You should read the following discussion in conjunction with the audited consolidated financial statements and the accompanying notes included in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Specifically, forward-looking statements may be preceded by, followed by or may include such words as "estimate", "plan", "project", "forecast", "intend", "expect", "is to be", "anticipate", "goal", "believe", "seek", "target" or other similar expressions. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-K, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed elsewhere in this Form 10-K and those listed in other documents we have filed with the Securities and Exchange Commission.

Overview

BioFuel Energy Corp. produces and sells ethanol and distillers grain through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota. In late June 2008, we commenced start-up of commercial operations and began to produce ethanol at both of our plants, each having a nameplate capacity, based on the maximum amount of permitted denaturant, of 115 million gallons per year ("Mmgy"). During the remainder of 2008, we focused on optimizing production and streamlining operations with the goal of producing at nameplate capacity, which was achieved in December 2008. From inception, we have worked closely with Cargill, Inc., one of the world's leading agribusiness companies, with whom we have an extensive contractual relationship. The two plant locations were selected primarily based on access to corn supplies, the availability of rail transportation and natural gas and Cargill's competitive position in the area. At each location, Cargill, has a strong local presence and owns adjacent grain storage facilities. Cargill provides corn procurement services, markets the ethanol and distillers grain we produce and provides transportation logistics for our two plants under long-term contracts. In addition, we lease grain storage and handling facilities adjacent to our plants from affiliates of Cargill.

The Company previously evaluated three similar sites and incurred site development costs for the possible construction of additional plants. During the year ended December 31, 2008, the Company decided to no longer pursue construction of these sites and therefore has written off the associated development costs which totaled $1,100,000.

Our operations and cash flows are subject to fluctuations due to changes in commodity prices. We may use derivative financial instruments such as futures contracts, swaps and option contracts to manage commodity prices. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and capital resources; and-Hedging Losses" elsewhere in this report.

We are a holding company with no operations of our own, and are the sole managing member of BioFuel Energy, LLC, or the LLC, which is itself a holding company and indirectly owns all of our operating assets. The Company's ethanol plants are owned and operated by the Operating Subsidiaries of the LLC.

The Operating Subsidiaries of the LLC entered into engineering, procurement and construction ("EPC") contracts with The Industrial Company-Wyoming ("TIC") for the construction of the Wood River and Fairmont plants. Pursuant to these EPC contracts, TIC was to be paid a total of $272.0 million, subject to certain adjustments, for the turnkey construction of the two plants. The Operating Subsidiaries of the LLC entered into agreements with TIC, effective December 11, 2008,

that settled various issues that had arisen between the parties under the terms of the EPC contracts during the course of constructing the plants. Among the items agreed to were that TIC had met both substantial completion and project completion, that TIC would continue to be responsible for its warranty obligations, and that TIC would pay the subsidiaries of the LLC $2.0 million for each plant, which amounts would be deducted from the retainage amounts owed to TIC. The construction retainage liability at December 31, 2008 of $9.4 million was recorded net of the $2.0 million for each plant owed by TIC as part of the settlement agreement and was paid to TIC in February 2009. At December 31, 2008, property, plant and equipment related to the EPC contracts was $248.9 million, net of liquidated damages of $19.1 million arising out of completion delays at both plants and net of $4.0 million arising out of the settlement agreements with TIC. Spending on construction of the Wood River and Fairmont plants, exclusive of corporate overhead and financing charges, is expected to total approximately $319 million, or $300 million net of liquidated damages. As of December 31, 2008 the Company estimated that an additional $5 million will be spent by the Operating Subsidiaries of the LLC on plant infrastructure and other construction requirements to permit the plants to be operated safely and reliably at their nameplate capacities.

Going Concern

In connection with their year-end audit of our annual financial statements, our independent auditor assesses whether a statement should be included in their audit report regarding the existence of substantial doubt related to our ability to continue as a going concern. Our auditors have issued an opinion on our consolidated financial statements for the fiscal year ended December 31, 2008, which is included with this report, that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that the factors discussed in Note 1 to the consolidated financial statements raise substantial doubt about our ability to continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred a loss before minority interest of $84.1 million in 2008, primarily due to hedging losses on corn contracts and significant costs associated with the start up and operation of our plants. We continue to suffer operating losses in 2009 resulting from poor operating margins due to the relative prices of corn and ethanol. The Company's liquidity position continues to decline as a result of these losses. In addition, under the terms on the Company's senior debt facility with a group of lenders financing construction of our plants, minimum quarterly principal payments of $3,150,000 are scheduled to begin on June 30, 2009. Based on current operating margins and the Company's liquidity position, the Company may not be able to generate sufficient cash flow to make principal and interest payments when they become due during 2009. Failure to make these payment obligations when they become due would result in events of default under the senior debt facility, which we would have up to 3 days to cure. We have initiated a company-wide business restructuring plan to reduce costs and are currently exploring various alternatives to address our liquidity issues. These include: (i) reducing operating expenses through headcount reductions or operating efficiency initiatives; (ii) reducing the cost of various inputs and services by renegotiating the terms of supply and service agreements, including our agreements with Cargill; (iii) seeking forbearance or some other accommodation from our lenders; (iv) seeking new capital, either from new or existing investors or (v) some combination of the foregoing or other measures. However there can be no assurance that we will be successful in achieving any of these objectives or, if successfully implemented, that these initiatives will be sufficient to address our lack of liquidity. If the Company is unable to reach an agreement with the senior lenders, raise additional capital, or is unable to generate sufficient liquidity from its operations to satisfy its obligations, it may have a material adverse effect on our liquidity and may result in our inability to continue as a going concern, and could potentially force us to seek relief from creditors through a filing under the U.S. Bankruptcy Code.

Our primary source of revenue is the sale of ethanol. The selling prices we realize for our ethanol are largely determined by the market supply and demand for ethanol, which, in turn, is influenced by industry factors over which we have little control. Ethanol prices are extremely volatile.

We also receive revenue from the sale of distillers grain, which is a residual co-product of the processed corn and is sold as animal feed. The selling prices we realize for our distillers grain are largely determined by the market supply and demand, primarily from livestock operators and marketing companies in the U.S. and internationally. Distillers grain is sold by the ton and, based upon the amount of moisture retained in the product, can either be sold "wet" or "dry".

Cost of goods sold and gross profit (loss)

Our gross profit (loss) is derived from our revenues less our cost of goods sold. Our cost of goods sold is affected primarily by the cost of corn and natural gas. The prices of both corn and natural gas are volatile and can vary as a result of a wide variety of factors, including weather, market demand, regulation and general economic conditions, all of which are outside of our control.

Corn is our most significant raw material cost. Historically, rising corn prices result in lower profit margins because ethanol producers are unable to pass along increased corn costs to customers. The price and availability of corn is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. Historically, the spot price of corn tends to rise during the spring planting season in May and June and tends to decrease during the fall harvest in October and November.

We also purchase natural gas to power steam generation in our ethanol production process and as fuel for our dryers to dry our distillers grain. Natural gas represents our second largest operating cost after corn, and natural gas prices are extremely volatile. Historically, the spot price of natural gas tends to be highest during the heating and cooling seasons and tends to decrease during the spring and fall.

Corn procurement fees paid to Cargill are included in our cost of goods sold. Other cost of goods sold primarily consists of our cost of chemicals and enzymes, electricity, depreciation, manufacturing overhead and rail car lease expenses.

General and administrative expenses

General and administrative expenses consist of salaries and benefits paid to our management and administrative employees, expenses relating to third party services, insurance, travel, office rent, marketing and other expenses, including certain expenses associated with being a public company, such as costs associated with our annual audit and quarterly reviews, compliance with
Section 404 of the Sarbanes-Oxley Act, and listing and transfer agent fees.

Results of operations

The following discussion summarizes the significant factors affecting the consolidated operating results of the Company for the years ended December 31, 2008 and 2007. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this Form 10-K.

At December 31, 2008, the Company owned 69.1% of the LLC and the remainder was owned by our founders and original equity investors. As a result, the Company consolidates the results of the LLC. The amount of income or loss allocable to the 30.9% holders is reported as minority interest in our Consolidated Statements of Operations.

The following table sets forth net sales, expenses and net loss, as well as the percentage relationship to net sales of certain items in our consolidated statements of operations (no percentages are provided for the year ended December 31, 2007 due to the Company not having any net sales during such periods):

                                                   Year Ended December 31,
                                                       2008             2007
                                                         (unaudited)
                                                    (dollars in thousands)
          Net sales                             $ 179,867     100.0 % $      -
          Cost of goods sold                      199,163     110.7          -

          Gross loss                              (19,296 )   (10.7 )        -
          General and administrative expenses      17,044       9.5      9,215
          Other operating expense                   1,350       0.8          -

          Operating loss                          (37,690 )   (21.0 )   (9,215 )
          Other income (expense), net             (46,437 )   (25.8 )    1,812

          Loss before income taxes                (84,127 )   (46.8 )   (7,403 )
          Minority interest                        43,262      24.1      4,982

          Net loss                                (40,865 )   (22.7 )   (2,421 )
          Beneficial conversion charge                  -         -     (1,327 )

          Net loss to common shareholders       $ (40,865 )   (22.7 ) $ (3,748 )

The following table sets forth key operational data for 2008 that we believe are important indicators of our results of operations (no data exists for 2007 as the plants were not operational until June 2008):

                                                         Year Ended
                                                        December 31,
                                                            2008
                                                        (unaudited)
            Ethanol sold (gallons, in thousands)                82,582
            Dry distillers grains sold (tons, in                 170.9
            thousands)
            Wet distillers grains sold (tons, in                 185.8
            thousands)
            Average price of ethanol sold (per           $        1.85
            gallon)
            Average price of dry distillers grains       $      133.68
            sold (per ton)
            Average price of wet distillers grains       $       37.21
            sold (per ton)
            Average corn cost (per bushel)               $        4.54

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Both of the Company's plants commenced start-up and began commercial operations in late June 2008. Because of this, there are no net sales, cost of goods sold, or gross profit (loss) for the year ended December 31, 2007 for comparison purposes.

Cost of goods sold and gross loss: Cost of goods sold was $199,163,000 for the year ended December 31, 2008 which resulted in a gross loss of $19,296,000 for the year ended December 31, 2008. Cost of goods sold included $140,454,000 for corn, $19,767,000 for natural gas, $3,071,000 for

denaturant, $5,137,000 for electricity, $10,416,000 for chemicals and enzymes, $11,729,000 for general operating expenses, and $8,589,000 for depreciation. Our cost of goods sold was higher in relation to revenues for several reasons. The cost of corn per gallon of ethanol increased at a rate greater than the price of ethanol as the crush spread narrowed. For the remaining cost of goods sold expense categories, except depreciation, our costs were higher than expected due to the delays in our plants' completion and the resulting inability to operate at capacity, which resulted in inefficiencies in all cost categories. Our plants ran at 64% and 84% of capacity for the quarters ended September 30, 2008 and December 31, 2008, respectively. We achieved 100% production capacity on a combined basis in December 2008.

General and administrative expenses: General and administrative expenses increased $7,829,000, or 85.0%, to $17,044,000 for the year ended December 31, 2008, compared to $9,215,000 for the year ended December 31, 2007. The increase was primarily due to an increase in compensation expense of $2,684,000 and other expense of $5,145,000. Of the $2,684,000 increase in compensation expense, $2,531,000 was attributable to plant employees who began working and training at the plants in early 2008. As the plants did not begin commercial operation until June, the plant employees compensation costs were included in general and administrative expenses until that time. Subsequent to June, the plant employees costs are now included in cost of goods sold. Of the $5,145,000 increase in other expense, $4,371,000 was attributable to expenses at the plants. As the plants did not begin commercial operation until June, all start-up costs were included in general and administrative expenses until that time. Subsequent to June, plant costs are now included in cost of goods sold. The most significant start-up costs related to rail car leases for $2,048,000 and elevator leases for $450,000.

Other operating expense: Other operating expense was $1,350,000 for the year ended December 31, 2008 compared to zero for the year ended December 31, 2007. The expense consisted of a $250,000 insurance claim deductible expense and a $1,100,000 write off of development costs associated with the evaluation of three additional plant sites.

Other income (expense): Interest income decreased $725,000, or 40.0%, to $1,087,000 for the year ended December 31, 2008, compared to $1,812,000 for the year ended December 31, 2007. The decrease was primarily attributable to a decrease in the amount of funds available to be invested in money market mutual funds as a result of the Company having to fund operating losses with its existing cash balances.

Interest expense was $5,831,000 for the year ended December 31, 2008, compared to zero for the year ended December 31, 2007, as a result of the Company no longer capitalizing interest associated with the loans financing the construction of the plants effective September 1, 2008. The amount represents four months of interest expense on such loans.

Other non-operating expense was $1,781,000 for the year ended December 31, 2008, compared to zero for the year ended December 31, 2007. The expense consisted of a $1,879,000 loss on the sale of corn prior to operations commencing, which was offset by $98,000 of other miscellaneous income.

Loss on derivative financial instruments was $39,912,000 for the year ended December 31, 2008, compared to zero for the year ended December 31, 2007. The increase was a result of the Company incurring losses associated with commodities hedging contracts during the third quarter of 2008. The Company was not a party to any such hedging contracts during the year ended December 31, 2007.

Minority Interest. Minority interest increased $38,280,000 to $43,262,000 for the year ended December 31, 2008, compared to $4,982,000 for the year ended December 31, 2007. The increase was attributable to the Company's loss before minority interest increasing from $7,403,000 for the year ended December 31, 2007 to $84,127,000 for the year ended December 31, 2008.

Our cash flows from operating, investing and financing activities during the years ended December 31, 2008 and December 31, 2007 are summarized below (in thousands):

                                           For the               For the
                                         Year Ended,           Year Ended,
                                      December 31, 2008     December 31, 2007
       Cash provided by (used in):
       Operating activities            $         (91,063 )  $           (5,607 )
       Investing activities                      (41,763 )            (190,686 )
       Financing activities                       89,138               225,041

       Net increase (decrease) in      $         (43,688 )  $           28,748
       cash and equivalents

Cash used in operating activities. Net cash used in operating activities was $91,063,000 for the year ended December 31, 2008, compared to $5,607,000 for the year ended December 31, 2007. For the year ended December 31, 2008, the amount was primarily comprised of a net loss, before minority interest, of $84,127,000, an increase in accounts receivable of $16,669,000 and an increase in inventories of $14,929,000 which were offset by an increase in hedging loss liability of $14,402,000 and noncash depreciation and amortization expense of $9,791,000. The $84,127,000 net loss, before minority interest, resulted from a $37,690,000 operating loss due to poor operating margins resulting from plant start-up coupled with the relative prices of corn and ethanol and $46,437,000 in nonoperating expenses. The nonoperating expenses were primarily comprised of $39,912,000 in losses on corn hedging contracts and $5,831,000 in interest expense. The increase in accounts receivable and inventories resulted from the Company beginning commercial operations in June 2008 thereby resulting in accounts receivable and inventory at December 31, 2008 versus having none at December 31, 2007. For the year ended December 31, 2007 the amount was primarily comprised of a net loss, before minority interest, of $7,403,000, offset by share based compensation expense of $1,370,000.

Cash used in investing activities. Net cash used in investing activities was $41,763,000 for the year ended December 31, 2008, compared to $190,686,000 for the year ended December 31, 2007. During both periods, the cash used was primarily for construction of the Wood River and Fairmont ethanol plants. The decrease from 2007 to 2008 was a result of the construction being at its peak in 2007 versus winding down in the middle of 2008 as the projects neared completion and began operating.

Cash provided by financing activities. Net cash provided by financing activities was $89,138,000 for the year ended December 31, 2008, compared to $225,041,000 for the year ended December 31, 2007. For the year ended December 31, 2008, the amount was primarily comprised of $17,000,000 of borrowings under the Company's working capital facility and $77,150,000 of proceeds under its construction loan facilities, which were partially offset by $2,276,000 in payments for treasury stock purchases. For the year ended December 31, 2007, the amount was primarily comprised of $103,581,000 of proceeds related to our initial public offering and concurrent private placement, $104,000,000 in borrowings under the Company's construction facilities, and $50,000,000 in borrowings of Subordinated Debt, which were offset by $30,000,000 of principal payments of the Subordinated Debt.

                                                  December 31, 2008
             Cash and equivalents                  $          12,299
             Working capital                                   8,708
             Working capital loan availability                 3,000
             Construction loan availability                   28,850

Our principal liquidity needs are expected to be funding our operations, funding remaining construction costs, debt service requirements of our indebtedness, and general corporate purposes. Our construction loan availability will be utilized to pay construction retainage of $9.4 million (which was paid in February 2009), fund a debt service reserve of $10.8 million, and fund remaining construction costs of $5.0 million. The remaining $3.6 million can be used for general operating purposes.

Going Concern Considerations

As shown in the accompanying consolidated financial statements, the Company incurred a loss before minority interest of $84.1 million in 2008, primarily due to hedging losses on corn contracts and significant costs associated with the start up and operation of our plants. We continue to suffer operating losses in 2009 resulting from poor operating margins due to the relative prices of corn and ethanol. The Company's liquidity position continues to decline as a result of these losses. In addition, under the terms on the Company's senior debt facility, minimum quarterly principal payments of $3,150,000 are scheduled to begin on June 30, 2009. Based on current operating margins and the Company's liquidity position, the Company may not be able to generate sufficient cash flow to make principal and interest payments when they become due during 2009. Failure to make these payment obligations when they become due would result in events of default under the senior debt facility, which we would have up to 3 days to cure. We have initiated a company-wide business restructuring plan to reduce costs and are currently exploring various alternatives to address our liquidity issues. These include: (i) reducing operating expenses through headcount reductions or operating efficiency initiatives; (ii) reducing the cost of various inputs and services by renegotiating the terms of supply and service agreements, including our agreements with Cargill; (iii) seeking forbearance or some other accommodation from our lenders; (iv) seeking new capital, either from new or existing investors or (v) some combination of the foregoing or other measures. However there can be no assurance that we will be successful in achieving any of these objectives or, if successfully implemented, that these initiatives will be sufficient to address our lack of liquidity. If the Company is unable to reach an agreement with the senior lenders, raise additional capital, or is unable to generate sufficient liquidity from its operations to satisfy its obligations, it may have a material adverse effect on our liquidity and may result in our inability to continue as a going concern, and could potentially force us to seek relief through a filing under the U.S. Bankruptcy Code.

Hedging Losses

During the second quarter of 2008, the LLC entered into various derivative instruments with Cargill in order to manage exposure to commodity prices for corn and ethanol, generally through the use of futures, swaps, and option contracts. During August 2008, the market price of corn declined sharply, exposing the LLC to large unrealized losses and significant unmet margin calls under these contracts. Cargill began liquidating the hedge contracts in August 2008 and by September 30, 2008 the LLC was no longer a party to any hedge . . .