the Nonconforming Product to Producer, and (ii) title and risk of loss to the Product shall immediately pass to Producer. In the event that any Product is seized or condemned by any federal or state department or agency as set forth in this paragraph, Producer shall be responsible for all costs incurred by Gavilon with regard to handling said Nonconforming Product and Gavilon shall have the right to set off all such amounts in accordance with the terms of the Master Agreement. In the event that Gavilon is directed to dispose of the Nonconforming Products at the direction of any federal or state department or agency, Gavilon shall coordinate with Producer with regard to the same; provided, however, Gavilon shall ultimately be responsible for determining how to comply with such orders and Producer shall ultimately be responsible for all costs arising therefrom.

4.4 Beginning / Ending Product Purchase / Sale . Effective as of the date of this Agreement, Gavilon agrees to purchase all Product currently owned by Producer and located at the Plant (the “Initial Purchase”) for a price equal to (i) for Ethanol Product [ * * * ], minus [ * * * ] per gallon, (ii) for DDG Co-Product, the Purchase Price as determined in Section 6.2.1 and (iii) for WDG Co-Product, the Purchase Price as determined in Section 6.2.1 (collectively, the “Initial Purchase Price”). Gavilon and Producer shall work in good faith to determine the amount of Product owned by Producer at the Plant as of the effective date of this Agreement, and after agreeing on such amount Gavilon’s payment of the Initial Purchase Price to Producer for the Initial Purchase shall be due two (2) Business Days later. Upon any termination of this Agreement at the end of its natural Term (but not due to an event of default), Gavilon shall sell

any Product then owned by Gavilon and located at the Plant in accordance with the Purchase Price and Confirmation process set forth in Section 6.2. Gavilon and Producer shall work in good faith to determine the amount of Product owned by Gavilon at the Plant as of the date of such termination, and after agreeing on such amount the final payment for the Product shall be due on the later of (i) within two (2) Business Days after the final sale or (ii) the normal timing for a Payment Date under the Master Agreement.

Article 5
DELIVERY, SCHEDULING AND LOGISTICS

5.1 Delivery. Delivery of Product hereunder shall take place at the applicable Delivery Point for Product and in accordance with the applicable Confirmation.

5.2 Designated Logistics Individual. At all times from the Commencement Date until the expiration of the Term, Producer shall designate (and may re-designate from time to time) in writing to Gavilon, a qualified, full-time, individual for daily operational and Logistics issues who shall interact directly with Gavilon relating to such matters and shall have full, binding authority on behalf of Producer for all operational and Logistics matters with respect to the transactions contemplated herein (the “ Designated Logistics Individual ”).

5.3 Delivery Schedule . The Parties shall jointly develop a delivery schedule (the “ Delivery Schedule ”), the format of which will be mutually agreed upon by the Parties, which will serve as the formal planning tool for Logistics purposes.

5.4 Gavilon’s Covenants . Gavilon shall be responsible for the coordination and management of Logistics which arise after Delivery and for delivery of Transport Carriers to the Delivery Point for Product loading. Except as otherwise stated herein, Gavilon covenants and agrees to:

5.4.1 Secure and maintain all necessary agreements, licenses, documents and contracts related to the transport of the Product from the Delivery Point;

5.4.2 Establish, monitor and communicate Logistics-related data to Producer as reasonable to ensure the shipment of Product in accordance with the applicable Delivery Schedule;

5.4.3 Except as otherwise expressly provided herein, secure and supply to Producer in connection with Delivery of Products herein all trucks (the owner or lessee of which shall be Gavilon and not Producer), and bear all costs relating to same, and advise Producer on tracking Transport Carriers and applicable respective estimated times of arrival therefore in an effort to reduce Demurrage and other costs;

5.4.4 Schedule the loading and shipping of all outbound Product purchased hereunder and shipped by Transport Carrier;

5.4.5 Comply in all material respects with all applicable federal, state, and local laws, regulations and requirements regarding the shipment of Product from the Plant including, but not limited to, all DOT requirements relating to the shipment of hazardous materials or otherwise applicable to the shipment of the Product (e.g., proper paperwork, railcars meeting DOT requirements, etc.); and

5.4.6 Provide Producer with such accounting, financial and other information as may be reasonably requested in order for Producer to monitor and assess Gavilon’s credit status during the Term, provided that Gavilon’s obligation to provide such information is contingent on Producer signing a nondisclosure agreement containing terms acceptable to Gavilon in its reasonable discretion.

5.5 Producer’s Covenants . Producer shall be responsible for the coordination and management of transporting, storing and otherwise handling Product up through completion of Delivery of the Product to Gavilon and, except as otherwise stated herein, Producer covenants and agrees to:

5.5.1 Provide a qualified, full-time, Designated Logistics Individual for daily shipping, storage, and such matters up through Delivery;

5.5.2 Comply in all material respects with all applicable federal, state, and local laws, regulations and requirements regarding the labeling and shipment of Product applicable to Producer in connection with Delivery of Product at the Plant including, but not limited to, all DOT requirements relating to the labeling and shipment of hazardous materials or otherwise applicable to the labeling and shipment of the Product (e.g., proper paperwork, railcars meeting DOT requirements, etc.);

5.5.3 Provide to Gavilon and Gavilon’s representatives access to the Plant in a manner and at all times reasonably necessary and convenient for Gavilon to take Delivery of the Product;

5.5.4 Provide all labor, facilities and equipment necessary to load the Transport Carriers and consummate Delivery of the Product at no charge to Gavilon;

5.5.5 Handle the Product in a good and workmanlike manner in accordance with all governmental regulations and in accordance with normal industry practice;

5.5.6 Maintain all loading facilities at the Terminal in a safe operating condition in accordance with normal industry standards;

5.5.7 Prior to Delivery, inspect all applicable Transport Carriers in accordance with industry standards to ensure that the same are free of debris and foreign material that are prohibited under applicable laws or industry standards, free of odor and visually ascertainable contamination, and free of leaks from the Transport Carrier valves, and immediately notify Gavilon upon the discovery of or suspicion of the presence of such items to allow the Parties to coordinate the removal of such contaminants or arrange for substitute transportation equipment; such inspections shall include, but not be limited to, ensuring that the Transport Carriers are free and clear of mammalian protein; and all such inspections shall be documented and reported in accordance with inspection reports and records as mutually agreed upon by the Parties;

5.5.8 Use commercially reasonable efforts to load all Transport Carriers to full capacity at the Delivery Point. In the event that a Transport Carrier is not loaded to full capacity due to Producer’s failure to use such commercially reasonable efforts, Producer shall pay that portion of freight charges allocable

to the unused capacity of the applicable Transport Carrier and shall notify Gavilon within one (1) Business Day of the occurrence of such partial load;

5.5.9 Provide, at Producer’s sole cost and expense, storage capacity for a minimum of ten (10) calendar days production of Product (at nameplate capacity) at the Plant, in accordance with industry standards and all applicable state and federal regulations;

5.5.10 Provide Gavilon with such accounting, financial and other information as may be reasonably requested in order for Gavilon to monitor and assess Producer’s credit status during the Term, provided that Producer’s obligation to provide such information is contingent on Gavilon signing a nondisclosure agreement containing terms acceptable to Producer in its reasonable discretion; and

5.5.11 Provide, at Producer’s full cost and expense, all railcars required or required to meet its obligations hereunder.

5.5.12 Provide to Gavilon on a daily basis complete and accurate reports and downloads of all data related to Product (i) currently existing as work in process, (ii) produced and/or stored at the Plant and (iii) shipped from storage at the Plant.

5.6 Producer’s Demurrage Obligations. Producer shall be responsible for Demurrage and other applicable freight and storage penalties which may accrue during the period commencing after the Transport Carriers are received by Producer (or prevented from being received in accordance with the most recent Production Forecast) for loading of Product onto the respective Transport Carriers and ending when Transport Carriers are loaded and ready for shipment at the Delivery Point, but only to the extent that such penalties arise as a result of Producer’s conduct in its performance under this Agreement, including any Production Forecast errors which result in Gavilon sending Transport Carriers when not needed for Product.

5.7 Notification of Problems with Delivery. Each Party shall inform the other Party of any problem regarding any Delivery or shipment of Product within one (1) Business Day by facsimile or email, and telephone, after a Party becomes aware of any such problem. An example of such problem(s) includes, but is not limited to, a difference in the quantity of the Delivery of Product from that quantity set out in the applicable Confirmation.

Article 6
PRICING AND PAYMENTS

6.1 Designated Pricing Individual. At all times from the Commencement Date until the expiration of the Term, Producer shall designate (and may re-designate from time to time) in writing to Gavilon a qualified, full-time individual to interact directly with Gavilon for all pricing and payment matters who shall have full, binding authority on behalf of Producer for all pricing, billing, and payment matters with respect to the transactions contemplated herein (the “ Designated Pricing Individual” ). The Designated Logistics Individual and the Designated Pricing Individual may be the same individual.

6.2 Confirmation Process.

6.2.1 The price for Product sold hereunder (the “Purchase Price”) shall be based on market-price bids from Gavilon’s customers, less (a) all documented costs incurred by Gavilon (excluding Gavilon’s customary costs for operating its business, but including any logistics costs, storage costs and other fees specifically associated with selling the Product) and (b) the Fees as described in Section 6.3. The Purchase Price for Product sold hereunder will be established through an “offer” and “confirmation” process between both Parties. Gavilon will offer market-based Product prices to Producer and Producer shall timely confirm the offered price, volume and delivery period to establish each “Confirmation” all as set forth on Exhibit “C” attached hereto. To the extent that any terms of any Confirmation conflict with the terms of this Agreement, the terms of this Agreement shall govern unless both Parties have specifically expressed their intent in writing to supersede the terms of this Agreement. Gavilon agrees to use commercially reasonable best efforts to achieve the highest Purchase Price available under prevailing market conditions.

6.2.2 Producer shall have the right to establish “flat price” pricing for Ethanol Product and Co-Product for up to [ * * * ] forward on volumes not to exceed the [ * * * ]. Additionally, Producer shall have the right to establish (i) “index pricing” for Ethanol Product for up to [ * * * ] forward and (ii) “flat price” pricing for Ethanol Product and Co-Product for up to [ * * * ] forward, in each case on volumes not to exceed [ * * * ]; provided, however, Producer must [ * * * ]. Any forward sales shall be subject to (i) the offsetting rights outlined in the Master Agreement and (ii) the net mark-to-market balance of the then-existing forward contracts being within the tolerance set by Gavilon’s credit department. In the event that this Agreement is terminated in accordance with Section 13.5 or Section 13.6 below, all open contracts which comply with the terms of this Section 6.2.2 shall be honored by the Parties (subject to the rights and obligations of the Parties as set forth in Article 13 below).

6.2.3 To the extent that Producer obtains a more favorable bid or price quote for the Product (the “ Favorable Terms ”) from a third-party (but on terms that are otherwise customary and comparable to those set forth herein), Producer shall give oral or written notice to Gavilon of the Favorable Terms, including the Product quantities and specifications. Gavilon has the right (but not any requirement) to match the Favorable Terms and purchase the Product from Producer. If Gavilon does not provide oral confirmation (followed by written notice) to Producer of Gavilon’s agreement to purchase Product at the Favorable Terms within a reasonable time after Producer’s notice to Gavilon, the sole remedy of Producer shall be for Producer to directly sell the applicable Product on the Favorable Terms to the third-party. As of the date of this Agreement, Gavilon and Producer each anticipate that Gavilon shall have the ability to determine whether or not to match the Favorable Terms during (or within ten minutes after) any phone call received from Producer to discuss such Favorable Terms. If Gavilon elects not to match the Favorable Terms pursuant to this Section 6.2.3, Gavilon shall not receive any Fees on such third-party transaction but shall have the option to provide services for Logistics in regard to the third party transaction at Gavilon’s then-current rates.

6.3 Fees. In consideration for Gavilon’s agreement to purchase Product hereunder, and other obligations contained herein, Producer shall deduct from the Purchase Price for all Product sold to Gavilon under this Agreement the following (collectively, the “ Fees ”):

6.3.1 A marketing fee equal to (i) [ * * * ] of the applicable sale price of the Ethanol Product, with a minimum fee of [ * * * ] per gallon and a maximum fee of [ * * * ] per gallon (“ Ethanol Marketing Fee ”), (ii) [ * * * ] of the applicable sale price for DDG Co-Product, with a minimum fee of [ * * * ] per ton (“ DDG Co-Product Marketing Fee ”), and (iii) [ * * * ] of the applicable sale price for WDG Co-Product, with a minimum fee of [ * * * ] per ton (“ WDG Co-Product Marketing Fee ”, and collectively with the Ethanol Marketing Fee and DDG Co-Product Marketing Fee, the “ Gavilon Service Fee ”).

6.3.2 In the event a Gavilon railcar is used to transport Product from the Plant, then Producer shall reimburse Gavilon for the then-applicable lease cost for said railcar computed on the number of days the railcar is utilized by Producer (or a third party transporting Product for Producer in accordance with Section 6.2.3 above). Any lease fees for Gavilon railcars shall be invoiced by Gavilon and paid by Producer in accordance with Gavilon’s then-current invoice policy.

6.4 Taxes. Producer shall pay or cause to be paid all valid levies, assessments, duties, rates and taxes (together “ Taxes ”) on Product sold to Gavilon hereunder that arise prior to, or at the time and as a result of, the sale of such Product to Gavilon. Gavilon shall pay or cause to be paid all Taxes, including fuel or excise Taxes, on Product that arise after the sale of Product by Producer to Gavilon hereunder. Any and all state or federal tax, production, investor, or U.S. excise credits, any and all emissions credits, other government incentives or credits or benefits relating to the production of Product or the sale thereof to Gavilon, shall inure solely to the benefit of Producer.

6.5 Billing and Payment.

6.5.1 Invoice. Within one (1) Business Day of Delivery of Product to Gavilon (the “ Invoice Date ”), Producer will provide an invoice to Gavilon, in writing or electronically, setting forth the net amounts due from Gavilon with respect to such Delivery of Product after deducting the applicable Fees (the “ Invoice ”).

6.5.2 Payment Due. Subject to the receipt of the invoice described in Section 6.5.1, Gavilon shall issue payment for the net amount due to Producer in accordance with the Master Agreement.

Article 7
REPRESENTATIONS AND WARRANTIES

7.1 Representations, Warranties and Covenants. Producer and Gavilon each represent, warrant and covenant to the other that:

7.1.1 Such Party is duly organized, validly existing, and in good standing under the laws of the state of its formation, has registered as a foreign entity in those jurisdictions where such registration is required, and has the power and authority to own and operate its properties and to carry on its business as now being conducted;

7.1.2 Such Party is duly authorized to execute and deliver this Agreement and any Confirmations, perform the covenants contained herein and therein, to consummate the transactions contemplated hereby, and to execute, deliver and perform all documents and instruments to be executed and delivered by such Party pursuant hereto, and all required action in respect to the foregoing has been taken by such Party;

7.1.3 When executed and delivered, this Agreement, any Confirmations, and all of the documents and instruments described herein and therein, will constitute valid and binding obligations of the Parties thereto, enforceable against the Parties, in accordance with their respective terms;

7.1.4 The execution and delivery of this Agreement and any Confirmations, and the performance of or compliance with the terms and provisions of this Agreement and any Confirmations will not conflict with, or result in a breach of, a default under, or accelerate any agreement, lease, license, undertaking or any other instrument or obligation of any kind or character to which such Party is a party or by which such Party or the Product may be bound, and will not constitute a default thereunder or result in the declaration or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the Product;

7.1.5 Except as set forth in Section 15.2, it (i) has not assigned, transferred, created or permitted to exist any lien or other encumbrance on, or otherwise disposed of, or purported to assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of any of its rights to any amounts that may be owed to it under this Agreement to any third-party, and (ii) covenants that, so long as this Agreement is in effect, it will not assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of or purport to assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of any of its rights to any amounts that may be owed to it under this Agreement, to any third-party;

7.1.6 It is not relying upon any representations of the other Party, other than those expressly set forth in (i) this Agreement or any Confirmation issued pursuant thereto, (ii) the Master Agreement, (iii) the Storage Agreement and (iv) the Corn Supply Agreement; and

7.1.7 It has entered into this Agreement with a full understanding of the material terms and risks of the same, and it is capable of assuming those risks.

Article 8
POSSESSION AND TITLE

8.1 Title; Risk of Loss. The Product to be sold by Producer shall be delivered FOB the Delivery Point; provided that (i) title to and possession of the Product meeting the Specifications and delivered according to this Agreement shall transfer from Producer to Gavilon at the point when such Product leaves Producer’s manufacturing process and enters into the storage process, whereby title to and possession of Ethanol Product shall transfer at the point of the Ethanol Product entering Tank No. 8422 and Tank No. 8423 at the Plant and title to and possession of Co-Product shall transfer at the point of the DDG Co-Product reaching flat storage and the WDG Co-Product reaching the modified pad, and (ii) risk of loss or damage to the Product meeting the Specifications and delivered according to this Agreement shall transfer

from Producer to Gavilon at Delivery of the Product. Until such times as specifically set forth in the prior sentence, Producer shall be deemed to be in control of, and in possession of, and shall have title to and risk of loss of and in the Product. Notwithstanding anything herein to the contrary, in the case of Product rejected as Nonconforming and returned to Producer pursuant to Section 4.3 by Gavilon, the title and risk of loss to such Product shall pass to Producer promptly upon the written notice of rejection thereof by Gavilon (or Gavilon’s customer) provided to, and received by, Producer.

8.2 Responsibility for Product. Gavilon shall have no responsibility or liability with respect to any Product delivered under this Agreement until Delivery. Without prejudice to Gavilon’s right to reject Nonconforming Product as set forth in Section 4.3 and without affecting Producer’s liability for the Delivery of Nonconforming Product, Producer shall have no responsibility or liability with respect to the Product after Delivery or on account of anything which may be done or happen to arise with respect to such Product after such Delivery except as otherwise expressly provided for herein.

Article 9
FORWARD MARKET SERVICES

9.1 Services. During the Term and for no additional cost to the Producer, Gavilon will (i) review Product positions and current market conditions relating to purchases of Product, (ii) provide basis quotes, index quotes and price quotes for nearby and forward markets on an as needed and requested by Producer basis if available in the market, and (iii) provide Producer with daily mark-to-market position reporting for all fixed price and open positions for the activities at the Plant, each for the purpose of supporting Producer’s risk management policies (the “ Forward Market Services ”).

9.2 No Liability . Gavilon and Producer acknowledge that Product markets are volatile and subject to events over which neither Gavilon nor Producer have any control. Producer acknowledges that (i) any provision of Forward Market Services by Gavilon is provided as a courtesy to Producer at no charge and is for informational purposes only and (ii) any decisions concerning Producer’s risk management strategies and the implementation of such strategies by it, are and will be made solely by Producer and are the sole responsibility of Producer. Gavilon is not responsible for any losses, liabilities, costs, or expenses incurred by Producer or entitled to any gains of Producer, resulting from any Forward Market Services supplied by Gavilon. IN NO EVENT SHALL GAVILON OR PRODUCER BE LIABLE TO THE OTHER PARTY FOR ANY DAMAGES OF ANY NATURE, INCLUDING BUT NOT LIMITED TO, INDIRECT, CONSEQUENTIAL, PUNITIVE, OR SPECIAL DAMAGES, LOSS OF BUSINESS EXPECTATIONS OR PROFITS OR BUSINESS INTERRUPTIONS, ARISING IN ANY WAY OUT OF THE PROVISION OF THE FORWARD MARKET SERVICES.

Article 10
CONFIDENTIALITY

10.1 Confidential Information. For purposes of this Agreement, the term “ Confidential Information ” shall mean any information which is disclosed by one Party to the other pursuant to this Agreement and which is oral, written, graphic, machine readable or other tangible form, whether or not marked or identified as confidential or proprietary. Confidential Information shall not include any information which is (a) already known to the recipient, (b) already in the public domain, (c) lawfully disclosed to it by a third party, or (d) legally required to be disclosed by the recipient.

10.2 Producer Nondisclosure. Producer acknowledges that, by reason of this Agreement, it may become privy to Confidential Information belonging to Gavilon. With the exception of its investors, legal advisors, financial advisors, accountants and/or lenders, their agents, representatives, or employees (hereinafter “Producer’s Parties”), Producer shall not, without the prior written consent of Gavilon, or except as otherwise required by law, disclose to any third parties or use for Producer’s own benefit any Gavilon Confidential Information, except for the intended use pursuant to this Agreement. Producer shall inform any of Producer’s Parties and any consented-to third parties to whom Producer intends to disclose Confidential Information of the confidential nature of such Confidential Information and shall ensure that such persons are bound by confidentiality obligations similar to those set forth herein. The confidentiality obligations hereunder shall survive until the later of any expiration or termination of this Agreement and the Master Agreement for a period of two (2) years thereafter. Notwithstanding the foregoing, Producer may disclose the provisions of this Agreement to Producer’s Parties provided such parties have agreed in writing to be bound by the confidentiality obligations of this Article 10.

10.3 Gavilon Nondisclosure. Gavilon acknowledges that, by reason of this Agreement, it may become privy to Confidential Information belonging to Producer. Gavilon shall not, without the prior written consent of Producer, disclose to any third parties any such Confidential Information. The confidentiality obligations hereunder shall survive any expiration or termination of this Agreement for a period of two (2) years.

10.4 Term of Confidentiality Agreement . The Parties hereby agree that the term of any Confidentiality Agreement previously entered into by and between the Parties, or by the Producer for the benefit of Gavilon, is hereby extended, and shall remain the binding obligation of Producer until the later of (i) the expiration of such Confidentiality Agreement in accordance with its terms, or (ii) two (2) years following the expiration of the Term of this Agreement, and further agree that the provisions of this Article 10 shall supersede over any conflicting provisions contained in such Confidentiality Agreement(s).

Article 11
FORCE MAJEURE

11.1 Force Majeure. In the event either Party hereto is rendered unable by reason of Force Majeure to carry out its obligations under this Agreement, upon such Party giving written notice of such Force Majeure to the other Party as soon as possible after the occurrence of the cause relied on, the obligations of the Party giving such notice, so far as they are affected by Force Majeure, shall (except as otherwise provided in Article 13) be suspended during the continuance of any inability so caused, but for no longer period, and such cause shall, so far as reasonably possible, be remedied with all reasonable dispatch.

11.2 Definition of Force Majeure. The term “ Force Majeure , ” as used in this Agreement, shall mean any cause not reasonably within the control of the Party claiming suspension and which, by the exercise of commercially reasonable efforts, such Party is unable to prevent or overcome. Such term shall include, but not be limited to: acts of God, acts of the public enemy (including terrorism), wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, floods, tornadoes, storms, washouts or other inclement weather resulting in a delay of the movement, loading or off-loading of Transport Carriers, or the inability of Producer or Gavilon to sell or resell the Product due to governmental action or embargo, all of which shall be beyond the reasonable control of the Party claiming Force Majeure. In no event shall Force Majeure include any economic or commercial changes or events affecting the

purchase, sale, transport or production of Product, except to the extent that such economic or commercial changes or events result from any of the foregoing Force Majeure causes.

11.3 Sale of Product Upon Gavilon Claim of Force Majeure. If Gavilon is the Party claiming Force Majeure, Producer may, upon written notice to Gavilon, sell the Product to third-parties during the duration of the Force Majeure event, but only to the extent of Gavilon’s inability to perform or Gavilon’s delay in performance of this Agreement. The sole remedy of Producer during any Force Majeure event claimed by Gavilon shall be for Producer to directly sell the applicable Product to third parties during the duration of the Force Majeure event.

Article 12
INDEMNITY AND LIMITATIONS ON LIABILITY

12.1 Indemnification by Producer. Except as may be otherwise provided in this Agreement, Producer shall indemnify, defend and hold harmless Gavilon, its affiliates and their respective officers, directors, employees, agents, members, managers, shareholders and representatives from and against any and all claims, liabilities, actions, losses, damages, fines, penalties, costs and expenses including reasonable attorneys’ fees (collectively “ Damages ”) actually suffered by Gavilon resulting from or arising in connection with claims (x) for personal injury or tangible or real property damages, or (y) by third parties, in either case to the extent arising out of (a) any gross negligence or willful misconduct of Producer or any of its officers, directors, employees, agents, representatives and contractors hereunder; or (b) any breach of this Agreement by Producer (collectively “ Claims”) .

12.2 Indemnification by Gavilon. Except as may be otherwise provided in this Agreement, Gavilon shall indemnify, defend and hold harmless Producer, its affiliates and their respective officers, directors, employees, agents, members, managers, shareholders and representatives from and against any and all Damages actually suffered by Producer resulting from or arising in connection with claims (x) for personal injury or tangible or real property damages, or (y) by third parties, in either case to the extent arising out of (a) any gross negligence or willful misconduct of Gavilon or any of its officers, directors, employees, agents, representatives and contractors hereunder; or (b) any breach of this Agreement by Gavilon.

12.3 Limitation of Liability. IN NO EVENT SHALL PRODUCER OR GAVILON BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, CONSEQUENTIAL, PUNITIVE, EXEMPLARY, OR SPECIAL DAMAGES, LOSS OF BUSINESS EXPECTATIONS OR LOST PROFITS OR BUSINESS OR PLANT INTERRUPTIONS OR SHUT-DOWN COSTS ARISING IN ANY WAY OUT OF THIS AGREEMENT OR ANY BREACH OF THIS AGREEMENT. Under no circumstances (other than for willful misconduct or fraud) will either Party be liable to the other for damages for breach that collectively arise under this Agreement, the Storage Agreement and the Corn Supply Agreement and exceed the total amount of $1,000,000 ; provided, however, that such limitations shall not apply with respect to (a) the payment by Gavilon for Product received hereunder, (b) the obligation of Producer to reimburse Gavilon for payments in respect of Nonconforming Product, (c) third-party claims involving personal injury or property damage asserted under Section 12.1 or 12.2 above, or (d) damages covered by the insurance requirements specified below. In the event that damages exceed such limitation, the sole remedy of the damaged Party with respect to such excess damages shall be to terminate this Agreement.

Article 13
DEFAULT AND TERMINATION

13.1 Event of Default. An “ Event of Default ” shall mean, in addition to the other matters described in this Article 13, with respect to a Party, the occurrence of any of the following events:

13.1.1 The failure to make, when due, any payment required pursuant to this Agreement;

13.1.2 Any representation or warranty made by such Party herein is false or misleading in any material respect when made or when deemed made;

13.1.3 The failure to perform any material covenant, condition, or obligation set forth in this Agreement;

13.1.4 Producer’s failure to operate the Plant for a period of thirty (30) consecutive days (unless such shut-down is part of normal maintenance or any Plant upgrades as reflected in an Annual Forecast) or the monthly production of Product is less than seventy-five percent (75%) of the amount previously forecast by Producer;

13.1.5 Either party directly or indirectly, including by operation of law, transfers, assigns, sells, or disposes of all or substantially all of its assets or any rights or obligations under this Agreement, without the prior written consent of the other party, which shall not be unreasonably withheld, except to the extent such transfer, assignment, sale or disposition is otherwise specifically permitted by clause (iii) of Section 15.2.1 of this Agreement;

13.1.6 Any Party herein shall (i) become subject to any foreclosure proceeding by such Party’s primary lender or other material creditor(s), or (ii) become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; any Party hereunder shall file a voluntary petition in bankruptcy, or seek reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title 11 of the United States Code, as amended or recodified from time to time, or under any state or federal law granting relief to debtors (collectively “ Bankruptcy ”); or

13.1.7 Any Party herein shall default on any payment obligation with such Party’s primary lender or other material creditor(s), or such other Party has received notice of acceleration or demand for payment from such Party’s primary lender or any other material creditor(s), and such payment obligation default is not cured or the primary lender or material creditor does not forbear such payment obligation default, acceleration or demand for payment within ten (10) days following such default or notice.

13.2 Right to Cure. If an Event of Default is not cured within fifteen (15) days (or two (2) Business Days with respect to clause 13.1.1) after receipt of a notice thereof from the non-defaulting Party, the non-defaulting Party may, at any time after the applicable cure period,

terminate this Agreement by written notice. Notwithstanding the foregoing provision, no cure period shall apply to Bankruptcy and Producer or Gavilon may, upon the occurrence of Bankruptcy of the other Party, immediately suspend further performance under this Agreement, with or without giving notice of such default or notice of termination.

13.3 Non-Waiver of Future Default. No waiver by either Party of any Event of Default by the other Party in the performance of any of the provisions of this Agreement, the Corn Supply Agreement or Master Agreement will operate or be construed as a waiver of any other or future default or defaults, whether of a like or of a different character.

13.4 Cross Default. The occurrence and continuance of an Event of Default under this Agreement, the Storage Agreement, the Corn Supply Agreement or Master Agreement, now existing or entered into hereafter, shall constitute, at the election of the non-defaulting Party, in its sole, absolute and unreviewable discretion, an Event of Default under this Agreement, the Storage Agreement, the Corn Supply Agreement or Master Agreement, or combination of such agreements (together the “ Cross Default ”). A waiver of a Cross Default by the non-defaulting Party pursuant to this Section 13.4 shall not operate or be construed as a waiver of any other Event of Default or Cross Default.

13.5 Termination by Mutual Agreement. This Agreement may be terminated upon mutual written agreement between the Parties.

13.6 Termination for Force Majeure. In the event that Force Majeure shall continue for a period of ninety (90) days from the date the Party claiming relief due to Force Majeure gives the other Party notice thereof, the Party not claiming such relief shall have the right to terminate this Agreement by furnishing written notice to the Party claiming Force Majeure relief, with termination effective upon the expiration date of such ninety (90) day period. Upon such termination, each Party shall be relieved from its respective obligations, except for obligations for payment of monetary sums which arose prior to the event of Force Majeure and obligations pursuant to Article 10 and Section 13.7 herein.

13.7 Rights and Obligations on Termination or Default. Upon termination of, or default under, this Agreement, whether contained in this Article 13 or otherwise contained in this Agreement:

13.7.1 Any rights of Gavilon or Producer to payments accrued through termination of this Agreement shall remain in effect and, unless otherwise specified herein, all payments and monetary obligations of the respective Parties required pursuant to this Agreement shall be made pursuant to this Agreement or the Master Agreement, as applicable.

13.7.2 In addition to other remedies available, if Producer defaults in Producer’s obligation to deliver Product under Confirmed Orders, then Gavilon may, but shall not be obligated to, “cover” by purchasing Product from third parties. Producer shall pay to Gavilon the amount, if any, by which the cost of such third-party Product including all reasonable costs and expenses associated with the purchase of Product from third parties plus a Gavilon Service Fee for such amounts of Product purchased, exceeds the Purchase Price of Product. Payments due and owing under this Section 13.7.2 shall be made pursuant to this Agreement or the Master Agreement, as applicable.

13.7.3 In addition to other remedies available, if Gavilon defaults in Gavilon’s obligation to purchase Product under any Confirmation, Producer may, but shall not be obligated to, “cover” by selling its Product to third parties. Gavilon shall pay to Producer the amount, if any, by which the Purchase Price of such Product plus other reasonable costs and expenses associated with Producer’s sale of Product to third parties exceeds the net price to such third party. Payments due and owing under this Section 13.7.3 shall be made pursuant to this Agreement. In the event that Gavilon fails to purchase all of the Product included in the Production Forecast or otherwise actually produced by Producer, then Producer may sell such Product not purchased by Gavilon to third-parties but only to the extent of Gavilon’s failure to purchase such Product and without any liability to Gavilon hereunder (but subject to either Party’s rights as set forth in Sections 13.1 and 13.2).

13.8 Cumulative Rights and Remedies. The rights and remedies under this Article 13 are cumulative and not exclusive. Upon default (whether or not an Event of Default) or termination, the non-defaulting Party shall additionally have such other and further rights as may be provided at law or in equity, including all rights of set-off as contained in this Agreement or the Master Agreement, as applicable, and such rights may be exercised in such order and combination as the non-defaulting Party may determine.

Article 14
INSURANCE

14.1 Insurance Requirements . Producer and Gavilon shall be required to purchase, maintain and provide proof (via Certificate of Insurance) of the insurance set forth on Exhibit “D” .

Article 15
MISCELLANEOUS

15.1 No Press Releases or Public Announcements . Except as otherwise mandated by applicable law, no Party may issue, or otherwise permit to be issued, any press release or other public announcement relating to the subject matter or existence of this Agreement without the prior written approval of the other Party, which approval may be withheld in such Party’s sole discretion. Additionally, the Parties acknowledge that a Confidentiality Agreement, as described in Section 10.4 above, may have been entered into between the Parties relating to the transactions contemplated herein. For purposes hereof, the Parties agree and acknowledge that the mere existence of this Agreement shall be deemed confidential information, without regard to whether such a Confidentiality Agreement has been entered into, and shall not be disclosed, except as otherwise specifically permitted hereunder, without the prior written consent of Gavilon or Producer, which consent shall not be unreasonably withheld.

15.2 Assignment.

15.2.1 Neither Party may assign any of its rights or obligations under this Agreement without the prior written consent of the other Party, not to be unreasonably withheld. A Change in Control of Producer or Gavilon shall be construed to be an assignment for purposes of this Section. The above notwithstanding: (i) Gavilon may, without the need for consent from Producer, (A) transfer, sell, pledge, encumber or assign this Agreement, including the revenues or proceeds hereof, in connection with any financing arrangements, and

(B) transfer or assign this Agreement to an affiliate; and (ii) Producer may, without the need for consent from Gavilon, transfer, sell, pledge, encumber or assign this Agreement, including the revenues or proceeds hereof, in connection with any financing arrangements. In the event the Plant is sold by Producer, Producer shall assign this Agreement to the purchaser of the Plant and require the purchaser to assume all of Producer’s obligations hereunder, provided that such purchaser is reasonably acceptable to Gavilon. No such assignment shall in any way relieve the assigning Party from liability for full performance hereunder. It is further agreed that no such assignment shall be permitted unless the Master Agreement and all other agreements referenced therein are similarly assigned in accordance with their terms.

15.2.2 Cumulative Remedies . Unless otherwise specifically provided in this Agreement, the rights, powers and remedies of each of the Parties provided in this Agreement are cumulative and the exercise of any right, power or remedy under this Agreement does not affect any other right, power or remedy that may be available to either Party under this Agreement or otherwise at law or in equity.

15.3 Records. Producer and Gavilon will each establish and maintain at all times, true and accurate books, records and accounts relating to their own transactions under this Agreement in accordance with generally accepted accounting principles applied consistently from year to year in accordance with good industry practices. These books, records and accounts will be preserved by the applicable Party for a period of at least one (1) year after the expiration of the term of this Agreement, but in no event longer than seven (7) years from the date of creation.

15.4 Audit of Records. Upon five (5) Business Days notice and d uring normal business hours, each Party or its designated auditor has the right to inspect or audit the books, records and accounts of the other Party relating solely to the transactions in this Agreement, provided the right to inspect or audit shall be limited to two (2) calendar years following the completion of any delivery of Product. Each Party’s audit rights as set forth in this Section 15.4 shall survive the termination of this Agreement for a period of two (2) years following such termination. Any error or discrepancy detected which has led to an overpayment or an underpayment between the Parties shall be corrected by an appropriate balancing payment to the underpaid Party or by a refund by the overpaid Party. Such balancing payment or refund shall be made on the first payment date thereafter arising under the Master Agreement.

15.5 Dispute Resolution.

15.5.1 Dispute Notice. The Parties shall make a diligent, good faith attempt to resolve all disputes before either Party commences arbitration with respect to the subject matter of any dispute. If the representatives of the Parties are unable to resolve a dispute within forty five (45) days after either Party gives written notice to the other of a dispute, either Party may, by sending a dispute notice to the other Party, submit the dispute to binding arbitration in accordance with the Governing Body Arbitration Rules, except as such Governing Body Arbitration Rules may be modified by this Agreement.

15.5.2 Appointment of Arbitrators. An arbitration committee shall be appointed pursuant to the Governing Body Arbitration Rules unless the Parties otherwise agree to some other method of selecting one or more arbitrators.

15.5.3 Location. The site of the arbitration shall be determined by the Governing Body, unless otherwise agreed by the Parties.

15.5.4 Diligence; Remedies. The Parties shall diligently and expeditiously proceed with arbitration. The arbitrator(s) shall decide the dispute by majority of the arbitrators (if applicable). The arbitrator(s) shall be instructed to render a written decision within forty five (45) days after the conclusion of the hearing or the filing of such briefs as may be authorized by the arbitrator(s), subject to any reasonable delay due to unforeseen circumstances. Except to the extent the Parties’ remedies may be limited by the terms of this Agreement, the arbitrator(s) shall be empowered to award any remedy available under the laws of the State of Nebraska including, but not limited to, monetary damages and specific performance. The arbitrator(s) shall not have the power to amend or add to this Agreement. The award of the arbitrator(s) shall be in writing with reasons for such award and signed by the arbitrator(s). Any award rendered shall be final and binding. Judgment rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

15.5.5 Waiver of Appellate Review; Enforcement. The Parties hereby waive any rights to appeal or to the review of such award by any court or tribunal. The Parties further undertake to carry out without delay the provisions of any arbitral award or decision, and each agrees that any such award or decision may be enforced by any competent tribunal.

15.5.6 Costs of Arbitration. The costs of such arbitration shall be determined by and allocated between the Parties by the arbitral tribunal in its award.

15.5.7 Independent Agreement. This Section 15.5 constitutes an independent contract between the Parties to, pursuant to the Governing Body Arbitration Rules (except as said Governing Body Arbitration Rules are modified by the express terms of this Agreement), arbitrate all disputes between the Parties related to this Agreement, including, without limitation, disputes regarding the formation of contract(s) and whether either Party is entitled to quasi-contractual or quantum merit recovery from the other Party.

15.5.8 Continuation of Performance. Unless otherwise agreed in writing or as otherwise set forth in this Agreement, the Parties shall each continue to perform their respective obligations hereunder during any proceeding by the Parties in accordance with this Section 15.5.

15.6 Inurement. This Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the Parties, and Producer shall cause the same to be assumed by and to be binding upon any successor owner or operator of the Plant, provided that such successor or assign is reasonably acceptable to Gavilon.

15.7 Entire Agreement. This Agreement, together with the agreements referred to herein as executed pursuant hereto, including the Storage Agreement, Corn Supply Agreement and Master Agreement and any confidentiality or nondisclosure agreements previously executed by the Parties in connection herewith, constitutes the entire Agreement between the Parties with respect to the subject matter contained herein and any and all previous agreements, written or oral, express or implied, between the Parties or on their behalf relating to the matters contained herein shall be given no effect.

15.8 Amendments. There will be no modification of the terms and provisions hereof except by the mutual agreement in writing signed by the Parties. Any attempt to so modify this Agreement in the absence of such writing signed by the Parties shall be considered void and of no effect.

15.9 Governing Law. The Agreement will be interpreted, construed and enforced in accordance with the procedural, substantive and other laws of the State of Nebraska without giving effect to principles and provisions thereof relating to conflict or choice of law even though one or more of the Parties is now or may do business in or become a resident of a different state. Subject to Section 15.5, all disputes arising out of this Agreement shall be resolved exclusively by state or federal courts located in Omaha, Nebraska, and each of the Parties waives any objection that it may have to bring an action in any such court.

15.10 Setoff. In addition to, and without limitation of, any rights hereunder, if Producer becomes insolvent, however evidenced, or upon any Event of Default on the part of Producer, and Producer fails to cure the Event of Default as permitted by Section 13.2 of this Agreement, within the applicable period specified therein, then any and all amounts due and owing by Producer may be applied by Gavilon toward the payment of amounts due and owing to Producer. This right of setoff shall be without prejudice and in addition to any right of setoff, net income, recoupment, a combination of accounts, lien, charge or the right to which Gavilon is at any time otherwise entitled (whether by operation of law, by contract or otherwise). If an amount is unascertained, Gavilon may reasonably estimate the amount to be set-off.

15.11 Forward Contract/Forward Contract Merchants . The Parties agree that each of them is a forward contract merchant as set forth in 11 U.S.C. §101(26). The Parties also agree that this Agreement is a forward contract as defined in 11 U.S.C. §101(25). The payments and transfers described herein shall constitute “Settlement Payments” or “Margin Payments” as set forth in 11 U.S.C. §§101(51A) and (38).

15.12 Compliance with Laws. This Agreement and the respective obligations of the Parties hereunder are subject to present and future valid laws and valid orders, rules and regulations of duly constituted authorities having jurisdiction.

15.13 Furnishing of Information and Further Action. The Parties will, upon request, provide such additional information and take or obtain such further action as may be reasonably required to allow the Parties to efficiently and effectively carry out their respective obligations hereunder and to determine and enforce individual or collective rights under this Agreement, including but not limited to the execution of a contract for arbitration with the Governing Body.

15.14 Faithful Performance and Good Faith. The Parties shall faithfully perform and discharge their respective obligations in this Agreement and endeavor in good faith to negotiate and settle all matters arising during the performance of this Agreement which are not specifically provided for herein.

15.15 No Partnership; Relationship . This Agreement shall not create or be construed to create in any respect a partnership or any agency or joint venture relationship between the Parties. The relationship of Gavilon and Producer established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed: to give either Party the power to unilaterally direct and control the day-to-day activities of the other or to be considered an agent of the other; to constitute the Parties as partners, joint ventures, co-owners or otherwise; or to allow either Party to create or assume any obligation on behalf of the other Party for any purpose whatsoever. Except as otherwise provided herein, nothing

contained in this Agreement shall be construed as conferring any right or benefit on a person not a Party to this Agreement.

15.16 Notice Addresses. Except as specifically otherwise provided herein, any notice or other written matter required or permitted to be given hereunder by one Party to the other Party pursuant to the terms and conditions of this Agreement, shall be deemed to be sufficiently given if delivered by hand or sent by certified mail, nationally recognized delivery service or by fax, and addressed as follows:

If to Gavilon:	Gavilon, LLC Eleven ConAgra Drive Omaha, NE 68102-5011 Attn: Senior Director - Renewable Fuels Fax: (402) 221-0228 Phone: (402) 889-4300 E-mail: Scott.Bunz@gavilon.com
With a copy to:	Gavilon, LLC Eleven ConAgra Drive, STE 11-160 Omaha, NE 68102 Fax: (402) 221-0228 Phone: (402) 889-4027 Attn: Legal Department E-mail: Kathryn.Murphy@gavilon.com
If to Producer:	Heron Lake BioEnergy, LLC 91246 390th Avenue Heron Lake, MN 68301 Fax: (507) 793-0078 Phone: (507) 793-0077 Attn: Bob Ferguson E-mail: bobf@heronlakebioenergy.com
With a copy to:	Lindquist & Vennum PLLP 4200 IDS Center, 80 S. 8th Street Minneapolis, MN 55402 Fax: (612) 371-3207 Phone: (612) 963-0600 Attn: Michael Weaver E-mail: mweaver@lindquist.com

Where this Agreement indicates that notice or information may be provided electronically or by email, such notice or information shall be deemed provided if sent to the email address of such Party indicated above and shall be effective as of the date sent if sent prior to 5:00 p.m. Central Time on a Business Day, otherwise effective as of the next Business Day. Either Party may give notice to the other Party (in the manner herein provided) of a change in its address for notice. Any notice or other written matter shall be deemed to have been given and received: if delivered by hand, certified mail or delivery service on the date of delivery or the date delivery is refused; and, if sent by fax before or during normal business hours, on the Business Day of the sending of the notice and the machine-generated evidence of receipt or if after normal business hours,

on the Business Day following the sending of the notice and the machine generated evidence of receipt.

15.17 Costs to be Borne by Each Party. Producer and Gavilon shall each pay their own costs and expenses incurred in the negotiation, preparation and execution of this Agreement and of all documents referred to herein.

15.18 Counterparts. This Agreement may be executed in multiple counterparts with the same effect as if Producer and Gavilon had signed the same document and all counterparts will be construed together and constituted as one and the same instrument. Each counterpart signature may be executed and delivered to the other Party by facsimile machine or electronic transfer, and the signature as so transmitted shall be as binding upon the executing Party as its original signature, without the necessity of the recipient Party to establish original execution or the existence of such original signature or the document to which affixed, all of which shall be deemed waived.

15.19 Severability. Any provision of this Agreement which is or becomes prohibited or unenforceable in any jurisdiction shall not invalidate or impair the remaining provisions of this Agreement, and the remaining terms of this Agreement shall continue in full force and effect or, if allowed by the law of the applicable jurisdiction, it shall be amended so as to most closely conform to the original intent of this Agreement without the offending provision, and as so amended shall continue in full force and effect.

15.20 Headings; Interpretations . The article and section headings used herein are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. Unless the context of this Agreement otherwise requires, (i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or plural number shall also include the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,” “hereby,” “hereto,” and derivative or similar words shall refer to this entire Agreement. This Agreement is the product of negotiation by and among the Parties hereto. This Agreement shall be interpreted and construed neutrally as to all Parties, without any Party deemed to be the drafter of this Agreement.

15.21 Waiver. No delay or omission in the exercise of any right, power or remedy hereunder shall impair such right, power or remedy or be construed to be a waiver of any default or acquiescence therein.

15.22 Interpretation . This Agreement shall not be interpreted against the Party drafting or causing the drafting of this Agreement. All Parties hereto have participated in the preparation of this Agreement. In the event of an inconsistency between or among the following documents entered into by the Parties, the following order of precedent shall govern:

15.22.1 The Master Agreement to the extent specifically referenced herein;

15.22.2 This Agreement; and

15.22.3 A Confirmation, confirmation of purchase and sale transaction, or other document used for the purposes of a Confirmation, including but not limited to, any general terms contained therein.

15.23 Incorporation of Exhibits/Schedules . The exhibits and schedules attached hereto form an integral part of this Agreement and are hereby incorporated herein by reference.

[The Remainder of This Page Intentionally Left Blank; Signature Page Follows.]

IN WITNESS WHEREOF the Parties have executed this Agreement by their respective proper signing officers as of the Commencement Date.

	GAVILON, LLC


	By:	John W. Neppl

	Its:	CFO

	Date:	8/30/11


	HERON LAKE BIOENERGY, LLC


	By:	Robert J. Ferguson

	Its:	CEO

	Date:	August 30, 2011

Ethanol and Distiller’s Grains Marketing Agreement

Signature Page

EXHIBIT “A”

ETHANOL SPECIFICATIONS

Specification Points	Test Method	Shipments		Deliveries(1)

Apparent Proof, 60°F	Hydrometer	Report
Or Density, 60°F	ASTM D-4052	Report

Water, Volume %, Maximum	ASTM E-203 or E-1064	1.24

Ethanol, Volume %, Minimum	ASTM D-5501	92.1		93.0

Methanol, Volume%, Maximum	ASTM D-5501	0.5

Sulphur, ppm (wt/wt), Maximum	ASTM D5453	10

Solvent Washed Gum,	ASTM D-381
mg/100mL	Air Jet Method
Maximum		5

Potential Sulfate, mass ppm	ASTM D7319
Maximum		4

Chloride, mg/L	ASTM D-512-81
Maximum	Procedure C,	32
	Modified per D-4806

Copper, mg/L	ASTM D-1688
Maximum	Method A,	0.08
	Modified per D-4806

Acidity (as acetic acid), Mass %	ASTM D-1613
Maximum		0.007

pHe	ASTM D-6423
Minimum		6.5
Maximum		9.0

Appearance @ 60°F	Visual Examination	Visibly free of suspended or precipitated contaminants. Must be clear and bright.

Denaturant Content and Type(2)
Volume%		2

Corrosion Inhibitor Additive,	Minimum treat rate	Vendor	Additive
One of the following is required:	20 lbs./1000 bbls.	Octel	DCI-11
	20 lbs./1000 bbls.	G. E. Betz	Endcor GCC9711
	20 lbs./1000 bbls.	Petrolite	Tolad 3222
	20 lbs./1000 bbls.	Nalco	5403
	20 lbs./1000 bbls.	Betz	ACN 13
	20 lbs./1000 bbls.	Midcontinental	MCC5011E
	13 lbs./1000 bbls.	Midcontinental	MCC5011PHE
	13 lbs./1000 bbls.	Petrolite	Tolad 3224
	13 lbs./1000 bbls.	US Water Services	Corrpro 654
	15 lbs./1000 bbls.	Nalco	5624A
	13 lbs./1000 bbls.	US Water Services	Corrpro 656

(1) Delivered products meets all applicable requirements at time and place of delivery.

(2) Only approved denaturants listed in D4806. The denaturant range must be within the guidelines provided for in IRS Notice 2009.06, which is 1.96% to no more than 2.5%.

EXHIBIT “B”

CO-PRODUCT SPECIFICATIONS

Unless otherwise set forth in a specific feed tag or confirmation, all distiller’s grains shall comply with the following specifications, which specifications may be adjusted by Gavilon upon notice to Producer, to include specifications for other distiller’s grains not listed below or to conform to market standards and specifications included in Gavilon’s other marketing agreements for similar products. In the event of any discrepancy between a specific feed tag or confirmation and a specification set forth in this Exhibit “B”, the specification set forth in the feed tag or confirmation shall be binding.

	Crude Protein		Crude Fat		Crude Fiber		Maximum Ash
	Min		Min		Max		Max		Moisture
Dry Distiller’s Grain	25	%	7.5	%	15	%	5.5	%	12.5% Maximum
Modified Wet Distiller’s Grain	11	%	4	%	5.5	%	3	%	60% Maximum

EXHIBIT “C-1”

CONFIRMATION

CONFIRMATION OF PURCHASE AND SALE TRANSACTION

[ADDRESS]

[DATE]

This letter shall confirm the agreement reached on [ ], 20 between, Gavilon, LLC (“ Gavilon ”) and Heron Lake BioEnergy, LLC (“ Counterparty ”) regarding the sale and purchase of under the terms and conditions as follows:

PRODUCER:

BUYER:

COMMODITY:

TYPE / QUALITY:

CONTRACT QUANTITY:

CONTRACT PRICE:

DELIVERY POINT(S):

PERIOD OF DELIVERY:		To

OTHER TERMS:

This Confirmation is being provided pursuant to and in accordance with the Ethanol and Distiller’s Grains Marketing Agreement dated as of August , 2011 (the “ Master Agreement ”) between Gavilon and Counterparty, and constitutes part of and is subject to all of the terms and provisions of such Master Agreement. Terms used but not herein defined shall have the meanings ascribed to them in the Master Agreement.

Please confirm that the terms stated herein accurately reflect the agreement between you and Gavilon by returning an executed copy of this Confirmation by facsimile to Gavilon. If you do not execute and return this Confirmation by 5:00 p.m. Central Standard (or Daylight) Time on the second (2 nd ) Business Day following your receipt hereof, you will be deemed to have accepted and agreed to all of the terms included herein, including the terms and provisions of the Master Agreement.

“Gavilon”			“Counterparty”
GAVILON, LLC			Heron Lake BioEnergy, LLC

By:			By:
Name:			Name:
Title:			Title:
Date:			Date:

EXHIBIT “C-2”

FORM OF CONFIRMED ORDER

[Letterhead]	Contract of Purchase

Seller:	Date:
[SELLER ADDRESS]	Our No:
	Your No:
	Broker: Broker No:
	Broker Cont.

Buyer: GAVILON, LLC-OMAHA 11 CONAGRA DRIVE OMAHA NE 68102 Ph#: (402)889-4371

BUYER AND SELLER HEREBY AGREE TO, AND CONFIRM, THE PURCHASE AND SALE OF THE REFERENCED COMMODITIES, SUBJECT TO THE TERMS AND CONDITIONS STATED BELOW AND ON THE REVERSE SIDE OF THIS CONFIRMATION. FAILURE TO ADVISE GAVILON VIA E-MAIL, FAX, OR OTHER WRITTEN FORM WITHIN FIVE (5) BUSINESS DAYS FOLLOWING YOUR RECEIPT OF THIS CONFIRMATION OF ANY DISCREPANCY, OBJECTION TO, OR DISAGREEMENT WITH THIS CONFIRMATION SHALL RESULT IN THIS CONFIRMATION’S AUTOMATICALLY BEING DEEMED ACCEPTED BY YOU.

Commodity:	DISTILLER’S GRAINS
Quantity:
Shipment:
Price:
Shipping Basis:
Weights To Apply:
Terns:

Remarks:

NOTE: The lack of a signature shall not prevent a valid and binding agreement from being formed between the parties.

The provisions of: (a) the Electronic Signatures in Global and National Commerce Act (“E-Sign”); (b) the Uniform Electronic Transactions Act (“UETA”); and (c) Amended Article 2 of the Uniform Commercial Code relating to electronic contracting (“Amended Article 2”) shall apply to this contract. In the event of a conflict between or among the provisions of any of the foregoing, such conflict shall be resolved as follows: (y) the provisions of E-Sign shall have precedence over those of UETA; and (z) the provisions of UETA shall have precedence over those of Amended Article 2. However, all such provisions shall be reasonably interpreted so as to avoid conflicts between or among them. Nothing in this provision shall be interpreted or deemed to be a waiver of any other rule of evidence governing the admissibility of an Imaged Document.

Terms and Conditions

1. Whether or not Seller is an active member of any of the following associations, and to the extent not inconsistent with the terms and conditions of this Contract, the rules, regulations and standards of the following associations (the “Associations”) shall apply respectively to each of the commodities governed thereby: the National Grain and Feed Association, the American Fats and Oils Association, the National Oilseed Processors Association, the American Dehydrators Association, the Canadian Oilseed Processors Association, and the National Cottonseed Products Association. If more than one Association purports to govern a given commodity, the rules and regulations of the association appearing later in the list shall apply.

2. Buyer and Seller may be collectively referred to as “the Parties” or individually as “the Party”.

3. Whether or not an active member of any of the Associations referenced in Paragraph I hereof, Seller acknowledges that it understands the provisions of the applicable Association’s rules, regulations and standards, and Seller agrees to be bound thereby. The Parties agree to settle any controversies hereunder by arbitration, that the arbitration rules of the applicable Association shall be the basis of said arbitration or if the applicable Association does not have arbitration rules, then according to the rules of the American Arbitration Association, and that the decision and award determined by such arbitration shall be final and binding upon the Parties.

4. It is agreed that neither Party to this Contract shall delegate the performance of any obligation hereunder nor assign any rights arising hereunder, to any third person without the prior written consent of the other Party.

5. Seller warrants that commodities delivered under this Contract will be free and clear, from and after time of delivery, of any security interest, lien, claim or encumbrance and that Seller has good and merchantable title thereto. Seller agrees that should any lien, security interest or encumbrance be claimed against any commodity sold hereunder, Seller will immediately cause the same to be discharged and terminated; and, will hold Buyer harmless therefrom; and, indemnity Buyer from any costs or losses incurred as a result of such claim.

6. Seller expressly represents and warrants that the commodity or commodities hereby purchased are of the grade indicated, and if none is indicated, that the commodity or commodities are suitable for feeding to poultry and livestock. Seller indemnifies and holds Buyer harmless against any liability, loss, cost, expense or damage related to the failure of any portion of the commodities purchased hereunder to meet Food and Drug Administration or other applicable governmental agency’s rules, regulations and standards for said commodity, as well as the applicable Association’s (as referenced in paragraph I hereof) rules, regulations, and standards for such commodity. Buyer’s payment will not constitute acceptance of a commodity sold hereunder or serve to waive Buyer’s rights to reject the commodity or recover damages should the commodity fail to comply with the terms or specifications of this Contract. Buyer specifically reserves all rights and remedies available to it under the applicable Association’s (referenced in Paragraph I hereof) rules, regulations, and standards; and the Uniform Commercial Code in effect within the jurisdiction under which this Contract is governed, if any of the commodity sold hereunder fails to comply with the warranties, descriptions, and requirements set forth in this Contract, or the applicable Association’s rules, regulations, and standards. In addition to and without waiving any of Buyer’s other remedies hereunder, Buyer may, at its sole option, request that the Seller replace any or all portions of any shipment of commodities hereunder which fails to comply with the terms of this Contract; said replacement shipment to be at Sellers sole cost and expense and occur within seven (7)days of Sellers receipt of Buyer’s notice of the commodity’s non-compliance with this Contract.

7. Buyer expressly reserves the right to cancel this Contract within the meaning of UCC section 2106 based upon the occurrence of any of the following: (a) the insolvency or financial condition of Seller; (b) the appointment for taking possession of any Seller’s assets or any part thereof by any third party, including a trustee, receiver, creditor or other party; (c) the breach of any warranty; or, (d) any other defaults hereunder.

8. This Contract assumes Buyer is purchasing free-flowing commodities. In the event any commodity arrives at its destination and does not freely flow, Buyer reserves the right to reject the shipment. If Buyer rejects the shipment Seller shall be responsible for all transportation, rail, freight and delivery charges.

9. In the event Seller breaches this Contract in any manner, Seller shall be liable to Buyer for any and all damages, including consequential damages, incidental damages, and any lost profits incurred as a result thereof and shall pay Buyers reasonable attorney fees, court costs and expenses incurred in the enforcement of this Contract and any collection activities related thereto.

10. In the event that a party hereto (the “Defaulting Party”) becomes insolvent, or suffers or consents to or applies for the appointment of a receiver, trustee, custodian or liquidator of itself or any obits property, or generally fails to pay its debts as they become due, or makes a general assignment for the benefit of creditors, or files a voluntary petition in bankruptcy, or seeks reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title II of the United States Code, as amended or recodified from time to time, or under any state or federal law granting relief to debtors then the other party (the ‘‘Non-defaulting Party”) may (i) immediately cancel this Contract and all other Contracts between the parties hereto, (ii) liquidate such cancelled Contracts in a commercially reasonable manner, and (iii) aggregate such liquidated amounts into a single liquidated settlement amount (the “Settlement Amount”) due, which shall be due and payable two (2) business days after written notice by the Non-defaulting Party. In addition, the Non-defaulting Party may set-off any amounts owed by the Defaulting Party to the Non-defaulting Party under any other agreements between the parties against any Settlement Amount owed by the Non-defaulting Party to the Defaulting Party hereunder. The parties agree that each of them is a forward contract merchant as set forth in II U.S.C. Section 101(25). The parties also agree that this Contract and any other commodity contract between the parties are all forward contracts as defined in II U.S.C. Section 101(25). The payments and transfers described herein shall constitute “Settlement Payments” or “Margin Payments” as set forth in II U.S.C. Sections 101(5IA) and (38).

11. Railcars must be loaded to capacity as required by railroad companies. Seller to pay weighing, inspection, trackage, and interest charges, if any. reconsigned rail cars cannot be utilized on this Contract unless consented to by Buyer in writing prior to loading. Buyer reserves the right to change destination offal shipments prior to departure of the railcar from Sellers facility.

12. If confirmation calls for delivery beyond fourteen (14) days from the date of this Contract, Buyer may demand from Seller a margin deposit often percent (10%) of the gross value of this Contract to be considered as margin on equity, and Buyer may demand such further payments from Seller as may be necessary to maintain a deposit on this Contract often percent (10%) of the gross value of this Contract, plus an amount equal to the difference between the contract-price-value and the prevailing market price-value, if the market is above the Contract price. Seller agrees to pay such margin on demand and if not paid, Buyer may exercise the same rights as if Seller had defaulted on this Contract.

13. Each Party consents to the recording of all telephone conversations between its representatives and the representatives of the other Party.

14. Any provision of this Contract which is prohibited or unenforceable in any jurisdiction shall, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

15. Seller warrants it has read this Contract in its entirety and understands its terms and legal effect. This Contract constitutes the entire understanding between the Parties hereto and no modification or amendment of this Contract shall be valid or binding unless agreed to by both Parties and confirmed by a writing signed by the party to be charged. Seller agrees that the terms hereof are acceptable and that Seller intends to be bound by the terms of this Contract even if said terms differ from or conflict with the terms or conditions contained in Sellers offer, acceptance on form of contract for such purchase.

16. Unless otherwise exempt, this Contract incorporates by reference the EEO Clause contained in 41 C.F.R. Sections 60-1.4, 60-741.5, and 60-250.5.

17. Any original contract and/or transaction confirmation relating to a transaction between the parties may be converted to and saved in electronic format (the “Imaged Document”). Each party waives any objection it may have to the admissibility of such Imaged Document in any judicial, arbitration, mediation, administrative, or other proceeding involving the parties to the extent such objection is based on any rule of evidence that: (a) requires authentication or identification of the Imaged Document; (b) requires an original document; or (c) governs the admissibility of duplicates. In addition, each party acknowledges that Imaged Documents are business records within the meaning of the business records exception to the hearsay rule.

EXHIBIT “D”

INSURANCE COVERAGES

Commercial General Liability Insurance - $1,000,000 per occurrence/$2,000,000 aggregate

Environmental Pollution Liability Insurance - $1,000,000 per occurrence/$2,000,000 aggregate

Policy shall include coverage for bodily injury or property damage arising from the handling, storage, processing, discharge or dispersion of pollutants on or about the Producer’s premises. Such insurance may be on an occurrence basis or claims-made basis.

Prior to the initial sale of Product and at all times during the Term of the Agreement, Producer and Gavilon shall carry insurance in accordance with the requirements described above. These requirements may be satisfied by issuance of separate policies or a combination of policies with umbrella/excess liability policies.

Producer and Gavilon shall also carry excess or umbrella liability insurance with limits of at least $4,000,000 per occurrence for bodily injury or property damage in excess of the limits afforded for general liability provided above.

Producer shall also carry the following insurance coverages:

All Risk Property insurance coverage for the Product and any Grain (as defined in the Storage Agreement) which is located at the Plant and not part of the Product. All Grain shall be insured for the full market value and property insurance coverage will include, but not be limited to, perils of wind, fire, lightning, flood, theft and infestation.

Producer and Gavilon shall provide notification to the respective party at least thirty (30) days prior to the effective date of any cancellation or change that would affect the insurance requirements described above or put them out of compliance of such policies. In the event that a Party receives notice that the other Party’s insurance shall be canceled, and in the event that the Party receiving notice does not receive a subsequent Certificate of Insurance showing that the other Party is in compliance with the insurance requirements set forth above, the Party receiving notice shall have the right to either (i) purchase insurance for the defaulting Party and set off all costs for such insurance in accordance with the terms of the Master Agreement, or (ii) terminate this Agreement.

Exhibit 10.50

MASTER NETTING, SETOFF, CREDIT AND SECURITY AGREEMENT

(HERON LAKE, MINNESOTA)

THIS MASTER NETTING, SETOFF, CREDIT AND SECURITY AGREEMENT (the “ Master Agreement ”) is dated and made effective as of September 1, 2011, by and between HERON LAKE BIOENERGY, LLC , a Minnesota limited liability company (“ Producer ”), and GAVILON, LLC , a Delaware limited liability company (“ Gavilon ”) (each of Producer and Gavilon is a “ Party ” and together they are collectively referred to as the “ Parties .”)

RECITALS:

(a) Producer and Gavilon are Parties to a certain Corn Supply Agreement (“ Corn Supply Agreement ”) and a certain Ethanol and Distiller’s Grains Marketing Agreement (“ Ethanol and DDG Agreement ”), each of even date herewith (collectively, the “ Supply Agreements ”).

(b) The Supply Agreements require each Party to make payment to, and to perform various supply and other obligations for, the other Party.

(c) Gavilon, Producer and Producer’s wholly-owned subsidiary Lakefield Farmers Elevator, LLC, are parties to that certain Corn Storage Agreement, of even date herewith (“ Storage Agreement ”).

(d) Each Party desires to have the right to setoff, net, liquidate and complete the transactions under the Supply Agreements and the Storage Agreement in accordance with the terms hereof, and this Master Agreement is entered into in reliance on the Parties’ agreements herein.

(e) The Parties further desire to set forth and establish certain credit and security obligations required in connection with the Supply Agreements and Storage Agreement (if applicable).

AGREEMENT :

NOW, THEREFORE, in consideration of the above recitals and the mutual promises and covenants set forth herein, Gavilon and Producer mutually agree as follows:

1. Definitions. Except as defined herein or on Exhibit “A” , all capitalized terms shall have the meanings given to them in the Supply Agreements.

2. Netting of Payments.

2.1 Payment Dates. Any invoices received and owed by the Parties pursuant to the Supply Agreements during each week shall be due and payable five (5) Business Days following receipt of the Netting Statement, in each case subject to the provisions set forth in Section 2.5 (each a “ Payment Date ”).

2.2 Netting Statements. Each week Gavilon shall provide Producer with a netting statement which identifies the Parties’ respective payment obligations under the Supply Agreements for the prior week (the “ Netting Statement ”), and the difference of the greater amount owed by either Party less the amount owed by the other Party (the “ Net Settlement ”). By way of example and not limitation, any invoices received and owed by the Parties pursuant to the Supply Agreements during the week of January 1-7, 2012 shall be identified in a Netting Statement issued by Gavilon during the week of January 8—14, 2012. Gavilon shall determine the day of the week that Netting Statements shall be issued and shall thereafter maintain the same day of the week for issuing such Statements, in each case subject to the provisions set forth in Section 2.5. Each Netting Statement shall include the cost of the Corn to Producer for any Limited Sales (as defined in the Corn Supply Agreement) made by Producer during the applicable payment period. The Net Settlement shall be paid by the Party owing the greater amount. Payment shall be made via wire transfer to the other Party on the applicable Payment Date.

2.3 [ * * * ] .

2.4 Disputed Amounts. Producer may, within three (3) Business Days of receiving a Netting Statement, notify Gavilon of any initial disputes it may have with respect to such Netting Statement. If any portion of the Net Settlement remains subject to dispute as of an applicable Payment Date, the disputed amount shall nonetheless be paid and then resolved pursuant to the terms of the applicable Supply Agreement. Any refund or additional amounts owed by either Party to the other Party shall be promptly paid upon resolution of the dispute. In the event that any disputed amount is not resolved within thirty (30) days after the Payment Date applicable to the disputed amount, then interest shall begin to accrue on the refund or additional amounts determined to be owed by either Party to the other Party until paid in full at the per annum rate equal to the lesser of (A) [ * * * ] plus [ * * * ] basis points or (B) [ * * * ], whereby such interest rate shall be adjusted periodically based upon rates then in effect. Notwithstanding the foregoing procedures, no failure on the part of Producer to notify Gavilon of any initial dispute it may have with respect to a Netting Statement within three (3) Business Days of receiving such Netting Statement shall operate as a waiver of Producer’s right to finally and fully dispute a Netting Statement within one (1) year of the date of any Netting Statement, and the Parties acknowledge and agree that such one-year period is reasonable regardless of any audit rights under the Supply Agreements.

2.5 Holidays. If the Payment Date falls on a Saturday or Holiday other than a Monday, payment shall be made on the preceding banking day. If the Payment Date falls on a Sunday or Monday Holiday, payment shall be made on the succeeding banking day. In addition, the second Payment Date in the month of February shall occur on the last day of such month (for deliveries occurring during days 14 through 26 of such month).

3. Credit and Security Requirements.

3.1 Credit Requirements. If at any time and from time to time during the Term (and notwithstanding whether an event of default has occurred under the Supply Agreements) a Party’s (the “ Secured Party ”) Exposure, as determined by the

Valuation Agent, exceeds the Threshold Amount applicable to the other Party (the “ Pledgor ”) (such excess amount herein called the “ Delivery Amount ”), the Secured Party may provide notice of such Delivery Amount to the Pledgor. Upon receipt of written notice of the existence of a Delivery Amount, the Pledgor shall deliver Margin to the Secured Party in an amount equal to the Delivery Amount (less the amount of any other Margin then held by Secured Party in excess of the Threshold Amount), subject to the Margin rounding provisions in Section 3.2 of this Master Agreement. Such Delivery Amount shall be due by 5:00 p.m. on the Business Day following the Pledgor’s receipt of the Secured Party’s request for such Delivery Amount, if such request is received by 12:00 p.m. If such request is received after 12:00 p.m., then such Delivery Amount shall be due by 5:00 p.m. on the second Business Day following the Pledgor’s receipt of such demand.

On any Business Day (but no more frequently than weekly with respect to any Letters of Credit and daily with respect to cash), the Pledgor, at its sole cost, may request that the amount of Margin held by the Secured Party be reduced by the amount (the “ Return Amount ”) by which the Margin previously delivered by the Pledgor exceeds (i) the amount corresponding to the Secured Party’s Exposure (as determined by the Valuation Agent), minus (ii) the Pledgor’s Threshold Amount. Any Return Amount shall (i) be rounded as provided herein, and (ii) be delivered to the Pledgor within two (2) Business Days of the Pledgor’s request therefor.

3.2 Rounding. Any Delivery Amount shall be rounded upwards to the next whole multiple of $10,000 and any Return Amount shall be rounded downward to the next whole multiple of $10,000 unless the Return Amount is $9,999.99 or less, in which case the Return Amount shall be rounded to zero.

3.3 Security Interests.

3.3.1 Posted Margin. Each Party, as the Pledgor, hereby pledges and grants to the other Party, as the Secured Party, as security for its obligations under this Master Agreement, a first priority continuing security interest in all Margin transferred to or received by the Secured Party hereunder and all distributions and proceeds and products of any non-cash Margin (collectively, the “ Posted Margin ”). Upon the transfer by the Secured Party back to the Pledgor of any amount of Posted Margin, the security interest granted hereunder in that amount of Posted Margin will be released immediately and, to the extent possible, without any further action by either Party. Upon demand made by the Secured Party, the Pledgor shall execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by the Secured Party to create, preserve, perfect or validate any security interest or lien granted hereunder, to enable the Secured Party to exercise or enforce its rights hereunder with respect to Posted Margin or to effect or document a release of a security interest in Posted Margin. The Pledgor will promptly give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Margin transferred by the Pledgor or that could adversely affect the security interest granted by it hereunder.

The Secured Party will exercise due care to assure the safe custody of all Posted Margin under laws applicable to custodians of funds. Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Margin, including, without limitation, any duty to collect any distributions, or to enforce or preserve any rights pertaining thereto. The Secured Party will be entitled to hold Posted Margin in accordance with the terms hereof so long as it is not a defaulting Party and, in such event, shall appoint a non-affiliate independent custodian in the business of acting as custodian of funds to hold such Posted Margin on its behalf; provided, however, the long-term unsubordinated unsecured debt of the custodian is rated at least “A” by S&P or at least “A2” by Moody’s. Posted Margin shall in any case be held only in the continental United States.

3.3.2 Producer’s Non-Fixed Assets. Subject to obtaining consent from Producer’s senior lender(s) in the form of either Exhibit “C” attached hereto or an intercreditor agreement mutually agreed upon between Gavilon and such senior lender(s), Producer hereby grants to Gavilon a first priority continuing security interest in, and a right to set off against, any and all right, title and interest of Producer in and to all of the following, whether now owned or existing or owned, acquired or arising hereafter (collectively, the “ Non-Fixed Assets ”): (i) the Corn (as defined in the Corn Supply Agreement), (ii) the Ethanol Product and Co-Product (each as defined in the Ethanol and DDG Agreement), (iii) the Grain (as defined in the Storage Agreement), if applicable, (iv) the work in process at the Plant, (v) the transactions arising under the Supply Agreements and (vi) all accounts, claims, general intangibles, letter-of-credit rights, money, receivables, accessions or other proceeds arising from any or all of the foregoing, with each such term in this provision (vi) having the meaning as set forth in the UCC. Upon demand made by Gavilon, Producer shall execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by Gavilon to create, preserve, perfect or validate any security interest or lien granted hereunder, to enable Gavilon to exercise or enforce its rights hereunder with respect to Non-Fixed Assets or to effect or document a release of a security interest in Non-Fixed Assets. Producer will promptly give notice to Gavilon of, and defend against, any suit, action, proceeding or lien that involves Non-Fixed Assets transferred by Producer or that could adversely affect the security interest granted by it hereunder.

Gavilon will exercise reasonable care to assure the safe custody of all Non-Fixed Assets, and, in any event, Gavilon will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property. Except as specified in the preceding sentence, Gavilon will have no duty with respect to the Non-Fixed Assets, including, without limitation, any duty to collect any distributions, or to enforce or preserve any rights pertaining thereto. Gavilon will be entitled to hold Non-Fixed Assets so long as it is not a defaulting Party and, in such event, shall appoint a custodian to hold such Non-Fixed Assets on its behalf; provided, however, the long-term unsubordinated unsecured debt of the custodian is rated at least “A” by

S&P or at least “A2” by Moody’s. Non-Fixed Assets shall in any case be held only in the continental United States.

3.4 Representations, Warranties and Covenants. Each of Producer and Gavilon (as applicable) represents, warrants and covenants to the other that:

(a) Except as set forth in Sections 3.3.1 and 3.3.2 and as allowed under Section 5.3, it has not assigned, transferred, created or permitted to exist any lien or other encumbrance on, or otherwise disposed of, or purported to assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of, the Posted Margin, the Non-Fixed Assets or any of its rights to any amounts that may be owed to it under the Supply Agreements to any third party, and covenants that, so long as this Master Agreement is in effect, it will not assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of or purport to assign, transfer, create or permit to exist any lien or other encumbrance on, or otherwise dispose of, the Posted Margin, the Non-Fixed Assets or any of its rights to any amounts that may be owed to it under the Supply Agreements, to any third party; provided, however, Producer may dispose of the Ethanol Product and Co-Product to a third party under certain circumstances as allowed under the Supply Agreements;

(b) Subject to Gavilon entering into an intercreditor agreement with Producer’s senior lender(s) as described in Section 3.3.2 above, this Agreement creates a valid security interest in favor of Gavilon, for the benefit of Gavilon, in the Non-Fixed Assets and Posted Margin of Producer and, when properly perfected by filing, shall constitute a valid and perfected, first priority security interest in the Non-Fixed Assets and Posted Margin to the extent such security interest can be perfected by filing under the UCC;

(c) It shall not, without providing ten (10) days prior written notice to the other Party, (i) change its name or state of formation or (ii) use any trade name other than as set forth on Schedule 3.4(c) hereto;

(d) It is not relying upon any representations of the other Party other than those expressly set forth in this Master Agreement, the Supply Agreements or any confirmation issued pursuant thereto;

(e) It has entered into this Master Agreement with a full understanding of the material terms and risks of the same, and it is capable of assuming those risks; and

(f) The Parties agree that this Master Agreement, the Supply Agreements, and the transactions thereunder form a single integrated agreement. Each Party has received consideration hereunder for its agreement to treat each of the Supply Agreements and this Master Agreement as one integrated agreement.

3.5 Interest on Margin. Assuming no event of default has occurred as set forth in Section 4.1 with respect to the Pledgor, the Secured Party will transfer to the Pledgor, by no later than the tenth (10 th ) day of each month, the interest amount (calculated at a percentage equal to the lesser of (i) [ * * * ] plus [ * * * ] basis points, or (ii) [ * * * ], whereby such interest rate shall be adjusted periodically based upon rates then in effect), attributable to any cash Margin posted by the Pledgor during the time such Margin is held by the Secured Party during the

previous month, as calculated by the Valuation Agent. Any such interest amount or portion thereof which is not transferred to the Pledgor pursuant to this Section 3.5 will constitute Posted Margin and will be subject to the security interest granted under Section 3.3.1 of this Master Agreement.

3.6 Financial Information. Each Party shall deliver to the other Party within forty-five (45) days following the end of each fiscal quarter and within one hundred twenty (120) days following the end of each fiscal year, as applicable, a copy of its quarterly financial statements and its annual report containing audited consolidated financial statements certified by independent certified public accountants. In all cases the statements shall be for the most recent accounting period and prepared in accordance with generally accepted accounting principles, consistently applied.

4. Close-Out/Remedies/Settlement.

4.1 Right to Close-Out Transactions; Remedies. Upon the occurrence of an event of default or termination event set forth in (i) any or either of Sections 8.2 or 8.3 of the Corn Supply Agreement, (ii) Article 13 of the Ethanol and DDG Agreement , or (iii) Section 15 of the Storage Agreement, or (iv) upon a default of any payment obligation under this Master Agreement, and after the expiration of any applicable cure periods in any of the foregoing, if any, without the required cure being provided or undertaken (as applicable), the non-defaulting Party shall immediately have the right to close out (i.e., accelerate, terminate, liquidate and cancel) all (but not less than all) of the transactions under the Supply Agreements, other than those which in the commercially reasonable judgment of the non-defaulting Party are commercially impracticable or illegal to terminate, by providing written notice to the defaulting Party; however, no notice shall be required for the close-out of any transaction that has been closed out by its own terms prior to the delivery of such notice.

If an above-described event of default or termination event occurs (and following expiration of any applicable cure period), the non-defaulting Party shall have the right to: (i) withhold any payments and/or suspend performance for transactions under the applicable Supply Agreement, provided, however, that the right to suspend payment and/or performance under such transactions shall be limited to a single fourteen (14) day period, unless the non-defaulting Party has provided notice of close-out specifying an earlier termination date (in which event suspension of payment and performance may continue until such date); (ii) exercise rights of setoff, netting, recoupment and otherwise pursuant to the terms of this Master Agreement; (iii) retain, draw on, liquidate and apply any Margin delivered by the defaulting Party against amounts owed to the non-defaulting Party; and (iv) give notice to the defaulting Party specifying the relevant event of default and that the non-defaulting Party is exercising its rights pursuant to this Master Agreement by declaring the defaulting Party in default under the Supply Agreements or the Storage Agreement and all transactions thereunder, and designating a day, no earlier than three (3) days after the day such notice is effective and no later than twenty (20) days after such notice is effective, as the close-out date for all such transactions. The non-defaulting Party’s exercise of rights pursuant to the terms hereof shall be without prejudice to any other or further exercise of rights or remedies which the non-defaulting

Party may possess, including, but not limited to, maintaining an action for breach of contract.

4.2 Additional Remedies. In addition to the rights and remedies set forth in Section 4.1 above, upon the occurrence of an event of default and during the continuation thereof, Gavilon shall have the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights and remedies are asserted and regardless of whether the UCC applies to the affected collateral) and, further, Gavilon may, with or without judicial process or the aid and assistance of others, (i) enter on any premises owned by Producer or its wholly-owned subsidiary Lakefield Farmers Elevator, LLC, or (to the extent lawful or permitted) any leased premises on which any of the Non-Fixed Assets may be located and, without resistance or interference by Producer, take possession of the Non-Fixed Assets, (ii) liquidate any Non-Fixed Assets on any such premises, (iii) require Producer to assemble and make available to Gavilon or its assigns at the expense of Producer any Non-Fixed Assets at any place and time designated by Gavilon that is reasonably convenient to both parties, (iv) remove any Non-Fixed Assets from any such premises for the purpose of effecting sale or other disposition thereof, and/or (v) without demand and without advertisement, notice, hearing or process of law, all of which Producer hereby waives to the fullest extent permitted by law, at any place and time or times, sell and deliver any or all Non-Fixed Assets held by or for it at public or private sale, at any exchange or broker’s board or elsewhere, by one or more contracts, in one or more parcels, for money, upon credit or otherwise, at such prices and upon such terms as Gavilon deems advisable, in its sole discretion (subject to any and all mandatory legal requirements). Producer acknowledges that any private sale referenced above may be at prices and on terms less favorable to the seller than the prices and terms that might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sale shall be deemed to have been made in a commercially reasonable manner, provided such private sale is conducted and completed in accordance with applicable law under UCC (except as otherwise waived herein). Gavilon’s disclaimer of warranties relating to the Non-Fixed Assets shall not be considered to adversely affect the commercial reasonableness of any sale. In addition to all other sums due to Gavilon under this Master Agreement or the Supply Agreements, Producer shall pay Gavilon all reasonable out-of-pocket costs and expenses incurred by Gavilon, including, but not limited to, reasonable and documented attorneys’ fees of outside counsel and court costs, in obtaining or liquidating the Non-Fixed Assets or in enforcing payment of the secured obligations. Producer agrees that any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to Producer in accordance with the notice provisions of the Corn Supply Agreement at least ten (10) days before the time of sale or other event giving rise to the requirement of such notice. Gavilon shall not be obligated to make any sale or other disposition of the Non-Fixed Assets regardless of notice having been given. To the extent permitted by applicable law, Producer hereby waives all of its rights of redemption with respect to any such sale.

4.3 Determination and Settlement of Settlement Amounts. As of the close-out date specified by the non-defaulting Party: (i) all the transactions under the Supply Agreements shall be closed out (or, to the extent that in the commercially reasonable judgment of the non-defaulting Party it is impractical or illegal to close out certain of such transactions, such transactions shall instead be closed out on the date or dates determined by the non-defaulting Party occurring as soon after

the close-out date as is reasonably practicable), subject to the rights of setoff, netting, recoupment, and otherwise as may be provided for herein or at law; provided, however, that if an obligation is unascertainable, the non-defaulting Party may, acting in a commercially reasonable manner, estimate the amount of such obligation and setoff, netting or recoup in respect of the estimate, subject to accounting to the defaulting Party when the obligation is ascertained; and (ii) the non-defaulting Party shall calculate the Settlement Amount for each terminated transaction or group of terminated transactions and determine the Settlement Amount with respect to each of the Supply Agreements, and shall calculate the resulting Final Net Settlement Amount.

Promptly after determination of the Final Net Settlement Amount, the non-defaulting Party shall determine the single amount (if any) payable by one Party to the other Party hereunder and provide the defaulting Party with a statement showing (in commercially reasonable detail) the calculation of the Final Net Settlement Amount. If the Final Net Settlement Amount is a positive amount, then such amount shall be owed by the defaulting Party to the non-defaulting Party; and if the Final Net Settlement Amount is a negative amount, then the absolute value of such amount shall be owed by the non-defaulting Party to the defaulting Party, subject to the rights of the non-defaulting Party to setoff, recoup, withhold or suspend payment as set forth in this Master Agreement or at law. The Final Net Settlement Amount shall be payable by the Party from whom such payment is due on the second (2nd) Business Day after which the statement is provided by the non-defaulting Party. If all or any portion of the Final Net Settlement Amount is not paid on or before such date, then the unpaid amount shall bear interest at a rate equal to the lesser of (A) the Wall Street Journal Prime Rate of interest plus 175 basis points or (B) Gavilon’s internal rate of interest, whereby such interest rate shall be adjusted periodically based upon rates then in effect.

4.4 Setoff. In the event the Final Net Settlement Amount is payable to the defaulting Party, the non-defaulting Party may, at its option and without prior notice to the defaulting Party, set off the Final Net Settlement Amount or any part thereof against any payment obligation of the defaulting Party (whether or not matured, contingent or invoiced) under any agreements, instruments or undertakings (including, but not limited to, any amounts owing under the Supply Agreements). This right of setoff shall be without prejudice and in addition to any right of setoff, netting, recoupment, combination of accounts, lien, charge or other right to which the non-defaulting Party is at any time otherwise entitled (whether by operation of law, by contract or otherwise). If an amount is unascertained, the non-defaulting Party may reasonably estimate the amount to be setoff.

4.5 Termination Due to Force Majeure. The rights available to the non-defaulting Party under this Section 4 shall also be available to the Party that terminates any of the Supply Agreements due to Force Majeure.

5. Miscellaneous.

5.1 Term. This Master Agreement shall commence on the date hereof and continue in effect until the Supply Agreements and Storage Agreement have been terminated and all amounts owing thereunder or hereunder shall have been fully and indefeasibly paid.

5.2 Board of Governors . As a material inducement for Gavilon to enter into this Master Agreement and the Supply Agreements, Producer hereby grants Gavilon the right to appoint one (1) observer (“ Observer ”) to each of (i) the Producer’s Board of Governors and (ii) the Producer’s Risk Management Committee as established by the Board of Governors. Producer acknowledges that the primary objective for the Observer is to allow the Observer to learn more detailed information about Producer that would not otherwise be available to Gavilon by simply receiving the various financials and other reports as set forth in this Master Agreement and/or the Supply Agreements. The Observer shall be allowed to participate in all meetings and discussions of the Board of Governors and the Risk Management Committee, and Producer shall provide the Observer with notice of all such meetings in accordance with the underlying organizational documents of the Producer which govern the Board of Governors and the Risk Management Committee; provided, however, the Observer shall not have any voting rights on the Board of Governors or the Risk Management Committee. By appointing the Observer, Gavilon acknowledges that the Observer shall be allowed to ask questions during meetings of the Board of Governors and the Risk Management Committee, but as such will not normally contribute to the discussions of the Board of Governors or the Risk Management Committee unless called upon or otherwise encouraged to do so by the Chairman or other participants. Producer and Gavilon each acknowledge and agree that, except as set forth in this Section 5.2, the Observer will not have any of the rights, duties or obligations of a regular member of the Board of Governors or the Risk Management Committee. By entering into this Agreement, Gavilon acknowledges that its Observer shall maintain the confidentiality provisions as set forth in Section 5.18 hereof with regard to any information it receives from Producer while attending Board of Governors meetings.

5.3 Assignment. Except as set forth herein, neither Party may assign this Master Agreement or any of its rights or obligations hereunder without the prior written consent of the other Party. A Change in Control of Producer or Gavilon shall be construed to be an assignment for purposes of this Section. The above notwithstanding, (a) Producer may assign its rights under this Master Agreement and to receive any Net Settlement or Final Net Settlement Amount to a lender that provides working capital financing to Producer so long as such lender first executes the Consent attached as Exhibit “B” or enters into an intercreditor agreement with Gavilon upon terms deemed acceptable to Gavilon, and (b) Gavilon may: (i) transfer, sell, pledge, encumber or assign this Master Agreement in connection with any financing arrangements; or (ii) transfer or assign this Master Agreement to an affiliate. In the event the Plant is sold by Producer, Producer shall assign this Master Agreement to the purchaser of the Plant and require the purchaser to assume all of Producer’s obligations hereunder, provided that such purchaser is reasonably acceptable to Gavilon. No such assignment shall affect the rights or obligations of the Parties (including those with respect to netting and setoff) under this Master Agreement or any Confirmed Orders. It is further agreed that no such assignment shall be permitted unless the Supply Agreements are similarly assigned in accordance with their terms.

5.4 Notices. Any written notices required hereunder shall be given in accordance with the terms of the Supply Agreements.

5.5 Inurement. This Master Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the Parties.

5.6 Entire Agreement. This Master Agreement, the Exhibits attached hereto, and the Supply Agreements (including Confirmed Orders issued pursuant thereto), constitute the entire agreement between the Parties with respect to the subject matter contained herein and any and all previous agreements, written or oral, express or implied, between the Parties or on their behalf relating to the matters contained herein are hereby terminated and canceled. In the event of any conflict between the terms of this Master Agreement and any of the Supply Agreements, this Master Agreement shall govern.

5.7 Waiver. No delay or omission in the exercise of any right, power or remedy hereunder shall impair such right, power or remedy or be construed to be a waiver of any default or acquiescence therein.

5.8 Amendments . There will be no modification of the terms and provisions hereof except by the mutual agreement in writing signed by the Parties. Any attempt to so modify this Agreement in the absence of such writing signed by the Parties shall be considered void and of no effect.

5.9 Governing Law; Venue. The Agreement will be interpreted, construed and enforced in accordance with the procedural, substantive and other laws of the State of Nebraska without giving effect to principles and provisions thereof relating to conflict or choice of law even though one or more of the Parties is now or may do business in or become a resident of a different state. Subject to the dispute resolution provisions in the Supply Agreements, all disputes arising out of this Master Agreement shall be resolved exclusively by state or federal courts located in Omaha, Nebraska, and each of the Parties waives any objection that it has to the bringing of an action in any such court.

5.10 Cumulative Remedies. Unless otherwise specifically provided in this Master Agreement, the rights, powers and remedies of each of the Parties provided in this Master Agreement are cumulative and the exercise of any right, power or remedy under this Master Agreement does not affect any other right, power or remedy that may be available to either Party under this Master Agreement, the Supply Agreements, or otherwise at law or in equity.

5.11 Forward Contract/Forward Contract Merchants. The Parties agree that each of them is a forward contract merchant as set forth in 11 U.S.C. §101(26). The Parties also agree that this Master Agreement, along with the Supply Agreements, are all forward contracts as defined in 11 U.S.C. §101(25). The payments and transfers described herein shall constitute “Settlement Payments” or “Margin Payments” as set forth in 11 U.S.C. §§ 101(51A) and (38).

5.12 No Partnership; Relationship. This Master Agreement shall not create or be construed to create in any respect a partnership or any agency or joint venture relationship between the Parties. The relationship of Gavilon and Producer established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed: to give either Party the power to unilaterally direct and control the day-to-day activities of the other or to be considered an agent of the other; to constitute the Parties as partners, joint

ventures, co-owners or otherwise; or to allow either Party to create or assume any obligation on behalf of the other Party for any purpose whatsoever. Except as otherwise provided herein, nothing contained in this Agreement shall be construed as conferring any right or benefit on a person not a Party to this Agreement.

5.13 Costs To Be Borne by Each Party . Except as otherwise provided herein, Producer and Gavilon shall pay its own costs and expenses incurred in the negotiation, preparation and execution of this Master Agreement and of all documents referred to in it. In the event of any dispute between the Parties with regard to this Master Agreement, the prevailing party shall be entitled to reimbursement for all reasonable out-of-pocket costs and expenses incurred by such Party, including, but not limited to, reasonable and documented attorneys’ fees of outside counsel and court costs.

5.14 Counterparts. This Master Agreement may be executed in multiple counterparts with the same effect as if Producer and Gavilon had signed the same document and all counterparts will be construed together and constituted as one and the same instrument. Each counterpart signature may be executed and delivered to the other Party by facsimile machine or electronic transfer, and the signature as so transmitted shall be as binding upon the executing Party as its original signature, without the necessity of the recipient Party to establish original execution or the existence of such original signature or the document to which affixed, all of which shall be deemed waived.

5.15 Severability . Any provision of this Master Agreement, which is or becomes prohibited or unenforceable in any jurisdiction, shall not invalidate or impair the remaining provisions of this Master Agreement, and the remaining terms of this Master Agreement shall continue in full force and effect, or if allowed by the law of the applicable jurisdiction, it shall be amended so as to most closely conform to the original intent of this Agreement without the offending provision, and as so amended shall continue in full force and effect.

5.16 Headings; Interpretations . The article and section headings used herein are for convenience of reference only and shall not affect the construction or interpretation of this Master Agreement. Unless the context of this Master Agreement otherwise requires, (i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or plural number shall also include the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,” “hereby,” “hereto,” and derivative or similar words shall refer to this entire Master Agreement. This Master Agreement is the product of negotiation by and among the Parties hereto. This Master Agreement shall be interpreted and construed neutrally as to all Parties, without any Party deemed to be the drafter of this Master Agreement.

5.17 Time. Except as otherwise specified herein, all times described herein will be local time in Omaha, Nebraska.

5.18 Confidentiality. The term “ Confidential Information ” and the related confidentiality obligations of Producer and Gavilon, respectively, as set forth in Article 9 of the Corn Supply Agreement shall apply to the terms of this Master Agreement and the information exchanged hereunder.

5.19 Dispute Resolution . Except for a different dispute resolution mechanism as specified herein, in the event a dispute arises in connection with the performance or non-performance of this Agreement which the Parties are unable to mutually resolve, the Parties shall submit such matter to arbitration in a neutral geographic location using the arbitration provisions of the Trade Rules, provided such matter involves commercial aspects covered by the Trade Rules and is accepted by the NGFA for resolution; otherwise the Parties shall have available whatever rights or remedies exist at law or equity. The arbitrator(s) shall have no power to award damages inconsistent with this Agreement. All aspects of the arbitration shall be treated as confidential and judgment on the arbitrator’s award may be entered in any court having jurisdiction. The expenses of the arbitrator(s) shall be shared equally by the Parties, and each Party shall bear its own legal costs, unless the arbitrators determine that legal costs shall be otherwise assessed. Nothing contained in any indemnification provision hereunder shall be construed as having any bearing on the award of attorney’s fees under this Section. The foregoing dispute-resolution process shall in no event be deemed to excuse either Party from continuing to fulfill its respective obligations under, or to prevent or impede either Party from exercising its rights or remedies set forth in, this Agreement.

[The remainder of this page intentionally left blank; signature page follows.]

IN WITNESS WHEREOF, the Parties have each executed this Master Agreement on the date first above written.

GAVILON, LLC		HERON LAKE BIOENERGY, LLC


By:	/s/ John W. Neppl	By:	/s/ Robert J. Ferguson
Name:	John W. Neppl	Name:	Robert J. Ferguson
Title:	CFO	Title:	CEO

Master Netting, Setoff, Credit and Security Agreement

(Heron Lake, Minnesota)

Signature Page

EXHIBIT “A”

DEFINITIONS

For purposes of this Master Agreement:

“Business Day” or “Business Days” means the hours from 8:00 a.m. to 5:00 p.m. Central Time excluding Saturdays, Sundays, and scheduled holidays observed by the Chicago Board of Trade, Chicago, Illinois, USA.

“Change in Control” means a change in the ownership of a Party, whereby such change results in any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), other than Project Viking, L.L.C. or any affiliates owned or controlled by Ron and Diane Fagen with respect to Producer, directly or indirectly, having the ability to control the governing body of such Party.

“Delivery Amount” has the meaning as set forth in Section 3.1.

“Exposure” means an amount equal to the amount that would result from closing-out each then-existing transaction for the purchase or sale of ethanol, co-products or corn under the Supply Agreements and calculating the Gain or Loss, if any, for each such transaction, and aggregating or netting such amounts, without duplication, against any or all other amounts owing under the Supply Agreements to a single liquidated settlement payment; provided that the Exposure shall be deemed to be zero whenever the above calculation yields a number less than zero.

“Final Net Settlement Amount” means the sum of the Settlement Amounts, provided that in the event the sum of the Settlement Amounts is positive, it shall be reduced by any amount received by the non-defaulting Party (if any) to the extent the non-defaulting Party shall exercise its rights to apply Margin delivered by the defaulting Party.

“Gain(s)” means, with respect to any transaction or group of transactions, an amount determined by the non-defaulting Party in a commercially reasonable manner and expressed as a negative number equal to the present value as of the close-out date (discounted at the rate determined in a commercially reasonable manner by the non-defaulting Party for the period between the close-out date and the date on which amounts under the transaction or group of transactions would have otherwise been due) of the economic benefit (exclusive of costs and expenses) to the non-defaulting Party, if any, resulting from the termination of such transaction or group of transactions pursuant to this Master Agreement. Nothing herein shall require the non-defaulting Party to enter into a replacement transaction in order to determine its Gains.

“Holiday” means a nationally recognized or state recognized holiday on which date commercial banks are authorized to close under the laws of, or are in fact closed in, the state where each Party’s office is located.

“Letter of Credit” means an irrevocable, non-transferable standby letter of credit, issued by a major U.S. commercial bank, and in a form, reasonably acceptable to the Secured Party.

Exhibit A-1

“LIBOR” means the per annum rate of interest equal to the London Interbank Offered Rate for overnight deposits at 11:00 a.m. (London time), from time to time in effect, as reported on Telerate.

“Loss(es)” means, with respect to any transaction or group of transactions, an amount determined by the non-defaulting Party in a commercially reasonable manner and expressed as a positive number equal to the present value as of the close-out date (discounted at the rate determined in a commercially reasonable manner by the non-defaulting Party for the period between the close-out date and the date on which amounts under the transaction or group of transactions would have otherwise been due) of the economic loss (exclusive of costs and expenses), to the non-defaulting Party, if any, resulting from the termination of such transaction or group of transactions pursuant to this Master Agreement. Nothing herein shall require the non-defaulting Party to enter into a replacement transaction in order to determine its Losses.

“Margin” means with respect to Gavilon: (a) cash, or (b) Letter of Credit; and with respect to Producer: (a) cash, or (b) Letter of Credit (excluding the Standby Letter of Credit).

“Netting Statement” has the meaning as set forth in Section 2.2.

“Net Settlement” has the meaning as set forth in Section 2.2.

“NGFA” “ means the National Grain and Feed Association.

“Payment Date” has the meaning as set forth in Section 2.1.

“Plant” means the Producer’s ethanol plant located at Heron Lake, Minnesota.

“Pledgor” has the meaning as set forth in Section 3.1.

“Posted Margin” has the meaning as set forth in Section 3.3.

“Return Amount” has the meaning as set forth in Section 3.1.

“Secured Party” has the meaning as set forth in Section 3.1.

“Settlement Amount” means, with respect to a terminated transaction or group of terminated transactions: (i) the sum of (a) Losses or Gains, as applicable, plus (b) without duplication of any amounts included in the foregoing, costs and expenses incurred by the non-defaulting Party, plus (c) without duplication of any amounts included in the foregoing, any unpaid amounts owed by the defaulting Party to the non-defaulting Party with respect to such terminated transaction or group of terminated transactions, less (ii) without duplication of any amounts included in the foregoing, any unpaid amounts owed by the non-defaulting Party to the defaulting Party with respect to such terminated transaction or group of terminated transactions. Each Settlement Amount may be either a positive amount (if owed to the non-defaulting Party) or a negative amount (if owed to the defaulting Party).

“Threshold Amount” means, with respect to Gavilon, $[ * * * ], and with respect to Producer, $[ * * * ]; provided that notwithstanding anything to the contrary contained herein, Gavilon may in its sole and reasonable discretion modify such Threshold Amount upon no less than sixty (60) days written notice to Producer; provided further, however, that if an event of default has occurred and is continuing with respect to a Party, then such Party’s Threshold Amount shall be $0.

Exhibit A-2

“Trade Rules” means the trade rules of the NGFA Trade Rules and Arbitration Rules Booklet, as amended March 5, 2010, and as otherwise amended or restated from time to time. Any reference to the Trade Rules in this Agreement shall be a reference to the specific portions of the Trade Rules which are applicable to such reference. By way of example and not limitation, any reference to arbitration in accordance with the terms of the Trade Rules shall be a specific reference to the arbitration provisions of the Trade Rules.

“UCC” means the Uniform Commercial Code of the State of Nebraska, as it currently exists or is hereafter revised.

“Valuation Agent” means Gavilon or, if an event of default has occurred and is continuing with respect to Gavilon, Producer or a mutually-agreed third party.

Exhibit A-3

EXHIBIT “B”

LENDER’S CONSENT AND ACKNOWLEDGMENT

The undersigned (“ Lender ”) hereby acknowledges and agrees as follows:

1. Heron Lake BioEnergy, LLC (“ Counterparty ”) and Gavilon, LLC (“ Gavilon ”) have entered into a certain Master Netting, Setoff, Credit and Security Agreement dated September 1, 2011 (“ Netting Agreement ”), pursuant to which such Parties will periodically determine and pay the net amount that is owed by one Party to the other.

2. Lender has been provided with a copy of the Netting Agreement.

3. The Lender hereby consents to Counterparty’s execution and full performance of the Netting Agreement.

4. Lender acknowledges that any right, title and interest that it may hold in Counterparty’s receivables (a) do not include any amounts payable by Gavilon to Counterparty except for the amounts of any Net Settlement payment and Final Net Settlement Amount (each as defined in the Netting Agreement), and (b) are otherwise subject and subordinate to Gavilon’s rights, and Counterparty’s obligations, under the Netting Agreement.

	LENDER




	By:
	Its:
	Date:

EXHIBIT “C”

LENDER’S CONSENT AND ACKNOWLEDGMENT

The undersigned (“ Lender ”) hereby acknowledges and agrees as follows:

1. Lakefield Farmers Elevator, LLC, a wholly-owned subsidiary of Counterparty (“ Lakefield ”), Counterparty and Gavilon, LLC (“Gavilon”) have entered into a certain Corn Storage Agreement, dated September 1, 2011 (“ Storage Agreement ”), pursuant to which Lakefield and Counterparty shall receive, store and ship Grain for Gavilon in accordance with terms set forth therein.

2. Lender has been provided with a copy of the Netting Agreement and Storage Agreement.

3. Lender hereby consents to Counterparty’s execution and full performance of the Netting Agreement and Lakefield’s and Counterparty’s execution and full performance of the Storage Agreement.

4. Lender acknowledges that any right, title and interest that it may hold in Counterparty’s Non-Fixed Assets or in Lakefield’s or Counterparty’s real estate, fixtures, equipment, inventory, receivables or other forms of collateral shall be subordinate to (i) the security interest held by Gavilon in the Non-Fixed Assets pledged by Counterparty under the Netting Agreement and (ii) the title to the Grain owned by Gavilon and stored in the Elevators (as defined in the Storage Agreement), and any security interest Lender may have in the collateral of Counterparty or Lakefield shall be subject and subordinate to Gavilon’s rights, and Counterparty’s and Lakefield’s obligations, under the Netting Agreement and Storage Agreement.

	LENDER




	By:
	Its:
	Date:

Exhibit 10.51

CORN STORAGE AGREEMENT

This Corn Storage Agreement (this “Agreement”) is dated and made effective as of September 1, 2011, by and among Lakefield Farmers Elevator, LLC, a Minnesota limited liability company (“Contractor”), Heron Lake BioEnergy, LLC, a Minnesota limited liability company (“Producer”), and Gavilon, LLC, a Delaware limited liability company (“Gavilon”) (each of Contractor, Producer and Gavilon is a “Party” and together they are collectively referred to as the “Parties”).

R E C I T A L S :

WHEREAS, Contractor is a wholly-owned subsidiary of Producer;

WHEREAS, Gavilon and Producer have entered into certain agreements, including (i) a “Corn Supply Agreement”, (ii) an “Ethanol and Distiller’s Grains Marketing Agreement” and (iii) a “Master Netting, Setoff, Credit and Security Agreement” (collectively, the “Ethanol Plant Agreements”), whereby Gavilon provides Producer with corn for use in Producer’s ethanol plant, and Producer then sells the bi-product consisting of ethanol, dry distiller’s grains and wet distiller’s grains to Gavilon, all in accordance with the terms of such agreements;

WHEREAS, as a condition to Gavilon providing corn to Producer under the terms of the Corn Supply Agreement, Contractor and Producer agreed to provide Gavilon with certain storage space and personnel necessary for the storage and delivery of corn, all as set forth in this Agreement; and

WHEREAS, Contractor and Producer each desire to store corn for Gavilon, and Gavilon desires to store corn in certain elevators or storage facilities owned by Contractor and Producer, all upon the terms set forth in this Agreement.

NOW, THEREFORE, in consideration of the above premises and the mutual covenants, conditions and agreements contained herein, the Parties agree as follows:

1. Elevator Facilities; Contractor and Producer Responsibilities. Contractor owns and operates (i) a grain elevator located in Lakefield, Minnesota, which holds up to 1,872,000 bushels, and (ii) a grain elevator located in Wilder, Minnesota, which holds up to 920,000 bushels (“Contractor’s Elevators”). Producer owns and operates a storage facility located in Heron Lake, Minnesota, which holds up to 550,000 bushels and is utilized for temporary grain storage prior to use at Producer’s ethanol plant (“Producer’s Elevator”) (each of the Contractor’s Elevators and Producer’s Elevator shall sometimes be referred to individually as an “Elevator” and collectively the “Elevators”). As consideration for Gavilon entering into the Ethanol Plant Agreements with Producer, Contractor and Producer agree that the Elevators shall hereafter be used exclusively for the storing and handling of corn purchased by Gavilon (the “Grain”) for purposes of fulfilling Producer’s requirements for corn under the Corn Supply Agreement. Contractor and Producer shall maintain their respective Elevators for Gavilon’s sole use for storage of the Grain, and the Grain shall not be co-mingled at the Elevators with any other corn or other grain or products unless Gavilon, Contractor and Producer first agree in writing that the Grain may be co-mingled. Contractor and Producer each represent and warrant that their respective Elevators are in good working order and repair, and Contractor and Producer each hereby covenant and agree to maintain all personnel, utilities and equipment necessary to operate and maintain the Elevators in a manner which allows for the Grain to be (i) unloaded from trucks or railcars and placed in the Elevators during each Party’s normal business hours, (ii) stored in a manner acceptable to industry standards with minimal spoilage, (iii) with regard to Contractor, unloaded from the Elevators into trucks or railcars for purposes of delivery to Producer or other third parties when and as directed by Gavilon or pursuant to a Limited Sale, and (iv) with regard to Producer, unloaded from the Producer’s Elevator for use at the ethanol plant.

2. Term . The term of this Agreement shall be as of the date set forth above and shall continue until the later to occur of (i) the delivery of all Grain stored in the Elevators as directed by Gavilon and (ii) the termination of the Ethanol Plant Agreements.

3. Rates and Charges; Demurrage . As consideration for entering into this Agreement, Contractor and Producer each acknowledge that it shall receive a direct benefit from Producer’s use of the Grain at Producer’s ethanol plant. Contractor and Producer each further acknowledge that Gavilon shall provide a discounted supply fee to Producer under the terms of the Ethanol Plant Agreements in exchange for Contractor and Producer providing the Elevators to Gavilon for storage of the Grain. As a wholly-owned subsidiary of Producer, Contractor hereby acknowledges and agrees that it shall receive adequate consideration from Gavilon under the terms of the Ethanol Plant Agreements and Contractor shall not charge any additional consideration to Gavilon for Contractor’s services at, and Gavilon’s use of, the Contractor’s Elevators to store Grain as set forth in this Agreement. Additionally, Producer hereby acknowledges and agrees that it shall receive adequate consideration from Gavilon under the terms of the Ethanol Plant Agreements and Producer shall not charge any additional consideration to Gavilon for Producer’s services at, and Gavilon’s use of, the Producer’s Elevator to store Grain as set forth in this Agreement. Contractor shall be responsible for any demurrage charges incurred by Gavilon due to Contractor’s failure to timely unload or load Grain from (or into) trucks or rail cars in accordance with the contracts received from Gavilon and approved by Producer.

4. Setoff . Contractor agrees that it shall have no right of setoff against Gavilon with regard to any failure by Gavilon to perform its obligations under this Agreement or under the terms of the Ethanol Plant Agreements. To the extent any setoff rights may be claimed against Gavilon arising under the terms of this Agreement, Contractor agrees that such setoff rights shall belong to Producer and shall be handled in accordance with the terms set forth in the Ethanol Plant Agreements.

5. Services to Be Performed; Direction Given .

a. Contractor shall receive, store and ship the Grain at and from the Contractor’s Elevators in accordance with the terms of any corn contracts entered into by Gavilon or Producer under the terms of the Corn Supply Agreement. Contractor shall be responsible for selecting the area within the Contractor’s Elevators for storing the Grain and may, without notice, move the Grain between or within the Contractor’s Elevators, but shall not, without Gavilon’s prior consent, move the Grain to any other location. Contractor shall at all times maintain functional scales at the Contractor’s Elevators and shall weigh all incoming and outgoing Grain within industry tolerances and maintain accurate records of the same. Contractor’s scales shall be certified on an annual basis in accordance with the then-current NGFA Grain Trade Rules, whereupon Contractor shall provide the certification certificate to Gavilon. In the event that either Contractor or Gavilon reasonably believes that Contractor’s scales are not working properly, either Party may request that such scales be tested and re-certified. Gavilon shall have the right to inspect the Contractor’s Elevators and Contractor’s records at any time during normal business hours or, if outside of normal business hours, after giving written notice at least 24 hours in advance. Contractor shall comply with all regulatory requirements mandated by federal, state or local municipalities for owning and operating the Contractor’s Elevators. Contractor acknowledges that all Grain received at the Contractor’s Elevators under corn contracts arising under the Corn Supply Agreement shall be stored, shipped or otherwise disposed of in accordance with directions received from Gavilon, and Producer shall have no right or authority to direct Contractor with regard to the storage, shipment or other disposition of the Grain. In the event that Contractor receives directions from Producer with regard to taking any actions (or not taking actions) related to the Grain, Contractor shall notify Gavilon of such directions and

Gavilon shall direct Contractor on how to proceed with the same. In no event shall Contractor sell or ship or otherwise dispose of any Grain based upon directions received by Producer.

b. Producer shall receive, store and ship the Grain at and from the Producer’s Elevator in accordance with the terms of any corn contracts entered into by Gavilon or Producer under the terms of the Corn Supply Agreement. Producer shall be responsible for selecting the area within the Producer’s Elevator for storing the Grain, but shall not, without Gavilon’s prior consent, move the Grain to any other location except for Producer’s use of such Grain in the ordinary course of business to produce ethanol. Producer shall at all times maintain functional scales at the Producer’s Elevator and shall weigh all incoming and outgoing Grain within industry tolerances and maintain accurate records of the same. Producer’s scales shall be certified on an annual basis in accordance with the Trade Rules (as defined in Section 16), whereupon Producer shall provide the certification certificate to Gavilon. In the event that either Producer or Gavilon reasonably believes that Producer’s scales are not working properly, either Party may request that such scales be tested and re-certified. Gavilon shall have the right to inspect the Producer’s Elevator and Producer’s records at any time during normal business hours or, if outside of normal business hours, after giving written notice at least 24 hours in advance. Producer shall comply with all regulatory requirements mandated by federal, state or local municipalities for owning and operating the Producer’s Elevator. Unless otherwise agreed upon by Gavilon in accordance with the terms of the Corn Supply Agreement, Producer acknowledges that all Grain received at the Producer’s Elevator under corn contracts arising under the Corn Supply Agreement shall be stored, shipped or otherwise disposed of in accordance with directions received from Gavilon in accordance with the Corn Supply Agreement, and Producer shall have no right or authority to otherwise direct shipment or other disposition of the Grain.

6. Grain . Gavilon represents and warrants that Gavilon shall lawfully possess any Grain shipped to the Elevators at Gavilon’s direction and Gavilon has the right and authority to store the Grain with Contractor or Producer, as applicable. Each of Contractor and Producer shall provide Gavilon with daily reports showing the amount of Grain received at, or removed from, the Elevators. Additionally, Contractor and Producer, as applicable, each agrees to provide Gavilon with a calculation of the Grain remaining in the Elevators as of the last day of each month. Additionally, each of Contractor and Producer shall work in good faith to true-up such amounts and account for the same on a monthly basis based upon measurements taken at the Elevators to determine the amount of Grain remaining at the end of each month. In the event that there is a discrepancy between the estimated amount of Grain remaining in each Elevator at the end of each month based upon shipments of Grain received or shipped when compared with the estimated amount of Grain remaining at each Elevator based upon measurements taken at the Elevators, Contractor and Producer shall work in good faith to resolve such issues with Gavilon with the actual estimated measurements to be determinative unless otherwise agreed upon by the Parties. Each of Contractor and Producer shall notify Gavilon immediately of any errors, problems or complaints relating to the Grain, including any matters related to Grain contracts ( i.e. , specification issues or delivery issues) or related to storage of the Grain ( i.e ., any damage or spoilage).

7. Liability .

a. Contractor and Producer shall each be liable for loss of or injury to the Grain while under its care, custody and control when caused by its failure to exercise such care in regard to the Grain as a reasonably careful man would exercise under like circumstances. Except as otherwise set forth in the Corn Supply Agreement, Contractor and Producer shall not be liable for damages which could not have been avoided by the exercise of such care.

b. Contractor and Producer shall each be liable for any loss or injury suffered by Gavilon due to Contractor’s or Producer’s breach of the terms of this Agreement.

c. Contractor and Producer shall not be liable for any loss of profit or special, indirect or consequential damages of any kind.

d. Contractor and Producer acknowledge that any risk of loss for the Grain as between Gavilon and Producer shall be as set forth in the Ethanol Plant Agreements, and at no time shall Contractor or Producer have title to the Grain while it is stored in the Elevators.

8. Insurance . Contractor shall provide policies and limits of insurance as set forth on Exhibit “A”. The policies shall be with carriers who are “A” rated by Best’s Insurance Reports. Contractor shall provide Gavilon with insurance certificates reflecting such coverage, which certificates shall provide that the carrier will not terminate or reduce the coverage without first giving Gavilon 30 days’ prior written notice. Contractor shall provide Gavilon with the policies for inspection upon Gavilon’s request. Producer shall provide policies and limits of insurance as set forth in the Ethanol Plant Agreements, and such insurance shall also cover the Grain stored in Producer’s Elevator.

9. Independent Contractor. Contractor and Producer shall each act as an independent contractor under this Agreement. Each shall perform its obligations under this Agreement using its own employees or agents. Each shall decide on the manner and means of accomplishing those obligations and shall direct, control and supervise its employees. Each shall comply with all payroll tax, withholding, social security, unemployment and related employer obligations. Neither Contractor nor Producer shall hold itself out as an agent of or joint venturer with Gavilon, and neither Contractor nor Producer shall have any authority to act on behalf of Gavilon except to the extent necessary to accomplish its obligations under this Agreement.

10. Title; Subordination. Contractor and Producer shall not permit any lien or other encumbrance to be placed against the Grain while it is in Contractor’s or Producer’s possession, as applicable. Title to the Grain shall at all times remain in Gavilon, and at no time shall Contractor or Producer have any claim to title for the Grain. Neither Contractor nor Producer shall have a general warehouseman’s lien on the Grain for any claims or unpaid charges arising under this Agreement or under the Ethanol Plant Agreements, and Contractor and Producer each hereby waive any and all rights to place a lien on the Grain arising from Contractor’s or Producer’s (as applicable) performance under the terms of this Agreement. As a condition to entering into this Agreement, Contractor and Producer each acknowledge that any lender(s) it may have with regard to the Elevators or any equipment or operations related thereto, shall enter into a Lender’s Consent and Acknowledgement in the form attached hereto as Exhibit “B”. Contractor hereby acknowledges and agrees that any fees or charges due to Contractor shall be paid by Producer, or received as a benefit from Producer based upon Contractor being a wholly-owned subsidiary of Producer, and Gavilon shall have no responsibility or liability for paying any such amounts to Contractor.

11. Security Interests. In the event that any mediation, arbitration or court proceeding shall determine that any Grain owned by Gavilon under the terms of the Corn Supply Agreement was instead owned by Producer, then Contractor and Producer each hereby acknowledge that Gavilon shall have a first priority lien in the Grain in accordance with the terms of the Ethanol Plant Agreements and Contractor and Producer shall follow the directions of Gavilon with regard to receiving, storing and shipping the Grain until such time as a court with proper jurisdiction determines (after all appeals are time barred or have otherwise been completed) to the contrary.

12. Force Majeure . No Party shall be liable to the other Parties for failure to perform its obligations under this Agreement if prevented from doing so because of an act of God, strikes, fire, flood, war, civil disturbance, interference by civil or military authority or other causes beyond the reasonable control of the Party. Upon the occurrence of such an event the Party seeking to rely on this provision shall promptly give written notice to the other Parties of the nature and consequences

of the cause. If the cause is one which nevertheless requires Contractor or Producer to continue to protect the Grain, Contractor and Producer each agree that any expenditures made by Contractor or Producer to protect the Grain shall be paid by Producer as partial consideration for Gavilon entering into the Ethanol Plant Agreements.

13. Indemnification . Each Party (the “Indemnitor”) shall indemnify and hold the other Parties (the “Indemnitee) harmless from and against all liabilities, claims, suits, fines, damages, losses, costs and expenses (including reasonable attorneys’ fees) arising out of injury to or death of any person or damage to or loss or destruction of any property (except for the Grain where liability is covered in Section 7 above) caused by or performance resulting from any parties’ default, improper performance or nonperformance of obligations hereunder by the Indemnitor, its employees or agents. The Indemnitee shall provide prompt notice of any claim or liability, shall tender defense or settlement to the Indemnitor, and shall fully cooperate in defense of the claim. Should the Indemnitor fail to honor a timely request for indemnification, then the Indemnitee shall be entitled to all costs (including reasonable attorney’s fees) incurred in the enforcement of the right of indemnification hereunder, which enforcement results in a legal judgment in its favor or an acknowledgement by the Indemnitor that the claimed indemnification is valid in a settlement of such claim.

14. Assignment . Except as otherwise set forth in the Ethanol Plant Agreements as between Producer and Gavilon, no Party shall assign or transfer this Agreement or any of its rights or obligations hereunder without the prior written consent of the other Parties. It is further agreed that no such assignment of this Agreement shall be permitted unless the Ethanol Plant Agreements and all other agreements referenced therein are similarly assigned in accordance with their terms unless otherwise waived or approved in writing by the Parties.

15. Default. If Contractor or Producer shall fail to perform any of the covenants or obligations of performance and payment imposed upon it under and by virtue of this Agreement (except where such failure is excused under other provisions of this Agreement), Gavilon shall have the right to either (i) perform such obligations or make such necessary payments, in which case Contractor or Producer (as applicable) shall be responsible for immediately reimbursing Gavilion for its documented expenses, or (ii) give Contractor or Producer written notice, stating specifically the cause for which the notice of default is given and the time within which the default must be cured. If Gavilon chooses to provide notice under provision (ii) of the prior sentence and Contactor or Producer fails to commence with diligence to remove and remedy the default, then Gavilon may either perform such obligations under provision (i) of the prior sentence or terminate this Agreement without any further obligation to Contractor or Producer. Additionally, Contractor or Producer shall be deemed to be in default under the terms of this Agreement if either Contractor or Producer shall become insolvent or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors, or if either of such Parties shall file a voluntary petition in bankruptcy, or seek reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, Title 11 of the United States Code, as amended or recodified from time to time, or under any state or federal law granting a relief to debtors.

In addition to the provisions of the previous paragraph, the occurrence and continuance of any event of default under the Ethanol Plant Agreements by Producer shall constitute an event of default under this Agreement for both Contractor and Producer. Upon the occurrence of any event of default as set forth in this paragraph, Gavilon shall have the right to terminate this Agreement without any further obligation to Contractor or Producer under the terms of this Agreement, whereupon Contractor and Producer shall work in good faith with Gavilon to ship any Grain remaining at the Elevators as per directions received from Gavilon.

16. Dispute Resolution. Except where a different dispute resolution mechanism is specified herein, in the event a dispute arises in connection with the performance or non-performance of this Agreement which the Parties are unable to mutually resolve, the Parties shall submit such matter to arbitration in a neutral geographic location using the National Grain and Feed Association’s (“NGFA”) Trade Rules and Arbitration Rules Booklet, as amended March 5, 2010, and as otherwise amended or restated from time to time (the “Trade Rules”), provided such matter involves commercial aspects of the delivery of Grain and is accepted by the NGFA for resolution; otherwise the Parties shall have available whatever rights or remedies exist at law or equity. The arbitrator(s) shall have no power to award damages inconsistent with this Agreement. All aspects of the arbitration shall be treated as confidential and judgment on the arbitrator’s award may be entered in any court having jurisdiction. The expenses of the arbitrator(s) shall be shared equally by the Parties, and each Party shall bear its own legal costs, unless the arbitrators determine that legal costs shall be otherwise assessed. Nothing contained in any indemnification provision hereunder shall be construed as having any bearing on the award of attorney’s fees under this Section. The foregoing dispute-resolution process shall in no event be deemed to excuse either Party from continuing to fulfill its respective obligations under, or to prevent or impede either Party from exercising its rights or remedies set forth in, this Agreement. By entering into this Agreement, each Party hereby waives its rights to trial by jury in any judicial proceeding involving, directly or indirectly, any matter (whether sounding in tort, contract or otherwise) in any way arising out of, related to, or connected with this Agreement or the Ethanol Plant Agreements.

17. Notices . Any notice to any Party to this Agreement by the other Parties shall be deemed to have been properly given if mailed to said Parties by certified mail return receipt requested to such other address or person as any Party may designate by notice to the other Parties hereunder. A notice hereunder shall be deemed to have been given as of the date it was received.

If to Gavilon, at:

Gavilon, LLC

Eleven ConAgra Drive

Omaha, NE 68102-5011

Attn: Legal Department

Phone: (402) 889-4000

and if to Contractor, at:

Lakefield Farmers Elevator, LLC

102 South Main Street

Lakefield, MN 56150

Attn: Tyronne Bialas

Phone: (507) 793-0077

and if to Producer, at:

Heron Lake BioEnergy, LLC

91246 390th Avenue

Heron Lake, MN 68301

Attn: Bob Ferguson

Phone: (507) 793-0077

18. Modification . Any amendment or modification to this Agreement shall be effective only if in writing and signed by each Party hereto.

19. Entire Agreement . The attached Exhibit is incorporated into and is made part of this Agreement. This Agreement embodies the entire agreement and understanding between the Parties and supersedes all prior agreements and understandings between them relating to the subject matter hereof.

20. Governing Law; Venue. This Agreement will be interpreted, construed and enforced in accordance with the procedural, substantive and other laws of the State of Nebraska without giving effect to principles and provisions thereof relating to conflict or choice of law even though one or more of the Parties is now or may do business in or become a resident of a different state. Subject to Section 16, all disputes arising out of this Agreement shall be resolved exclusively by state or federal courts located in Omaha, Nebraska, and each of the Parties waives any objection that it may have to the bringing of an action in any such court.

21. Severability . If any term or provision of this Agreement or any application thereof shall be invalid or unenforceable, the remainder of this Agreement or any other application of such term or provision shall not be affected thereby.

[The Remainder of This Page Intentionally Left Blank; Signature Page Follows.]

IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the date and year first above written.

	GAVILON, LLC


	By	John W. Neppl
	Its	CFO


	LAKEFIELD FARMERS ELEVATOR, LLC


	By	Robert J. Ferguson
	Its	Manager


	HERON LAKE BIOENERGY, LLC


	By	Robert J. Ferguson
	Its	CEO

Corn Storage Agreement

Signature Page

EXHIBIT “A”

INSURANCE

Commercial Automobile Liability Insurance - $1 Million Combined Single Limit

Policy shall include coverage for liability resulting from the operation of all owned, non-owned and hired automobiles.

Such insurance shall be on an occurrence basis.

All Risk Property insurance coverage for the Grain in storage under the terms of this Agreement. All Grain shall be insured for the full market value and property insurance coverage will include, but not be limited to, perils of wind, fire, lightning, flood, theft and infestation.

EXHIBIT “B”

LENDER’S CONSENT AND ACKNOWLEDGMENT

The undersigned (“ Lender ”) hereby acknowledges and agrees as follows:

1. Lakefield Farmers Elevator, LLC and Heron Lake BioEnergy, LLC (each, a “ Counterparty ”) and Gavilon, LLC (“ Gavilon ”) have entered into a certain Corn Storage Agreement, dated September , 2011 (“ Storage Agreement ”), pursuant to which each Counterparty shall receive, store and ship Grain for Gavilon in accordance with terms set forth therein.

2. Lender has been provided with a copy of the Storage Agreement.

3. Lender hereby consents to Counterparty’s execution and full performance of the Storage Agreement.

4. Lender acknowledges that any right, title and interest that it may hold in Counterparty’s real estate, fixtures, equipment, inventory, receivables or other forms of collateral shall not include any Grain stored by Gavilon in the Elevators (as defined in the Storage Agreement), and any security interest Lender may have in the collateral of Counterparty shall be subject and subordinate to Gavilon’s rights, and Counterparty’s obligations, under the Storage Agreement.

	LENDER




	By:
	Its:
	Date:

Exhibit 21.1

Subsidiaries of Heron Lake BioEnergy, LLC

Name		State of Organization
Lakefield Farmers Elevator, LLC		Minnesota

HLBE Pipeline Company, LLC		Minnesota

EXHIBIT 31.1

CERTIFICATIONS

I, Robert J. Ferguson, certify that:

1. I have reviewed this Form 10-K of Heron Lake BioEnergy, LLC.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

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

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2012

	/s/ Robert J. Ferguson
	Robert J. Ferguson
	Chief Executive Officer
	(principal executive officer)

EXHIBIT 31.2

CERTIFICATIONS

I, Lucas G. Schneider, certify that:

1. I have reviewed this Form 10-K of Heron Lake BioEnergy, LLC.

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2012

	/s/ Lucas G. Schneider
	Lucas G. Schneider
	Chief Financial Officer
	(principal financial officer and principal accounting officer)

EXHIBIT 32

CERTIFICATION

The undersigned certifies pursuant to 18 U.S.C. §1350, that:

(1) The accompanying Annual Report on Form 10-K for the period ended October 31, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 30, 2012

	/s/ Robert J. Ferguson
	Robert J. Ferguson
	Chief Executive Officer
	( Principal executive officer )

	/s/ Lucas G. Schneider
	Lucas G. Schneider
	Chief Financial Officer
	(Principal financial officer and principal accounting officer )