Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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** **

**FORM 10-Q**

 

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**x****      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended February 28, 2011**

 

**Commission file number: 33-83868**

 

**AMERICAN CRYSTAL SUGAR COMPANY**

(Exact name of registrant as specified in its charter)

 

| **Minnesota**                                                  | ** ** | **84-0004720**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**101 North Third Street**

**Moorhead, Minnesota 56560**

(Address of principal executive offices)

 

**Telephone Number (218) 236-4400**

(Registrant’s telephone number, including area code)

 

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, 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act). YES o NO x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

| **Class of Common Stock** | ** ** | **Outstanding at   April 7, 2011** |
|------------------------------------------|------------|------------------------------------|
| **$10 Par Value**                        | ** ** | **2,750**                          |

 

 

 

 

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**AMERICAN CRYSTAL SUGAR COMPANY**

 

**FORM 10-Q**

 

**INDEX**

 
| ** **       | ** **                                                                                       | **PAGE NO.** |
|------------------|--------------------------------------------------------------------------------------------------|-------------------|
| ** **       | ** **                                                                                       | ** **        |
| **PART I**  | **FINANCIAL   INFORMATION**                                                                      |              |
| ** **       | ** **                                                                                       |              |
| **ITEM 1.**      | **CONSOLIDATED   FINANCIAL STATEMENTS**                                                          |              |
| ** **       | ** **                                                                                       |              |
| ** **       | **CONSOLIDATED   BALANCE SHEETS**                                                                | **1**             |
| ** **       | ** **                                                                                       | ** **        |
| ** **       | **CONSOLIDATED STATEMENTS OF OPERATIONS**                                                        | **3**             |
| ** **       | ** **                                                                                       | ** **        |
| ** **       | **CONSOLIDATED STATEMENTS OF CASH FLOWS**                                                        | **4**             |
| ** **       | ** **                                                                                       | ** **        |
| ** **       | **NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**                                               | **5**             |
| ** **       | ** **                                                                                       | ** **        |
| **ITEM 2.**      | **MANAGEMENT’S   DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | **15**            |
| ** **       | ** **                                                                                       | ** **        |
| **ITEM 3.**      | **QUANTITATIVE   AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 | **21**            |
| ** **       | ** **                                                                                       | ** **        |
| **ITEM 4.**      | **CONTROLS AND   PROCEDURES**                                                                    | **21**            |
| ** **       | ** **                                                                                       | ** **        |
| **PART II** | **OTHER INFORMATION**                                                                            |              |
| ** **       | ** **                                                                                       |              |
| **ITEM 1.**      | **LEGAL PROCEEDINGS**                                                                            | **21**            |
| **ITEM 1A.**     | **RISK FACTORS**                                                                                 | **22**            |
| **ITEM 2.**      | **UNREGISTERED   SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                | **23**            |
| **ITEM 3.**      | **DEFAULTS UPON   SENIOR SECURITIES**                                                            | **23**            |
| **ITEM 4.**      | **(REMOVED AND RESERVED)**                                                                       | **23**            |
| **ITEM 5.**      | **OTHER INFORMATION**                                                                            | **23**            |
| **ITEM 6.**      | **EXHIBITS**                                                                                     | **24**            |
| ** **       | ** **                                                                                       | ** **        |
| **SIGNATURES**   |                                                                                             | **26**            |

 

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Table of Contents

 

**American Crystal Sugar Company**

**Consolidated Balance Sheets**

**(Unaudited)**

**(In Thousands)**

** **

**Assets**

 
| ** **                                      | ** ** | **February 28** | ** ** | **August 31** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2011**             | ** ** | **2010**           | ** ** | **2010*** | ** ** |
| **Current Assets:**                             |       |                 |       |               |       |   |   |
| Cash and Cash Equivalents                       |       | $                    | 127        |               | $          | 321 |   | $ | 128 |   |
| Receivables:                                    |       |                 |       |               |       |   |   |
| Trade                                           |       | 82,112               |       | 68,243             |       | 52,608 |   |
| Members                                         |       | —               |       | 28                 |       | 5,195 |   |
| Other                                           |       | 4,972                |       | 1,455              |       | 4,080 |   |
| Advances to Related Parties                     |       | 2,071                |       | 3,276              |       | 15,243 |   |
| Inventories                                     |       | 673,626              |       | 493,777            |       | 204,117 |   |
| Prepaid Expenses                                |       | 9,836                |       | 1,849              |       | 815 |   |
|                                            |       |                 |       |               |       |   |   |
| **Total Current Assets**                        |       | 772,744              |       | 568,949            |       | 282,186 |   |
|                                            |       |                 |       |               |       |   |   |
| **Property and Equipment:**                     |       |                 |       |               |       |   |   |
| Land and Land Improvements                      |       | 78,906               |       | 68,822             |       | 73,804 |   |
| Buildings                                       |       | 126,361              |       | 120,229            |       | 124,533 |   |
| Equipment                                       |       | 954,408              |       | 903,750            |       | 942,346 |   |
| Construction in Progress                        |       | 20,045               |       | 16,487             |       | 16,737 |   |
| Less Accumulated Depreciation                   |       | (802,876             | )          | (764,900           | )          | (775,904 | ) |
|                                            |       |                 |       |               |       |   |   |
| **Net Property and Equipment**                  |       | 376,844              |       | 344,388            |       | 381,516 |   |
|                                            |       |                 |       |               |       |   |   |
| **Net Property and Equipment Held   for Lease** |       | 97,113               |       | 106,639            |       | 102,333 |   |
|                                            |       |                 |       |               |       |   |   |
| **Other Assets:**                               |       |                 |       |               |       |   |   |
| Investments in CoBank, ACB                      |       | 8,846                |       | 10,258             |       | 8,771 |   |
| Investments in Marketing Cooperatives           |       | 1,282                |       | 368                |       | 1,094 |   |
| Restricted Cash from Revenue Bonds              |       | 15,000               |       | —             |       | — |   |
| Other Assets                                    |       | 11,488               |       | 12,056             |       | 11,778 |   |
|                                            |       |                 |       |               |       |   |   |
| **Total Other Assets**                          |       | 36,616               |       | 22,682             |       | 21,643 |   |
|                                            |       |                 |       |               |       |   |   |
| **Total Assets**                                |       | $                    | 1,283,317  |               | $          | 1,042,658 |   | $ | 787,678 |   |

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

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* Derived from audited financial statements

 

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**American Crystal Sugar Company**

**Consolidated Balance Sheets**

**(Unaudited)**

**(In Thousands)**

** **

**Liabilities and Members’ Investments**

 
| ** **                                                       | ** ** | **February 28** | ** ** | **August 31** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **2011**             | ** ** | **2010**           | ** ** | **2010*** | ** ** |
| **Current Liabilities:**                                         | ** ** | ** **           |       |               |       |   |   |
| Short-Term Debt                                                  |       | $                    | 221,729    |               | $          | 150,026 |   | $ | 5,000 |   |
| Current Maturities of Long-Term Debt                             |       | 375                  |       | 11,507             |       | 375 |   |
| Accounts Payable                                                 |       | 24,570               |       | 24,784             |       | 37,298 |   |
| Advances Due to Related Parties                                  |       | 2,022                |       | 1,397              |       | 5,697 |   |
| Accrued Continuing Costs                                         |       | 131,824              |       | 81,655             |       | — |   |
| Other Current Liabilities                                        |       | 37,714               |       | 35,648             |       | 42,626 |   |
| Amounts Due Growers                                              |       | 315,391              |       | 222,493            |       | 137,133 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Total Current Liabilities**                                    |       | 733,625              |       | 527,510            |       | 228,129 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Long-Term Debt, Net of Current   Maturities**                  |       | 155,698              |       | 130,927            |       | 140,698 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Accrued Employee Benefits**                                    |       | 75,082               |       | 46,768             |       | 77,584 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Other Liabilities**                                            |       | 10,987               |       | 10,859             |       | 10,657 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Total Liabilities**                                            |       | 975,392              |       | 716,064            |       | 457,068 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Commitments and Contingencies**                                |       |                 |       |               |       |   |   |
|                                                             |       |                 |       |               |       |   |   |
| **Members’ Investments:**                                   |       |                 |       |               |       |   |   |
| Preferred Stock                                                  |       | 38,275               |       | 38,275             |       | 38,275 |   |
| Common Stock                                                     |       | 27                   |       | 28                 |       | 28 |   |
| Additional Paid-In Capital                                       |       | 152,261              |       | 152,261            |       | 152,261 |   |
| Unit Retains                                                     |       | 164,212              |       | 164,384            |       | 193,779 |   |
| Accumulated Other Comprehensive Income (Loss)                    |       | (80,208              | )          | (60,110            | )          | (85,986 | ) |
| Retained Earnings (Accumulated Deficit)                          |       | (14,879              | )          | (21,138            | )          | (18,456 | ) |
|                                                             |       |                 |       |               |       |   |   |
| Total American Crystal Sugar Company Members’   Investments |       | 259,688              |       | 273,700            |       | 279,901 |   |
|                                                             |       |                 |       |               |       |   |   |
| Noncontrolling Interests                                         |       | 48,237               |       | 52,894             |       | 50,709 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Total Members’ Investments**                              |       | 307,925              |       | 326,594            |       | 330,610 |   |
|                                                             |       |                 |       |               |       |   |   |
| **Total Liabilities and Members’   Investments**            |       | $                    | 1,283,317  |               | $          | 1,042,658 |   | $ | 787,678 |   |

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

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* Derived from audited financial statements

 

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** **

**American Crystal Sugar Company**

**Consolidated Statements of Operations**

**(Unaudited)**

**(In Thousands)**

 
| ** **                                                                               | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ****                                                                                     | ** ** | **February 28**                             | ** ** | **February 28**                               | ** ** |
| ** **                                                                               | ** ** | **2011**                                         | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| **Net Revenue**                                                                          |       | $                                                | 729,827    |                                               | $          | 587,770 |   | $ | 377,848 |   | $ | 268,362 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Cost of Sales**                                                                        |       | (68,142                                          | )          | 45,463                                             |       | (3,590 | ) | (3,146 | ) |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Gross Proceeds**                                                                       |       | 797,969                                          |       | 542,307                                            |       | 381,438 |   | 271,508 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Selling, General and   Administrative Expenses**                                       |       | 134,235                                          |       | 117,850                                            |       | 68,956 |   | 56,131 |   |
| **Accrued Continuing Costs**                                                             |       | 131,824                                          |       | 81,655                                             |       | 45,708 |   | 25,493 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Operating Proceeds**                                                                   |       | 531,910                                          |       | 342,802                                            |       | 266,774 |   | 189,884 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Other Income (Expense):**                                                              |       |                                             |       |                                               |       |   |   |   |   |
| Interest Income                                                                          |       | 51                                               |       | 33                                                 |       | 38 |   | 24 |   |
| Interest Expense, Net                                                                    |       | (4,357                                           | )          | (4,478                                             | )          | (2,386 | ) | (2,456 | ) |
| Other, Net                                                                               |       | (161                                             | )          | (80                                                | )          | (41 | ) | 27 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Total Other Income (Expense)**                                                         |       | (4,467                                           | )          | (4,525                                             | )          | (2,389 | ) | (2,405 | ) |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Proceeds Before Income Tax   Expense**                                                 |       | 527,443                                          |       | 338,277                                            |       | 264,385 |   | 187,479 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Income Tax Expense**                                                                   |       | (2,786                                           | )          | (1,902                                             | )          | (1,471 | ) | (516 | ) |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Consolidated Net Proceeds**                                                            |       | 524,657                                          |       | 336,375                                            |       | 262,914 |   | 186,963 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Less: Net Proceeds Attributable   to Noncontrolling Interests**                        |       | (2,786                                           | )          | (3,201                                             | )          | (1,344 | ) | (1,466 | ) |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Net Proceeds Attributable to American   Crystal Sugar Company**                        |       | $                                                | 521,871    |                                               | $          | 333,174 |   | $ | 261,570 |   | $ | 185,497 |   |
|                                                                                     |       |                                             |       |                                               |       |   |   |   |   |
| **Distributions of Net Proceeds   Attributable to American Crystal Sugar Company:**      |       |                                             |       |                                               |       |   |   |   |   |
| Credited (Charged) to American Crystal Sugar Company’s   Members’ Investments: |       |                                             |       |                                               |       |   |   |   |   |
| Non-Member Business Income                                                               |       | $                                                | 3,577      |                                               | $          | 2,744 |   | $ | 1,684 |   | $ | 749 |   |
| Unit Retains Declared to Members                                                         |       | —                                           |       | —                                             |       | — |   | — |   |
| Net Credit to American Crystal Sugar Company’s   Members’ Investments          |       | 3,577                                            |       | 2,744                                              |       | 1,684 |   | 749 |   |
| Payments To/Due Members for Sugarbeets, Net of   Unit Retains Declared                   |       | 518,294                                          |       | 330,430                                            |       | 259,886 |   | 184,748 |   |
| **Total**                                                                                |       | $                                                | 521,871    |                                               | $          | 333,174 |   | $ | 261,570 |   | $ | 185,497 |   |

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

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** **

**American Crystal Sugar Company**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(In Thousands)**

 
| ** **                                                             | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **February 28**                             | ** ** |
| ** **                                                             | ** ** | **2011**                                         | ** ** | **2010** | ** ** |
| **Cash Provided By (Used In)   Operating Activities:**                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net Proceeds Attributable to American Crystal   Sugar Company          |       | $                                                | 521,871    |   | $ | 333,174 |   |
| Payments To/Due Members for Sugarbeets, Net of   Unit Retains Declared |       | (518,294                                         | )          | (330,430 | ) |
| Add (Deduct) Non-Cash Items:                                           |       |                                             |       |   |   |
| Depreciation and Amortization                                          |       | 36,516                                           |       | 35,175 |   |
| (Income)/Loss from Equity Method Investees                             |       | (3                                               | )          | 1 |   |
| Loss on the Disposition of Property and Equipment                      |       | 239                                              |       | 131 |   |
| Non-Cash Portion of Patronage Dividend from   CoBank, ACB              |       | (75                                              | )          | (147 | ) |
| Deferred Gain Recognition                                              |       | (32                                              | )          | (32 | ) |
| Noncontrolling Interests                                               |       | 2,786                                            |       | 3,201 |   |
| Changes in Assets and Liabilities:                                     |       |                                             |       |   |   |
| Receivables                                                            |       | (25,201                                          | )          | (1,016 | ) |
| Inventories                                                            |       | (469,508                                         | )          | (312,466 | ) |
| Prepaid Expenses                                                       |       | (9,017                                           | )          | (1,004 | ) |
| Non Current Pension Asset/Liability                                    |       | 1,590                                            |       | 2,560 |   |
| Advances To/Due to Related Parties                                     |       | 9,497                                            |       | 19,002 |   |
| Accounts Payable                                                       |       | (4,023                                           | )          | (5,401 | ) |
| Accrued Continuing Costs                                               |       | 131,824                                          |       | 81,655 |   |
| Other Liabilities                                                      |       | (3,053                                           | )          | 4,711 |   |
| Amounts Due Growers                                                    |       | 178,258                                          |       | 135,275 |   |
| **Net Cash Used In Operating   Activities**                            |       | (146,625                                         | )          | (35,611 | ) |
|                                                                   |       |                                             |       |   |   |
| **Cash Provided By (Used In)   Investing Activities:**                 |       |                                             |       |   |   |
| Purchases of Property and Equipment                                    |       | (34,594                                          | )          | (24,808 | ) |
| Purchases of Property and Equipment Held for Lease                     |       | (489                                             | )          | (1,287 | ) |
| Proceeds from the Sale of Property and Equipment                       |       | 5                                                |       | 3 |   |
| Restricted Cash from Revenue Bonds                                     |       | (15,000                                          | )          | — |   |
| Changes in Other Assets                                                |       | (202                                             | )          | (238 | ) |
| **Net Cash Used In Investing   Activities**                            |       | (50,280                                          | )          | (26,330 | ) |
|                                                                   |       |                                             |       |   |   |
| **Cash Provided By (Used In)   Financing Activities:**                 |       |                                             |       |   |   |
| Net Proceeds from Short-Term Debt                                      |       | 216,729                                          |       | 104,037 |   |
| Proceeds from Issuance of Long-Term Debt                               |       | 15,000                                           |       | — |   |
| Long-Term Debt Repayment                                               |       | —                                           |       | (19,428 | ) |
| Payment of Unit Retains                                                |       | (29,567                                          | )          | (17,217 | ) |
| Distributions to Noncontrolling Interests                              |       | (5,258                                           | )          | (5,257 | ) |
| **Net Cash Provided By Financing   Activities**                        |       | 196,904                                          |       | 62,135 |   |
| **Increase (Decrease) In Cash and   Cash Equivalents**                 |       | (1                                               | )          | 194 |   |
| **Cash and Cash Equivalents,   Beginning of Year**                     |       | 128                                              |       | 127 |   |
|                                                                   |       |                                             |       |   |   |
| **Cash and Cash Equivalents, End of   Period**                         |       | $                                                | 127        |   | $ | 321 |   |

 

**Non-Cash Investing Activities:**Purchases of Property and Equipment include the changes in accounts payable related to these purchases of ($8,706,000) and ($5,196,000) for the six months ended February 28, 2011 and 2010, respectively.

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

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** **

**AMERICAN CRYSTAL SUGAR COMPANY**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS AND THREE MONTHS ENDED**

**February 28, 2011 and 2010**

**(Unaudited)**

 

**Note 1:  Basis of Presentation**

 

The unaudited consolidated financial statements of American Crystal Sugar Company (Company) contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.  However, in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.  These financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2010.

 

The Company’s consolidated financial statements are comprised of: American Crystal Sugar Company; its wholly-owned subsidiaries Sidney Sugars Incorporated (Sidney Sugars) and Crab Creek Sugar Company (Crab Creek); and ProGold Limited Liability Company (ProGold), a limited liability company in which the Company holds a 51 percent ownership interest.  All material inter-company transactions have been eliminated.

 

The operating results for the six months ended February 28, 2011, are not necessarily indicative of the results that may be expected for the year ended August 31, 2011.  The amount paid to shareholders for sugarbeets (member beet payment) depends on the future selling prices of sugar and agri-products as well as processing and other costs incurred during the remainder of the fiscal year associated with the 2010 Red River Valley sugarbeet crop (RRV crop).  The amount paid to non-member growers for sugarbeets (non-member beet payment) depends on the future selling prices of sugar and the related selling expenses associated with the 2010 Sidney Sugars sugarbeet crop (Sidney crop).  For the purposes of this report, the amount of the beet payments, future revenues and costs have been estimated.  Therefore, adjustments with respect to these estimates may be necessary in the future, as additional information becomes available.

 

**Note 2: Recently Issued Accounting Pronouncements**

 

In January 2010, the FASB issued an update to the authoritative guidance which contains amendments and clarification to the guidance related to the disclosures involving recurring or nonrecurring fair value measurements. The new disclosures and clarifications became effective and were adopted by the Company in the third quarter of fiscal 2010 except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements which becomes effective for the Company in the first quarter of fiscal 2012. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.

 

In July 2010, the FASB issued an update to the authoritative guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  This guidance was adopted by the Company in the second quarter of fiscal 2011 and had no material effect on the Company’s financial statements.

 

In December 2010, the FASB issued an update to the authoritative guidance which modifies Step one of the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2012. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.

 

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**Note 3:  Accounts Receivable and Credit Policies**

 

The Company grants credit, individually and through its marketing cooperatives, to its customers, which are primarily companies in the food processing industry located throughout the United States.

 

Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 15 to 90 days from the invoice date.  The receivables are non-interest bearing.  Trade receivables are stated at the amount billed to the customer.  Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

 

Ongoing credit evaluations of customers’ financial condition are performed and the Company maintains a reserve for potential credit losses.  The carrying amount of trade receivables is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. The Company determines a receivable to be uncollectable and is written off against the reserve based on several criteria including such items as the credit evaluation of a customer’s financial condition, the aging of the receivable and previous unsuccessful collection efforts.

 

**Note 4:  Inventories**

 

The major components of inventories are as follows (In Thousands):

 
| ** **                                                      | ** ** | **February 28   2011** | ** ** | **February 28   2010** | ** ** | **August 31   2010** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Sugar, Pulp, Molasses, Other Agri-Products and   Sugarbeet Seed |       | $                           | 463,122    |                        | $          | 334,665                   |       | $ | 154,602 |   |
| Unprocessed Sugarbeets                                          |       | 168,550                     |       | 122,755                     |       | 4,396                     |       |
| Maintenance Parts and Supplies                                  |       | 41,954                      |       | 36,357                      |       | 45,119                    |       |
|                                                            |       |                        |       |                        |       |                      |       |
| Total Inventories                                               |       | $                           | 673,626    |                        | $          | 493,777                   |       | $ | 204,117 |   |

 

Sugar, pulp, molasses and other agri-products inventories are valued at estimated net realizable value.  Unprocessed sugarbeets are valued at the estimated gross beet payment.  Maintenance parts and supplies and sugarbeet seed inventories are valued at the lower of average cost or market.

 

**Note 5: Short-Term Debt**

 

The Company has a seasonal line of credit through June 1, 2011 with a consortium of lenders led by CoBank, ACB of $400.0 million.  On June 1, 2011, the seasonal line of credit with this consortium of lenders is reduced to $320.0 million and is available through July 30, 2012. The Company also has a line of credit with Wells Fargo Bank for $1.0 million.  The Company’s commercial paper program provides short-term borrowings up to the amount of the CoBank, ACB seasonal line of credit, currently $400.0 million.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.

 

The Company can also utilize the Commodity Credit Corporation (CCC) to meet its short-term borrowing needs.  The Company can borrow funds on a non-recourse basis from the CCC, with repayment of such funds secured by sugar.  The limitations on such borrowings are based on the amount of the Company’s sugar inventory and certain loan covenant restrictions by CoBank, ACB.  As of February 28, 2011, the Company had the capacity to obtain non-recourse loans from the CCC of approximately $311.3 million. The Company has not utilized the CCC during fiscal 2011.

 

As of February 28, 2011, the Company had outstanding commercial paper of $221.7****million at average interest rates of .40% to .55% and maturity dates between March 1, 2011 and April 19, 2011.  The Company had no outstanding short-term debt with CoBank, ACB, Wells Fargo Bank or the CCC as of February 28, 2011.  The Company had $2.8 million of short-term letters of credit outstanding as of February 28, 2011.  The unused seasonal line of credit as of February 28, 2011 was $176.5 million.

 

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As of February 28, 2010, the Company had a seasonal line of credit through July 30, 2012, with a consortium of lenders led by CoBank, ACB of $320.0 million and a line of credit with Wells Fargo Bank for $1.0 million.  The Company’s commercial paper program provided short-term borrowings of up to $320.0 million.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.  As of February 28, 2010, the Company had outstanding commercial paper of $150.0****million at average interest rates of .35% to .53% and maturity dates between March 1, 2010 and March 31, 2010.  The Company had no outstanding short-term debt with CoBank, ACB or the CCC as of February 28, 2010.  The Company had $2.9 million of short-term letters of credit outstanding as of February 28, 2010.  The unused seasonal line of credit as of February 28, 2010 was $168.1 million.

 

**Note 6:  Long-Term Debt**

 

The Company has a long-term debt line of credit through July 30, 2015, with CoBank, ACB of****$132.1 million, against which $21.3 million in loans and $69.8 million in long-term letters of credit were outstanding as of February 28, 2011.  The unused long-term line of credit as of February 28, 2011, was $41.0 million.  In addition, the Company had long-term debt outstanding, as of February 28, 2011, of $50 million from a private placement of Senior Notes that occurred in September of 1998 and $69.8 million from six separate issuances of Pollution Control and Industrial Development Revenue Bonds.

 

On December 16, 2010, the Company closed a bond issuance for $15.0 million.  The City of Moorhead, Minnesota (the Issuer) issued the Recovery Zone Facility Revenue Bonds (American Crystal Sugar Company Project) Series 2010 in the principal amount of $15.0 million (the Bonds).  Proceeds of the Bonds will be used by the Company to construct a tower diffuser and associated enclosure at the Company’s sugar beet processing facility in Moorhead, Minnesota. The principal amount of the Bonds of $3.0 million is due on June 1, 2024 and the remaining principal amount of the bonds is due in equal payments of $4.0 million each on June 1 of the subsequent three years.  The Bonds carry fixed interest rates of 5.35% and 5.65%.  Interest on the Bonds is payable semiannually on each June 1 and December 1, commencing June 1, 2011.  As of February 28, 2011, the entire proceeds from the bond issuance were held by a Trustee and will be released as the Company provides documentation of allowable expenditures to the Trustee.  The proceeds are reflected on the accompanying Company’s Consolidated Balance Sheet under Other Assets as “Restricted Cash from Revenue Bonds.”

 

As of February 28, 2010, the Company had long-term debt availability through December 31, 2011, with CoBank, ACB of****$156.6 million, of which $22.3 million in loans and $70.8 million in long-term letters of credit were outstanding as of February 28, 2010.  The unused long-term line of credit as of February 28, 2010, was $63.5 million.  In addition, the Company had long-term debt outstanding, as of February 28, 2010, of $50 million from a private placement of Senior Notes that occurred in September of 1998 and $70.1 million from five separate issuances of Pollution Control and Industrial Development Revenue Bonds.

 

**Note 7:  Interest Paid and Interest Capitalized**

 

Interest paid, net of amounts capitalized, was $2.5 million and $2.9 million for the six months ended February 28, 2011 and 2010, respectively and $1.2 million and $1.7 million for the three months ended February 28, 2011 and 2010, respectively.  Interest capitalized was $ .2 million and $ .2 million for the six months ended February 28, 2011 and 2010, respectively and $ .1 million and $ .1 million for the three months ended February 28, 2011 and 2010, respectively.

 

**Note 8:  Derivative Instruments and Hedging Activities**

 

The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates which may adversely affect its results of operations and financial position.  In seeking to minimize the risks and/or costs associated with such activities, the Company may enter into derivative contracts.

 

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The Company manages its foreign currency related risks primarily through the use of foreign currency forward contracts. The contracts held by the Company are denominated in Euros. The Company has entered into foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to foreign currency-denominated purchases of equipment.  Inputs used to measure the fair value of the foreign currency forward contracts are contained within level 1 of the fair value hierarchy.  At February 28, 2011, the Company had cash flow hedges for approximately 169,000 Euros with maturity dates of April 21, 2011 to June 15, 2011.  At February 28, 2011, the fair value of the open contracts was a gain of approximately $3,000 recorded in accumulated other comprehensive income/(loss) in members’ equity.  At February 28, 2010, the Company had cash flow hedges for approximately 154,000 Euros with a maturity date of October 15, 2010.  At February 28, 2010, the fair value of the open contracts was a loss of approximately $8,000 recorded in accumulated other comprehensive income/(loss) in members’ equity.   Amounts deferred to accumulated other comprehensive income/(loss) are reclassified into the cost of the equipment when the actual purchase takes place.

 

The Company is exposed to interest risk primarily through its borrowing activities.  On December 24, 2009, the Company entered into an interest rate swap contract associated with a $27.3 million Industrial Development Revenue Bond issue that matures on September 1, 2019.  The interest rate swap contract requires payment of a fixed interest rate of 2.827 % and the receipt of a variable rate of interest based on the Securities Industry and Financial Market Association (SIFMA) index of .278 % as of February 28, 2011 on $27.3 million of indebtedness. The Company has designated this interest rate swap contract as a cash flow hedge.  Inputs used to measure the fair value of the interest rate swap contracts are contained within level 2 of the fair value hierarchy.  As of February 28, 2011, the fair value of the cash flow hedge reflected a loss of approximately $1.0 million recorded in accumulated other comprehensive income/(loss) and will be reclassified to interest expense over the life of the swap contract. No ineffectiveness was recognized in earnings during the quarter ended February 28, 2011.  The current period loss of $168,000 is classified as interest expense on the statements of operations.  As of February 28, 2011, $675,000 of deferred net losses on the interest rate swap contract contained in accumulated other comprehensive income/(loss) are expected to be reclassified to earnings during the next 12 months. As of February 28, 2010, the fair value of the cash flow hedge, was a loss of approximately $374,000 recorded in accumulated other comprehensive income/(loss).

 
| ** **                                     | ** ** | **Fair Value of Asset Derivatives as of February 28** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **(In Thousands) **                  | ** ** | **Balance Sheet Location**                                                          | ** ** | **2011** | ** ** | **2010** | ** ** |
| Derivatives Designated as Hedging Instruments: |       |                                                                                          |       |   |   |   |   |
| Foreign Currency Forward Contracts             |       | Prepaid   Expenses                                                                            |       | $ | 3 |   | $ | — |   |
|                                           |       |                                                                                          |       |   |   |   |   |
| Total Asset Derivatives                        |       |                                                                                          |       | $ | 3 |   | $ | — |   |

 
| ** **                                     | ** ** | **Fair Value of Liability Derivatives as of February 28** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **(In Thousands)**                        | ** ** | **Balance Sheet Location**                                                              | ** ** | **2011** | ** ** | **2010** | ** ** |
| Derivatives Designated as Hedging Instruments: |       |                                                                                              |       |   |   |   |   |
| Foreign Currency Forward Contracts             |       | Other   Current Liabilities                                                                       |       | $ | — |   | $ | 8 |   |
| Interest Rate Contracts                        |       | Other   Current Liabilities                                                                       |       | 675 |   | — |   |
| Interest Rate Contracts                        |       | Other   Long-Term Liabilities                                                                     |       | 333 |   | 374 |   |
|                                           |       |                                                                                              |       |   |   |   |   |
| Total Liability Derivatives                    |       |                                                                                              |       | $ | 1,008 |   | $ | 382 |   |

 

**Note 9:  Accrued Continuing Costs**

 

For interim reporting, the net proceeds from member business is based on the forecasted gross beet payment and the percentage of the tons of sugarbeets processed to the total estimated tons of sugarbeets to be processed for a given crop year.  The net proceeds from the operations of Sidney Sugars is based on the forecasted net income for the fiscal year and the percentage of the tons of non-member sugarbeets processed to the total estimated tons of non-member sugarbeets to be processed for a given fiscal year.

 

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Accrued continuing costs represent the difference between the net proceeds as determined above and actual member business crop year and Sidney Sugars fiscal year revenues realized and expenses incurred through the end of the reporting period.  Accrued continuing costs are reflected in the Consolidated Financial Statements as a cost on the Consolidated Statements of Operations and as a current liability on the Consolidated Balance Sheets.

 

**Note 10:  Net Periodic Pension and Post-Retirement Costs**

 

The following schedules provide the components of the Net Periodic Pension and Post-Retirement Costs for the six months and three months ended February 28, 2011 and 2010:

 

***Components of Net Periodic Pension Cost***

(In Thousands)

 
| ** **                          | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **February 28**                             | ** ** | **February 28**                               | ** ** |
| ** **                          | ** ** | **2011**                                         | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| Service Cost                        |       | $                                                | 2,286      |                                               | $          | 1,816 |   | $ | 1,143 |   | $ | 908 |   |
| Interest Cost                       |       | 4,522                                            |       | 4,563                                              |       | 2,261 |   | 2,282 |   |
| Expected Return on Plan Assets      |       | (5,114                                           | )          | (4,962                                             | )          | (2,557 | ) | (2,481 | ) |
| Amortization of Prior Service Costs |       | 494                                              |       | 658                                                |       | 247 |   | 329 |   |
| Amortization of Net Actuarial Loss  |       | 4,744                                            |       | 3,470                                              |       | 2,372 |   | 1,735 |   |
| Net Periodic Pension Cost           |       | $                                                | 6,932      |                                               | $          | 5,545 |   | $ | 3,466 |   | $ | 2,773 |   |

 

***Components of Net Periodic Post-Retirement Cost***

(In Thousands)

 
| ** **                         | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **February 28**                             | ** ** | **February 28**                               | ** ** |
| ** **                         | ** ** | **2011**                                         | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| Service Cost                       |       | $                                                | 321        |                                               | $          | 484 |   | $ | 161 |   | $ | 242 |   |
| Interest Cost                      |       | 767                                              |       | 927                                                |       | 383 |   | 464 |   |
| Amortization of Net Actuarial Gain |       | (405                                             | )          | (344                                               | )          | (203 | ) | (172 | ) |
| Net Periodic Post-Retirement Cost  |       | $                                                | 683        |                                               | $          | 1,067 |   | $ | 341 |   | $ | 534 |   |

 

The Company made contributions of $4.8 million to the pension plans during the six months ended February 28, 2011 and is anticipating making total contributions of approximately $15.0 million to the pension plans during this fiscal year.  The Company has contributed and made benefit payments of approximately $50,000 related to the Supplemental Executive Retirement Plans during the six months ended February 28, 2011.  The Company expects to contribute and make benefit payments totaling approximately $99,000 this fiscal year related to the Supplemental Executive Retirement Plans.

 

The Company has contributed and made benefit payments of approximately $566,000 related to the post-retirement plans during the six months ended February 28, 2011.  The Company expects to contribute and make benefit payments of approximately $1.0 million related to the post-retirement plans during the current fiscal year.

 

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** **

**Note 11:  Members’ Investments**

 
| ** **        | ** ** | ** **         | ** ** | **Shares**     | ** ** | **Shares Issued**     | ** ** |
|-------------------|------------|--------------------|------------|----------------|------------|----------------------------|------------|
| ** **        | ** ** | **Par Value** | ** ** | **Authorized** | ** ** | **& Outstanding** | ** ** |
| Preferred Stock:  |       |               |       |           |       |                       |       |
| April 7, 2011     |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
| February 28, 2011 |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
| August 31, 2010   |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
| February 28, 2010 |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
|              |       |               |       |           |       |                       |       |
| Common Stock:     |       |               |       |           |       |                       |       |
| April 7, 2011     |       | $                  | 10.00      |           | 4,000      |                       | 2,750      |   |
| February 28, 2011 |       | $                  | 10.00      |           | 4,000      |                       | 2,744      |   |
| August 31, 2010   |       | $                  | 10.00      |           | 4,000      |                       | 2,768      |   |
| February 28, 2010 |       | $                  | 10.00      |           | 4,000      |                       | 2,788      |   |

 

**Note 12: Shipping and Handling Costs**

 

The costs incurred for the shipping and handling of products sold are classified in the financial statements as a selling expense on the Statements of Operations.  Shipping and handling costs were $93.1 million and $77.5 million for the six months ended February 28, 2011 and 2010, respectively and $49.5 million and $37.0 million for the three months ended February 28, 2011 and 2010, respectively.

 

**Note 13: Segment Reporting**

 

The Company has identified two reportable segments: Sugar and Leasing.  The sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets.  It also sells agri-products and sugarbeet seed.  The leasing segment is engaged in the leasing of a corn wet-milling plant used in the production of high-fructose corn syrup sweetener.  The segments are managed separately.  There are no inter-segment sales.  The leasing segment has a major customer that accounts for all of that segment’s revenue.

 

Summarized financial information concerning the Company’s reportable segments for the six months and three months ended February 28, 2011 and 2010, is shown below:

 
| ** **                          | ** ** | **For the Six Months Ended February 28, 2011** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(Dollars In Thousands)**                                              | ** ** |
| ** **                          | ** ** | **Sugar**                                                                         | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                                                                 | 718,388    |   | $ | 11,439 |   | $ | 729,827 |   |
| Gross Proceeds                      |       | $                                                                                 | 792,212    |   | $ | 5,757 |   | $ | 797,969 |   |
| Depreciation and Amortization       |       | $                                                                                 | 30,834     |   | $ | 5,682 |   | $ | 36,516 |   |
| Interest Income                     |       | $                                                                                 | 51         |   | $ | — |   | $ | 51 |   |
| Interest Expense                    |       | $                                                                                 | 4,357      |   | $ | — |   | $ | 4,357 |   |
| Income from Equity Method Investees |       | $                                                                                 | 3          |   | $ | — |   | $ | 3 |   |
| Other Income/(Expense), Net         |       | $                                                                                 | (137       | ) | $ | (27 | ) | $ | (164 | ) |
| Consolidated Net Proceeds           |       | $                                                                                 | 518,970    |   | $ | 5,687 |   | $ | 524,657 |   |
|                                |       |                                                                              |       |   |   |   |   |
| Capital Additions                   |       | $                                                                                 | 25,888     |   | $ | 489 |   | $ | 26,377 |   |

 

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| ** **                          | ** ** | **For the Six Months Ended February 28, 2010** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(Dollars In Thousands)**                                              | ** ** |
| ** **                          | ** ** | **Sugar**                                                                         | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                                                                 | 575,533    |   | $ | 12,237 |   | $ | 587,770 |   |
| Gross Proceeds                      |       | $                                                                                 | 535,676    |   | $ | 6,631 |   | $ | 542,307 |   |
| Depreciation and Amortization       |       | $                                                                                 | 29,569     |   | $ | 5,606 |   | $ | 35,175 |   |
| Interest Income                     |       | $                                                                                 | 33         |   | $ | — |   | $ | 33 |   |
| Interest Expense                    |       | $                                                                                 | 4,478      |   | $ | — |   | $ | 4,478 |   |
| Loss from Equity Method Investees   |       | $                                                                                 | (1         | ) | $ | — |   | $ | (1 | ) |
| Other Income/(Expense), Net         |       | $                                                                                 | (22        | ) | $ | (57 | ) | $ | (79 | ) |
| Consolidated Net Proceeds           |       | $                                                                                 | 329,843    |   | $ | 6,532 |   | $ | 336,375 |   |
|                                |       |                                                                              |       |   |   |   |   |
| Capital Additions                   |       | $                                                                                 | 19,612     |   | $ | 1,287 |   | $ | 20,899 |   |

 
| ** **                          | ** ** | **For the Three Months Ended February 28, 2011** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(Dollars In Thousands)**                                                | ** ** |
| ** **                          | ** ** | **Sugar**                                                                           | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                                                                   | 372,240    |   | $ | 5,608 |   | $ | 377,848 |   |
| Gross Proceeds                      |       | $                                                                                   | 378,672    |   | $ | 2,766 |   | $ | 381,438 |   |
| Depreciation and Amortization       |       | $                                                                                   | 15,521     |   | $ | 2,842 |   | $ | 18,363 |   |
| Interest Income                     |       | $                                                                                   | 38         |   | $ | — |   | $ | 38 |   |
| Interest Expense                    |       | $                                                                                   | 2,386      |   | $ | — |   | $ | 2,386 |   |
| Income from Equity Method Investees |       | $                                                                                   | 1          |   | $ | — |   | $ | 1 |   |
| Other Income/(Expense), Net         |       | $                                                                                   | (42        | ) | $ | — |   | $ | (42 | ) |
| Consolidated Net Proceeds           |       | $                                                                                   | 260,171    |   | $ | 2,743 |   | $ | 262,914 |   |
|                                |       |                                                                                |       |   |   |   |   |
| Capital Additions                   |       | $                                                                                   | 10,549     |   | $ | 133 |   | $ | 10,682 |   |

 
| ** **                          | ** ** | **For the Three Months Ended February 28, 2010** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(Dollars In Thousands)**                                                | ** ** |
| ** **                          | ** ** | **Sugar**                                                                           | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                                                                   | 262,547    |   | $ | 5,815 |   | $ | 268,362 |   |
| Gross Proceeds                      |       | $                                                                                   | 268,496    |   | $ | 3,012 |   | $ | 271,508 |   |
| Depreciation and Amortization       |       | $                                                                                   | 14,806     |   | $ | 2,803 |   | $ | 17,609 |   |
| Interest Income                     |       | $                                                                                   | 24         |   | $ | — |   | $ | 24 |   |
| Interest Expense                    |       | $                                                                                   | 2,456      |   | $ | — |   | $ | 2,456 |   |
| Income from Equity Method Investees |       | $                                                                                   | —     |   | $ | — |   | $ | — |   |
| Other Income/(Expense), Net         |       | $                                                                                   | 27         |   | $ | — |   | $ | 27 |   |
| Consolidated Net Proceeds           |       | $                                                                                   | 183,972    |   | $ | 2,991 |   | $ | 186,963 |   |
|                                |       |                                                                                |       |   |   |   |   |
| Capital Additions                   |       | $                                                                                   | 11,590     |   | $ | 340 |   | $ | 11,930 |   |

 

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| ** **                  | ** ** | **As of February 28, 2011** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **(Dollars In Thousands)**            | ** ** |
| ** **                  | ** ** | **Sugar**                                       | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and Equipment, Net |       | $                                               | 376,844    |   | $ | — |   | $ | 376,844 |   |
| Assets Held for Lease, Net  |       | $                                               | —     |   | $ | 97,113 |   | $ | 97,113 |   |
| Segment Assets              |       | $                                               | 1,182,139  |   | $ | 101,178 |   | $ | 1,283,317 |   |

 
| ** **                  | ** ** | **As of February 28, 2010** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **(Dollars In Thousands)**            | ** ** |
| ** **                  | ** ** | **Sugar**                                       | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and Equipment, Net |       | $                                               | 344,388    |   | $ | — |   | $ | 344,388 |   |
| Assets Held for Lease, Net  |       | $                                               | —     |   | $ | 106,639 |   | $ | 106,639 |   |
| Segment Assets              |       | $                                               | 931,578    |   | $ | 111,080 |   | $ | 1,042,658 |   |

 

**Note 14: Fair Value of Financial Instruments**

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Quoted market prices are generally not available for the Company’s financial instruments.  Fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates involve uncertainties and matters of judgment, and therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

 

*Long-Term Debt, Inclusive of Current Maturities* - Based upon discounted cash flows and current borrowing rates with similar maturities, the fair value of the long-term debt as of February 28, 2011 was approximately $155.1 million in comparison to the carrying value of $156.1 million. The fair value of the long-term debt as of February 28, 2010 was approximately $136.9 million in comparison to the carrying value of $142.4 million.

* *

*Investments in CoBank, ACB and Investments in Marketing Cooperatives* - The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations.

* *

*Foreign Currency Forward Contracts* —Based on a variety of pricing factors, which include the market price of the foreign currency forward contract available in the dealer-market, the fair value of the open contracts as of February 28, 2011 was an asset of approximately $3,000.  The fair value of the open contracts as of February 28, 2010 was a liability of approximately $8,000. Inputs used to measure the fair value of the foreign currency forward contracts are quoted prices in active markets for identical assets or liabilities and therefore are contained within level 1 of the fair value hierarchy. See the tables below.

* *

*Interest Rate Contracts* — Based on the zero coupon method in which the term, notional amount, and repricing date of the interest rate swap match the term, repricing date, and principal amount of the interest-bearing liability on which the hedging interest payments are due, the fair value of the interest rate contract as of February 28, 2011 was a liability of approximately $1.0 million. The fair value of the interest rate contract as of February 28, 2010 was a liability of approximately $374,000.  Inputs used to measure the fair value of the interest rate swap contracts are quoted prices in active markets for similar assets or liabilities and therefore are contained within level 2 of the fair value hierarchy. See the tables below.

 

The tables below reflect the assets and liabilities measured at fair value on a recurring basis as of February 28, 2011 and 2010.

 

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| ** **                         | ** ** | **Fair Value of Assets as of February 28, 2011** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **(In Thousands)**            | ** ** | **Level 1**                                                                         | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Foreign Currency Forward Contracts |       | $                                                                                        | 3          |   | $ | — |   | $ | — |   | $ | 3 |   |
| Total                              |       | $                                                                                        | 3          |   | $ | — |   | $ | — |   | $ | 3 |   |

 
| ** **              | ** ** | **Fair Value of Liabilities as of February 28, 2011** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **(In Thousands)** | ** ** | **Level 1**                                                                              | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Interest Rate Contracts |       | $                                                                                             | —     |   | $ | 1,008 |   | $ | — |   | $ | 1,008 |   |
| Total                   |       | $                                                                                             | —     |   | $ | 1,008 |   | $ | — |   | $ | 1,008 |   |

 
| ** **                         | ** ** | **Fair Value of Liabilities as of February 28, 2010** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **(In Thousands)**            | ** ** | **Level 1**                                                                              | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Foreign Currency Forward Contracts |       | $                                                                                             | 8          |   | $ | — |   | $ | — |   | $ | 8 |   |
| Interest Rate Contracts            |       | —                                                                                        |       | 374 |   | — |   | 374 |   |
| Total                              |       | $                                                                                             | 8          |   | $ | 374 |   | $ | — |   | $ | 382 |   |

 

**Note 15: Environmental Matters**

 

The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control.  The Company conducts an ongoing compliance program designed to meet these environmental laws and regulations.  The Company believes that it is in substantial compliance with applicable environmental laws and regulations.  From time to time, however, the Company may be involved in investigations or determinations regarding matters that may arise in the ordinary course of business.  The Company works closely with all affected government agencies to resolve environmental issues that have arisen and believes such issues will be resolved without any material adverse effect on the Company.

 

The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs).  Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change.  The Company believes it is likely that industries generating GHGs, including the Company, will be subject to either federal or state regulation relating to climate change policies in the relatively near future.  These policies, if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar.  These policies could have a significant negative impact on the Company’s beet payment to shareholders if the Company is not able to pass the increased costs on to the Company’s customers.

 

On November 25, 2008, the Company entered into a stipulation agreement with the Minnesota Pollution Control Agency (MPCA) related to hydrogen sulfide emissions from its Crookston, East Grand Forks and Moorhead, Minnesota factories.  As part of the stipulation agreement, the Company has agreed to make certain capital expenditures over the subsequent three years and implement specified changes in operating procedures to contain hydrogen sulfide emissions at the Minnesota factories. The Company is on schedule with the agreed to changes.

 

Including the expenditures related to the MPCA stipulation agreement, the Company has identified capital expenditures for environmental related projects over the next three years at the Company’s factory locations of approximately $10.7 million.

 

**Note 16: Legal Matters**

 

On September 21, 2009 the U.S. District Court (District Court) ruled against the U.S. Department of Agriculture (USDA) finding that the USDA violated federal law by failing to prepare an Environmental Impact Statement (EIS) before deregulating Roundup Ready® sugarbeets.  On August 13, 2010 District Court hearing on interim remedies, the District Court issued a ruling confirming the ability 

 

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of the shareholders to harvest the 2010 root crop even though it was produced primarily from Roundup Ready® sugarbeet seed but vacated the original decision by USDA to deregulate the use of Roundup Ready® sugarbeet seed.  As a result, the planting of Roundup Ready® sugarbeet seed after August 13, 2010 was prohibited until further action was taken by USDA.

 

On February 4, 2011, the USDA issued an Environmental Assessment that partially deregulated Roundup Ready® sugarbeet seed, an action that allows for the planting of Roundup Ready® sugarbeet seed for the 2011 sugarbeet crop, subject to certain conditions.  On March 23, 2011 the Company entered into a compliance agreement with the USDA that sets forth the growing conditions the Company and its shareholders must comply with in order to plant Roundup Ready® sugarbeet seed.  On March 30, the Company’s Board of Directors authorized the planting of Roundup Ready® sugarbeet seed for the 2011 growing season.  This authorization allows the Company shareholders to choose between conventional sugarbeet seed and Roundup Ready® sugarbeet seed.

 

The compliance agreement between the Company and USDA includes a number of conditions that individual shareholders, and the Company as a whole, must strictly observe.  Failure to comply with the conditions may result in a shareholder not being permitted to harvest his or her crop.  In addition, a shareholder’s noncompliance could result in a breach of the compliance agreement by the Company, which conceivably could mean that no Roundup Ready beets planted by any shareholder would be harvested.  Certain requirements must be satisfied before a shareholder will be permitted to obtain any Roundup Ready® sugarbeet seed.

 

The same plaintiffs who have repeatedly raised legal challenges to the planting of Roundup Ready® sugarbeet seed have made public statements that they plan to continue to oppose the use of the technology.  Although the Company believes the risk is low, the possibility exists that a subsequent ruling by the District Court could result in the inability of shareholders to harvest their Roundup Ready sugarbeets (and the Company not being permitted to process them) or to plant Roundup Ready® sugarbeet seeds in subsequent years.  Any failure of the Company or its shareholders to comply with the mandatory conditions imposed on Roundup Ready® sugarbeets could also adversely affect the ability to harvest the affected sugarbeets.  If a significant number of shareholders are not allowed to harvest their Roundup Ready® sugarbeets for any reason the Company could experience material adverse financial consequences that would impact both the Company and its members.

 

In order to mitigate the risk of non-delivery by a shareholder who plants Roundup Ready® sugarbeet seeds, both the five year agreement that each shareholder already has in place with the Company as well as a Roundup Ready® addendum that must be signed in order to plant Roundup Ready varieties, include language that obligates the shareholder to pay liquidated damages equal to the Company’s fixed costs if their Roundup Ready beets are not harvested for legal or regulatory reasons.  This liquidated damage requirement is in place to ensure that a possible legal decision that prevents the harvest of Roundup Ready beets will not financially damage the Company and those shareholders that grow conventional sugarbeets.

 

**Note 17: Subsequent Events**

 

The Company has evaluated events through the date that the financial statements were issued for potential recognition or disclosure in the February 28, 2011 financial statements.

 

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**Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Six Months and Three Months Ended February 28, 2011 and 2010**

 

This report contains forward-looking statements that involve risks and uncertainties.  Such forward-looking statements include, among others, those statements including the words “expect”, “anticipate”, “believe”, “may” and similar expressions.  The Company’s actual results could differ materially from those indicated.  Risk factors that could cause or contribute to such differences include, without limitation, market factors, weather and general economic conditions, farm and trade policy, and available quantity and quality of sugarbeets.  For a more complete discussion of “Risk Factors”, please refer to the Company’s 2010 Form 10-K.

 

**OVERVIEW**

 

The harvest of the Red River Valley and the Sidney sugarbeet crops grown during 2010 and to be processed during fiscal 2011 produced a total of 11.7 million tons of sugarbeets, or approximately 26.4 tons of sugarbeets per acre from approximately 445,000 acres.  This represents an increase in total tons harvested of approximately 11.9 percent compared to the 2009 crop.  The sugar content of the 2010 crop is 18.0 percent as compared to the 16.7 percent sugar content of the 2009 crop.  The Company expects to produce a total of approximately 34.5 million hundredweight of sugar from the 2010 crop, an increase of approximately 19.0 percent compared to the 2009 crop.

 

Net proceeds attributable to American Crystal Sugar Company for fiscal 2011 is expected to be approximately 32 percent higher than in fiscal 2010.  This expected increase is primarily due to increased tons harvested and an increase in the sugar content of the sugarbeets resulting in the increased production of sugar and agri-products. Also contributing to this expected increase are higher anticipated net selling prices for sugar. These anticipated increases will be partially offset by anticipated higher operating costs.

 

The Company, through its marketing agent, exports a substantial amount of its sugarbeet pulp to Japan.  The impact, if any, on future exports due to the recent catastrophic events in Japan are unknown at this time.

 

**RESULTS OF OPERATIONS**

 

**Comparison of the Six Months Ended February 28, 2011 and 2010**

 

Revenue for the six months ended February 28, 2011, was $729.8 million, an increase of $142.1 million from the six months ended February 28, 2010.  The table below reflects the percentage changes in product revenues, prices and volumes for the six months ended February 28, 2011, as compared to the six months ended February 28, 2010.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|------------------------|------------|------------|------------|
| Sugar       |       | 26.5        | %          | 12.1                   | %          | 12.9       | %          |
| Pulp        |       | 12.0        | %          | -10.6                  | %          | 25.3       | %          |
| Molasses    |       | 2.9         | %          | -7.4                   | %          | 11.2       | %          |
| CSB         |       | 20.8        | %          | -1.2                   | %          | 22.2       | %          |
| Betaine     |       | 3.0         | %          | 11.6                   | %          | -7.7       | %          |

 

The increases in selling prices for sugar and betaine reflect strong markets due to supply and demand factors. The decrease in the selling price of pulp, molasses and CSB is the result of lower prices for competing alternative products in the marketplace. The increase in the volume of sugar, pulp, molasses and CSB sold reflects the impact of more product availability due to an earlier startup at the Red River Valley factories this year, increased sugar content of the sugarbeets and a larger crop at our Sidney factory as compared to the previous year.

 

Rental revenue on the ProGold operating lease was $11.4 million and $12.2 million for the six months ended February 28, 2011 and 2010, respectively.

 

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Cost of sales for the six months ended February 28, 2011, exclusive of payments to members for sugarbeets, decreased $113.6 million as compared to the six months ended February 28, 2010. This decrease was primarily related to the following:

·                  At the end of each reporting period, product inventories are recorded at their net realizable value. The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations. The increase in the net realizable value of product inventories for the six months ended February 28, 2011 was $343.6 million as compared to an increase of $191.1 million for the previous six months ended February 28, 2010 resulting in a $152.5 million favorable change in the cost of sales between the two years as shown in the table below:

 

**Change in the Net Realizable Value of Product Inventories**

 
| ** **                                                    | ** ** | **For the Six Months Ended February 28** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(In Millions)**                                        | ** ** | **2011**                                                               | ** ** | **2010** | ** ** | **Change** | ** ** |
| Beginning Product Inventories at Net Realizable   Value       |       | $                                                                      | (111.8     | ) | $ | (137.6 | ) | $ | 25.8 | (1) |
|                                                          |       |                                                                   |       |   |   |   |   |
| Ending Product Inventories at Net Realizable Value            |       | 455.4                                                                  |       | 328.7 |   | 126.7 | (2) |
|                                                          |       |                                                                   |       |   |   |   |   |
| Increase in the Net Realizable Value of Product   Inventories |       | $                                                                      | 343.6      |   | $ | 191.1 |   | $ | 152.5 |   |

 

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(1) The change is primarily due to a 22.6 percent decrease in the hundredweight of sugar inventory as of August 31, 2010 as compared to August 31, 2009 partially offset by an 11.3 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2010 as compared to August 31, 2009; a 35.4 percent decrease in the tons of pulp inventory as of August 31, 2010 as compared to August 31, 2009; and a 47.3 percent decrease in the per ton net realizable value of pulp inventory as of August 31, 2010 as compared to August 31, 2009

(2) The change is primarily due to a 25.3 percent increase in the hundredweight of sugar inventory as of February 28, 2011 as compared to February 28, 2010 and a 12.8 percent increase in the per hundredweight net realizable value of sugar as of February 28, 2011 compared to February 28, 2010 partially offset by a 7.6 percent decrease in tons of pulp inventory and a 3.3 percent decrease in the per ton net realizable value of pulp as of February 28, 2011 compared to February 28, 2010.

 

·                  Factory operating costs increased $18.0 million for the six months ended February 28, 2011, as compared to the six months ended February 28, 2010 primarily due to an increase in the tons harvested and processed this year. These increases were partially offset by higher grower freight reimbursements resulting from an increase in tons harvested this year.

·                  The cost recognized associated with the non-member sugarbeets increased $18.4 million for the six months ended February 28, 2011, when compared to the six months ended February 28, 2010.  This increase was primarily due to an increase in the projected per ton sugarbeet payment for the Sidney crop this year and an increase in the tons purchased and processed.

·                  Due to low sugar inventory levels at the beginning of fiscal 2011, the Company’s sugar marketing agent, United Sugars Corporation, purchased and sold additional sugar to meet our customers’ needs during the first quarter of fiscal 2011.  As a result, the costs associated with purchased sugar were $2.6 million higher for the six months ended February 28, 2011, as compared to the six months ended February 28, 2010.

 

Selling, general and administrative expenses increased $16.4 million for the six months ended February 28, 2011, as compared to the six months ended February 28, 2010.  Selling expenses increased $16.7 million primarily due to an increase in shipping and handling costs associated with increased volumes of sugar and agri-products sold.  General and administrative expenses decreased $ .3 million due to general cost decreases.

 

Net proceeds attributable to American Crystal Sugar Company increased $188.7 million for the six months ended February 28, 2011, as compared to the six months ended February 28, 2010. This increase was primarily due to more tons of sugar beets processed, higher sugar content of the sugarbeets and increased sugar selling prices.

 

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**Comparison of the Three Months Ended February 28, 2011 and 2010**

 

Revenue for the three months ended February 28, 2011, was $377.8 million, an increase of $109.5 million from the three months ended February 28, 2010.  The table below reflects the percentage changes in product revenues, prices and volumes for the three months ended February 28, 2011, as compared to the three months ended February 28, 2010.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|------------------------|------------|------------|------------|
| Sugar       |       | 46.8        | %          | 11.5                   | %          | 31.7       | %          |
| Pulp        |       | 10.7        | %          | -0.1                   | %          | 10.8       | %          |
| Molasses    |       | -63.6       | %          | -13.8                  | %          | -57.8      | %          |
| CSB         |       | 12.4        | %          | 1.8                    | %          | 10.4       | %          |
| Betaine     |       | -6.3        | %          | 11.8                   | %          | -16.2      | %          |

 

The increases in selling prices for sugar, CSB and betaine reflect strong markets due to supply and demand factors. The decrease in the selling price of pulp and molasses is the result of lower prices for competing alternative products in the marketplace. The increase in the volume of sugar, pulp and CSB sold reflects the impact of more product availability due to an earlier startup at the Red River Valley factories this year, increased sugar content of the sugarbeets and a larger crop at our Sidney factory as compared to the previous year.

 

Rental revenue on the ProGold operating lease was $5.6 million and $5.8 million for the three months ended February 28, 2011 and 2010, respectively.

 

Cost of sales for the three months ended February 28, 2011, exclusive of payments to members for sugarbeets, decreased $ .4 million as compared to the three months ended February 28, 2010. This decrease was primarily related to the following:

 

·                  At the end of each reporting period, product inventories are recorded at their net realizable value. The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations. The increase in the net realizable value of product inventories for the three months ended February 28, 2011 was $147.3 million as compared to an increase of $125.6 million for the previous three months ended February 28, 2010 resulting in a $21.7 million favorable change in the cost of sales between the two years as shown in the table below:

 

**Change in the Net Realizable Value of Product Inventories**

 
| ** **                                                               | ** ** | **For the Three Months Ended February 28** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(In Millions)**                                                   | ** ** | **2011**                                                                 | ** ** | **2010** | ** ** | **Change** | ** ** |
| Beginning Product Inventories at Net Realizable   Value                  |       | $                                                                        | (308.1     | ) | $ | (203.1 | ) | $ | (105.0 | )(1) |
|                                                                     |       |                                                                     |       |   |   |   |   |
| Ending Product Inventories at Net Realizable Value                       |       | 455.4                                                                    |       | 328.7 |   | 126.7 | (2) |
|                                                                     |       |                                                                     |       |   |   |   |   |
| Increase (Decrease) in the Net Realizable Value of   Product Inventories |       | $                                                                        | 147.3      |   | $ | 125.6 |   | $ | 21.7 |   |

 

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(1) The change is primarily due to a 35.4 percent increase in the hundredweight of sugar inventory as of November 30, 2010 as compared to November 30, 2009 and a 20.1 percent increase in the per hundredweight net realizable value of sugar as of November 30, 2010 compared to November 30, 2009.

(2) The change is primarily due to a 25.3 percent increase in the hundredweight of sugar inventory as of February 28, 2011 as compared to February 28, 2010 and a 12.8 percent increase in the per hundredweight net realizable value of sugar as of February 28, 2011 compared to February 28, 2010 partially offset by a 7.6 percent decrease in tons of pulp inventory and a 3.3 percent decrease in the per ton net realizable value of pulp as of February 28, 2011 compared to February 28, 2010.

 

·                  Factory operating costs increased $7.7 million for the three months ended February 28, 2011, as compared to the three months ended February 28, 2010 primarily due to an increase in the tons processed during the second quarter this year.

 

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·                  The cost recognized associated with the non-member sugarbeets increased $14.4 million for the three months ended February 28, 2011, when compared to the three months ended February 28, 2010.  This increase was primarily due to an increase in the projected per ton sugarbeet payment for the Sidney crop this year and an increase in the tons purchased and processed.

·                  The costs associated with purchased sugar were $ .9 million lower for the three months ended February 28, 2011, as compared to the three months ended February 28, 2010 due to less of a requirement to supplement sugar inventories to fill customer orders.

 

Selling, general and administrative expenses increased $12.8 million for the three months ended February 28, 2011, as compared to the three months ended February 28, 2010.  Selling expenses increased $13.6 million primarily due to an increase in shipping and handling costs associated with increased volumes of sugar and agri-products sold.  General and administrative expenses decreased $ .8 million due to general cost decreases.

 

Net proceeds attributable to American Crystal Sugar Company increased $76.1 million for the three months ended February 28, 2011, as compared to the three months ended February 28, 2010. This increase was primarily due to more tons of sugarbeets processed, higher sugar content of the sugarbeets and increased sugar selling prices.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Under the Company’s agreement with its shareholders, payments for member-delivered sugarbeets for each crop year are calculated based on the revenues from sugar and agri-products derived from the sugarbeet crop less all member business expenses.  In addition, the beet payments made to member growers and non-member growers are paid in three payments over the course of a year, and the member payments are made net of any anticipated unit retain for the crop.  These procedures have the effect of providing the Company with an additional source of short-term capital.

 

Because sugar is sold throughout the year (while sugarbeets are processed primarily in the fall, winter and spring) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund its operations.  The majority of such financing has been provided by a consortium of lenders led by CoBank, ACB.

 

During the recent national economic downturn and financial market instability, the Company, due to its strong financial position and relationships with its lenders, has continued to secure the necessary financing for its working capital requirements and capital expenditures.

 

The Company has a seasonal line of credit through June 1, 2011 with a consortium of lenders led by CoBank, ACB of $400.0 million, against which there was no outstanding balance as of February 28, 2011.  On June 1, 2011, the seasonal line of credit with this consortium of lenders is reduced to $320.0 million and is available through July 30, 2012. The Company also has a line of credit with Wells Fargo Bank for $1.0 million, against which there was no outstanding balance as of February 28, 2011.  The Company’s commercial paper program provides short-term borrowings up to the amount of the CoBank, ACB seasonal line of credit, currently $400.0 million.  As of February 28, 2011 approximately $221.7 million of commercial paper was outstanding.  The Company had $2.8 million of short-term letters of credit outstanding as of February 28, 2011.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.  The unused short-term line of credit as of February 28, 2011, was $176.5 million.

 

Under the Farm Bill, the Company can borrow funds on a non-recourse basis from the CCC, with repayment of such funds secured by sugar.  The limitations on such borrowings are based on the amount of the Company’s sugar inventory and certain loan covenant restrictions by CoBank, ACB.  As of February 28, 2011, the Company had the capacity to obtain non-recourse loans from the CCC of approximately $311.3 million. The Company has not utilized the CCC during fiscal 2011.

 

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The Company also has a long-term debt line of credit through July 30, 2015, with CoBank, ACB of****$132.1 million, against which $21.3 million in loans and $69.8 million in long-term letters of credit were outstanding as of February 28, 2011.  The unused long-term line of credit as of February 28, 2011, was $41.0 million.  In addition, the Company had long-term debt outstanding, as of February 28, 2011, of $50 million from a private placement of Senior Notes that occurred in September of 1998 and $69.8 million from six separate issuances of Pollution Control and Industrial Development Revenue Bonds.

 

On December 16, 2010, the Company closed a bond issuance for $15.0 million.  The City of Moorhead, Minnesota (the Issuer) issued the Recovery Zone Facility Revenue Bonds (American Crystal Sugar Company Project) Series 2010 in the principal amount of $15.0 million (the Bonds).  Proceeds of the Bonds will be used by the Company to construct a tower diffuser and associated enclosure at the Company’s sugar beet processing facility in Moorhead, Minnesota. The principal amount of the Bonds of $3.0 million is due on June 1, 2024 and the remaining principal amount of the bonds is due in equal payments of $4.0 million each on June 1 of the subsequent three years.  The Bonds carry fixed interest rates of 5.35% and 5.65%.  Interest on the Bonds is payable semiannually on each June 1 and December 1, commencing June 1, 2011. As of February 28, 2011, the entire proceeds from the bond issuance were held by a Trustee and will be released as the Company provides documentation of allowable expenditures to the Trustee.  The proceeds are reflected on the accompanying Company’s Consolidated Balance Sheet under Other Assets as “Restricted Cash from Revenue Bonds.”

 

The Company had outstanding purchase commitments totaling $19.1 million as of February 28, 2011, for equipment and construction contracts related to various capital projects.

 

As of February 28, 2011, Midwest had outstanding short-term debt with CoBank, ACB of $6.1 million, of which $2.9 million was guaranteed by the Company.

 

The net cash used in operations was $146.6 million for the six months ended February 28, 2011, as compared to $35.6 million for the six months ended February 28, 2010.  This increase in cash used of $111.0 million was primarily the result of the following:

 

·                  Reflected in the change in the net cash used in operating activities is a net cash increase of $1.9 million from the prior year which was the result of increased revenue of $142.1 million and a decrease in costs of $47.8 million partially offset by an increase in the member gross beet payment of $187.9 million.

·                  There was a net unfavorable change in assets and liabilities from the prior year of $112.9 million primarily comprised of the following:

·                  The decrease in cash related to receivables of $24.2 million is primarily due to an increase in the selling price of sugar and the timing of the deliveries of products and collections.

·                  The decrease in cash related to the change in inventories of $157.0 million was primarily due to an increase in finished product inventories related to more sugar on hand and an increased net realizable value per hundredweight of sugar partially offset by a decreased net realizable value per ton of pulp, CSB and molasses and a decrease in the inventories of pulp and CSB.

·                  The decreases in cash are related to changes in other liabilities of $7.8 million,  prepaid expenses of $8.0 million and non-current pension asset/liabilities of $1.0 million and the increase in cash of $1.4 million related to accounts payable are due to the timing of payments.

·                  The decrease in cash related to changes in advances to related parties of $9.5 million was primarily due to the timing of the cash requirements of our marketing agents.

·                  The increase in cash related to changes in accrued continuing costs of $50.2 million was the result of the differences in the timing of revenues and expenses between the two years.

·                  The increase in cash related to the Amount Due Growers of $43.0 million was due to an increase in the current year’s total estimated grower payment based on an increase in tons harvested and a higher estimated per ton member grower payment this year as compared to this time last year.

 

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The net cash used in investing activities was $50.3 million for the six months ended February 28, 2011, as compared to $26.3 million for the year ended February 28, 2010.  The increase of $24.0 million was primarily due to restricted cash from a bond issue of $15.0 million and increased purchases of property and equipment of $9.0 million.

 

The net cash provided by financing activities was $196.9 million for the six months ended February 28, 2011, as compared to $62.1 million for the six months ended February 28, 2010.  This increase of $134.8 million was primarily due to increased proceeds from short- term debt of $112.7 million, proceeds from a bond issue of $15.0 million, reduced  payments on long term debt of $19.4 million partially offset by an increase in unit retains paid of $12.3 million.

 

The Company anticipates that the funds necessary for working capital requirements and future capital expenditures will be derived from operations and unit retains along with short-term and long-term borrowings.

** **

**OTHER**

 

**Environmental**

 

The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control.  The Company conducts an ongoing compliance program designed to meet these environmental laws and regulations.  The Company believes that it is in substantial compliance with applicable environmental laws and regulations.  From time to time, however, the Company may be involved in investigations or determinations regarding matters that may arise in the ordinary course of business.  The Company works closely with all affected government agencies to resolve environmental issues that have arisen and believes such issues will be resolved without any material adverse effect on the Company.

 

The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs).  Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change.  The Company believes it is likely that industries generating GHGs, including the Company, will be subject to either federal or state regulation relating to climate change policies in the relatively near future.  These policies, if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar.  These policies could have a significant negative impact on the Company’s beet payment to shareholders if the Company is not able to pass the increased costs on to the Company’s customers.

 

On November 25, 2008, the Company entered into a stipulation agreement with the Minnesota Pollution Control Agency (MPCA) related to hydrogen sulfide emissions from its Crookston, East Grand Forks and Moorhead, Minnesota factories.  As part of the stipulation agreement, the Company has agreed to make certain capital expenditures over the subsequent three years and implement specified changes in operating procedures to contain hydrogen sulfide emissions at the Minnesota factories. The Company is on schedule with the agreed to changes.

 

Including the expenditures related to the MPCA stipulation agreement, the Company has identified capital expenditures for environmental related projects over the next three years at the Company’s factory locations of approximately $10.7 million.

 

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**Item 3.  Quantitative and Qualitative Disclosures about Market Risk**

 

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument.  The value of a financial instrument may change as a result of changes in the interest rates, exchange rates, commodity prices, equity prices and other market changes.  Market risk is attributed to all market-risk sensitive financial instruments, including long-term debt.

 

The Company does not believe that there is any material market risk exposure with respect to interest rates, exchange rates, commodity prices, equity prices and other market changes that would require disclosure under this item.

 

**Item 4.   Controls and Procedures**

 

The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of February 28, 2011.  Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  There were no changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker’s compensation claims, tort claims and contractual disputes.  The Company is currently involved in certain legal proceedings, which have arisen in the ordinary course of the Company’s business.  The Company is also aware of certain other potential claims, which could result in the commencement of legal proceedings.  The Company carries insurance, which provides protection against certain types of claims.  With respect to current litigation and potential claims of which the Company is aware, the Company’s management believes that (i) the Company has insurance protection to cover all or a portion of any judgments which may be rendered against the Company with respect to certain claims or actions and (ii) any judgments which may be entered against the Company and which may exceed such insurance coverage or which may arise in actions involving potential liabilities not covered by insurance policies are not likely to have a material adverse effect upon the Company, or its assets or operations.

 

On September 21, 2009 the U.S. District Court (District Court) ruled against the U.S. Department of Agriculture (USDA) finding that the USDA violated federal law by failing to prepare an Environmental Impact Statement (EIS) before deregulating Roundup Ready® sugarbeets.  On August 13, 2010 District Court hearing on interim remedies, the District Court issued a ruling confirming the ability of the shareholders to harvest the 2010 root crop even though it was produced primarily from Roundup Ready® sugarbeet seed but vacated the original decision by USDA to deregulate the use of Roundup Ready® sugarbeet seed.  As a result, the planting of Roundup Ready® sugarbeet seed after August 13, 2010 was prohibited until further action was taken by USDA.

 

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On February 4, 2011, the USDA issued an Environmental Assessment that partially deregulated Roundup Ready® sugarbeet seed, an action that allows for the planting of Roundup Ready® sugarbeet seed for the 2011 sugarbeet crop, subject to certain conditions.  On March 23, 2011 the Company entered into a compliance agreement with the USDA that sets forth the growing conditions the Company and its shareholders must comply with in order to plant Roundup Ready® sugarbeet seed.  On March 30, the Company’s Board of Directors authorized the planting of Roundup Ready® sugarbeet seed for the 2011 growing season.  This authorization allows the Company shareholders to choose between conventional sugarbeet seed and Roundup Ready® sugarbeet seed.

 

The compliance agreement between the Company and USDA includes a number of conditions that individual shareholders, and the Company as a whole, must strictly observe.  Failure to comply with the conditions may result in a shareholder not being permitted to harvest his or her crop.  In addition, a shareholder’s noncompliance could result in a breach of the compliance agreement by the Company, which conceivably could mean that no Roundup Ready beets planted by any shareholder would be harvested.  Certain requirements must be satisfied before a shareholder will be permitted to obtain any Roundup Ready® sugarbeet seed.

 

The same plaintiffs who have repeatedly raised legal challenges to the planting of Roundup Ready® sugarbeet seed have made public statements that they plan to continue to oppose the use of the technology.  Although the Company believes the risk is low, the possibility exists that a subsequent ruling by the District Court could result in the inability of shareholders to harvest their Roundup Ready sugarbeets (and the Company not being permitted to process them) or to plant Roundup Ready® sugarbeet seeds in subsequent years.  Any failure of the Company or its shareholders to comply with the mandatory conditions imposed on Roundup Ready® sugarbeets could also adversely affect the ability to harvest the affected sugarbeets.  If a significant number of shareholders are not allowed to harvest their Roundup Ready® sugarbeets for any reason the Company could experience material adverse financial consequences that would impact both the Company and its members.

 

In order to mitigate the risk of non-delivery by a shareholder who plants Roundup Ready® sugarbeet seeds, both the five year agreement that each shareholder already has in place with the Company as well as a Roundup Ready® addendum that must be signed in order to plant Roundup Ready® varieties, include language that obligates the shareholder to pay liquidated damages equal to the Company’s fixed costs if their Roundup Ready beets are not harvested for legal or regulatory reasons.  This liquidated damage requirement is in place to ensure that a possible legal decision that prevents the harvest of Roundup Ready® beets will not financially damage the Company and also those shareholders that grow conventional sugarbeets.

 

**Item 1A.  Risk Factors.**

 

For a detailed discussion of certain risk factors that could affect the Company’s operations, financial condition or results for future periods, see Item 1A, Risk factors, in the Company’s 2010 Annual Report on Form 10-K.

 

**Quantity and quality of sugarbeets is sensitive to weather and other factors such as seed varieties.**

 

A significant decrease in the quantity of sugarbeets harvested would result in higher unit operating costs and lower earnings.  If we are unable to manage the quantity and quality of sugarbeets available for processing, we could experience material adverse financial consequences that would impact both us and our members.

 

Although the Company believes the risk is low, the possibility exists that a subsequent ruling by the District Court could result in the inability of shareholders to harvest their Roundup Ready sugarbeets (and the Company not being permitted to process them) or to plant Roundup Ready® sugarbeet seeds in subsequent years.  If a significant number of shareholders are not allowed to harvest their Roundup Ready® sugarbeets for any reason the Company could experience material adverse financial consequences that would impact both the Company and its members.

 

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In order to mitigate the risk of non-delivery by a shareholder who plants Roundup Ready® sugarbeet seeds, both the five year agreement that each shareholder already has in place with the Company as well as a Roundup Ready® addendum that must be signed in order to plant Roundup Ready varieties, include language that obligates the shareholder to pay liquidated damages equal to the Company’s fixed costs if their Roundup Ready beets are not harvested for legal or regulatory reasons.  This liquidated damage requirement is in place to ensure that a possible legal decision that prevents the harvest of Roundup Ready beets will not financially damage the Company and those shareholders that grow conventional sugarbeets.  The Company cannot be certain of its success in collecting such liquidated damages.

 

**Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.**

 

None

 

**Item 3.  Defaults Upon Senior Securities**

 

None

 

**Item 4.  (Removed and Reserved)**

 

**Item 5.  Other Information.**

 

None.

 

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**Item 6. Exhibits**

 
| **Item No.** | ** ** | ** **                                                                                  | ** ** | **Method of Filing**                                                                                                                                                                   |
|-------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 3.1               |       | Restated   Articles of Incorporation of American Crystal Sugar Company                      |       | Incorporated   by reference to Exhibit 3(i) from the Company’s Registration   Statement on Form S-1 (File No. 33-83868), declared effective   November 23, 1994.   |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 3.2               |       | Restated   By-laws of American Crystal Sugar Company                                        |       | Incorporated   by reference to Exhibit 3(ii) from the Company’s Registration   Statement on Form S-1 (File No. 333-11693), declared effective   November 13, 1996. |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 4.1               |       | Restated   Articles of Incorporation of American Crystal Sugar Company                      |       | See   Exhibit 3.1                                                                                                                                                                           |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 4.2               |       | Restated   By-laws of American Crystal Sugar Company                                        |       | See   Exhibit 3.2                                                                                                                                                                           |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 10.1              |       | Form of   Operating Agreement between Registrant and ProGold Limited Liability Company |       | Incorporated   by reference to Exhibit 10(u) from the Company’s Registration   Statement on Form S-1 (File No. 33-83868), declared effective   November 23, 1994.  |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 10.2              |       | Registrant’s   Senior Note Purchase Agreement                                          |       | Incorporated   by reference to Exhibit 10.24 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 1999                                              |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 10.3              |       | Registrant’s   Senior Note Inter-creditor and Collateral Agency Agreement              |       | Incorporated   by reference to Exhibit 10.25 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 1999                                              |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 10.4              |       | Registrant’s   Senior Note Restated Mortgage and Security Agreement                    |       | Incorporated   by reference to Exhibit 10.26 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 1999                                              |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| +10.5             |       | Long   Term Incentive Plan, dated June 23, 1999                                        |       | Incorporated   by reference to Exhibit 10.31 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2000                                              |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| 10.6              |       | Registrant’s   Senior Note Purchase Agreement dated January 15, 2003              |       | Incorporated   by reference to Exhibit 10.29 from the Company’s Form 10-Q for the   quarter ended February 28, 2003                                                          |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| +10.7             |       | Long   Term Incentive Plan, dated August 24, 2005                                      |       | Incorporated   by reference to Exhibit 10.25 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2005                                              |
|              |       |                                                                                        |       |                                                                                                                                                                                             |
| +10.8             |       | Employment Agreement dated March 21, 2007   between the Registrant and David A. Berg.  |       | Incorporated   by reference to Exhibit 10.26 from the Company’s Form 10-Q for the   quarter ended February 28, 2007.                                                         |

 

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| 10.9   |   | Growers’   Contract (5-year Agreement) for the crop years 2008 through 2012                                                                      |   | Incorporated   by reference to Exhibit 10.24 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2007 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| 10.10  |   | Amended   and Restated Uniform Member Sugar Marketing Agreement between the Registrant   and United Sugars Corporation dated September 20, 2007. |   | Incorporated   by reference to Exhibit 10.22 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2008 |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| 10.11  |   | Stipulation   Agreement between Registrant and State of Minnesota Pollution Control Agency,   dated November 25, 2008                            |   | Incorporated   by reference to Exhibit 10.19 from the Company’s Form 10-Q for the   quarter ended November 30, 2008             |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| +10.12 |   | Restated   Supplemental Executive Retirement Plan, dated December 5, 2008                                                                        |   | Incorporated   by reference to Exhibit 10.20 from the Company’s Form 10-Q for the   quarter ended November 30, 2008             |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| +10.13 |   | Restated   Board of Directors Deferred Compensation Plan, dated December 8, 2008                                                                 |   | Incorporated   by reference to Exhibit 10.21 from the Company’s Form 10-Q for the   quarter ended November 30, 2008             |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| +10.14 |   | First   Amendment to 2005 Long-Term Incentive Plan, dated December 20, 2006.                                                                     |   | Incorporated   by reference to Exhibit 10.22 from the Company’s Form 10-Q for the   quarter ended February 28, 2009             |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| +10.15 |   | Second   Amendment to 2005 Long-Term Incentive Plan, dated November 5, 2007.                                                                     |   | Incorporated   by reference to Exhibit 10.23 from the Company’s Form 10-Q for the   quarter ended February 28, 2009             |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| +10.16 |   | Third   Amendment to 2005 Long-Term Incentive Plan, dated December 11, 2008.                                                                     |   | Incorporated   by reference to Exhibit 10.24 from the Company’s Form 10-Q for the   quarter ended February 28, 2009             |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| 10.17  |   | Amended and Restated Credit Agreement between the   Registrant and CoBank, ACB dated July 30, 2009.                                              |   | Incorporated   by reference to Exhibit 10.17 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2009 |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| 10.18  |   | Amended   and Restated Uniform Member Marketing Agreement between the Registrant and   Midwest Agri-Commodities Company dated September 1, 2009. |   | Incorporated   by reference to Exhibit 10.18 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2009 |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| 10.19  |   | Amended   and Restated Member Control Agreement between Registrant and Golden Growers   Cooperative dated September 1, 2009.                     |   | Incorporated   by reference to Exhibit 10.19 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2009 |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| 10.20  |   | First   Amendment to Amended and Restated Credit Agreement between the Registrant and CoBank, ACB dated July 30, 2010.                           |   | Incorporated   by reference to Exhibit 10.20 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2010 |
|   |   |                                                                                                                                                  |   |                                                                                                                                                |
| +10.21 |   | Fourth   Amendment to 2005 Long-Term Incentive Plan, dated August 1, 2010.                                                                       |   | Incorporated   by reference to Exhibit 10.21 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2010 |

 

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| 10.22  |   | Administrative   Consent Agreement between the Registrant and the North Dakota Department of   Health dated September 7, 2010. |   | Incorporated   by reference to Exhibit 10.22 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2010 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                |   |                                                                                                                                                |
| 10.23  |   | Second   Amendment to Amended and Restated Credit Agreement between the Registrant and CoBank, ACB dated November 4, 2010.     |   | Incorporated   by reference to Exhibit 10.23 from the Company’s Form 10-Q for the   quarter ended November 30, 2010             |
|   |   |                                                                                                                                |   |                                                                                                                                                |
| 21.1   |   | List   of Subsidiaries of the Registrant                                                                                            |   | Incorporated   by reference to Exhibit 21.1 from the Company’s Annual Report on   Form 10-K for the year ended August 31, 2010  |
|   |   |                                                                                                                                |   |                                                                                                                                                |
| 31.1   |   | Rule 13a-14(a)/15(d)-14(a) Certification   of the Chief Executive Officer                                                 |   | Accompanying   herewith electronically                                                                                                              |
|   |   |                                                                                                                                |   |                                                                                                                                                |
| 31.2   |   | Rule 13a-14(a)/15(d)-14(a) Certification   of the Chief Financial Officer                                                 |   | Accompanying   herewith electronically                                                                                                              |
|   |   |                                                                                                                                |   |                                                                                                                                                |
| 32.1   |   | Section 1350   Certification of the Chief Executive Officer                                                                    |   | Accompanying   herewith electronically                                                                                                              |
|   |   |                                                                                                                                |   |                                                                                                                                                |
| 32.2   |   | Section 1350   Certification of the Chief Financial Officer                                                                    |   | Accompanying   herewith electronically                                                                                                              |

 

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+              A management contract or compensatory plan required to be filed with this report.

 

SIGNATURES

 

**Pursuant to the requirement 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.**

 

 
|      | **AMERICAN   CRYSTAL SUGAR COMPANY** |
|-----------|--------------------------------------|
|      | **(Registrant)**                     |
|      |                                 |
|      |                                 |
| **Date:** | **April 14,   2011**            | ** ** | **/s/   Teresa Warne** |
|      | **Teresa   Warne**                   |
|      | **Corporate   Controller,**          |
|      | **Chief   Accounting Officer**       |
|      | **Duly   Authorized Officer**        |
|           |                                      |  |  |  |

 

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